Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2013 national reform programme and delivering a Council opinion on Malta’s stability programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Malta, banking system, budget deficit, budgetary equilibrium, dropout, energy policy, financial solvency, health costs, labour market, retirement conditions, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 368 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Malta’s 2013 national reform programme  

and delivering a Council opinion on Malta’s stability programme for 2012-2016 

{SWD(2013) 368 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on Malta’s 2013 national reform programme  

and delivering a Council opinion on Malta’s stability programme for 2012-2016 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Malta’s 2013 national reform programme  

and delivering a Council opinion on Malta’s stability programme for 2012-2016 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2013) 368 final . 
P7_TA(2013)0052 and P7_TA(2013)0053. 

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(5) 

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On  26  March  2010,  the  European  Council  agreed  to  the  Commission’s  proposal  to 
launch  a  new  strategy  for  growth  and  jobs,  Europe  2020,  based  on  enhanced 
coordination of economic policies, which will focus on the key areas where action is 
needed to boost Europe’s potential for sustainable growth and competitiveness. 

On 13 July 2010, on the basis of the Commission's proposals, the Council adopted a 
recommendation  on  the  broad  guidelines  for  the  economic  policies  of  the  Member 
States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision on 
guidelines  for  the  employment  policies  of  the  Member  States5,  which  together  form 
the  ‘integrated  guidelines’.  Member  States  were  invited  to  take  the  integrated 
guidelines into account in their national economic and employment policies. 

On 29 June 2012, the Heads of State or Government decided on a Compact for Growth 
and  Jobs,  providing  a  coherent  framework  for  action  at  national,  EU  and  euro  area 
levels using all possible levers, instruments and policies. They decided on action to be 
taken  at  the  level  of  the  Member  States,  in  particular  expressing  full  commitment  to 
achieving the objectives of the Europe 2020 Strategy and to implementing the country-
specific recommendations. 

On  6  July  2012,  the  Council  adopted  a  recommendation  on  Malta’s  national  reform 
programme for 2012 and delivered its opinion on Malta’s updated stability programme 
for 2011-2015. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey6, 
marking  the  start  of  the  2013  European  Semester  of  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011, adopted the Alert Mechanism Report7, in which it identified Malta as one 
of the Member States for which an in-depth review would be carried out. 

On  14  March  2013,  the  European  Council  endorsed  the  priorities  for  ensuring 
financial stability, fiscal consolidation and action to foster growth. It underscored the 
need  to  pursue  differentiated,  growth-friendly  fiscal  consolidation,  to  restore  normal 
lending conditions to the economy, to promote growth and competitiveness, to tackle 
unemployment  and  the  social  consequences  of  the  crisis,  and  to  modernise  public 
administration. 
On  10  April  2013,  the  Commission  published  the  results  of  its  in-depth  review8  for 
Malta, under Article 5 of Regulation (EU) No 1176/2011. The Commission’s analysis 
leads  it  to  conclude  that  Malta  is  experiencing  macroeconomic  imbalances,  which 
deserve monitoring and policy action. In particular, the banking sector and real estate 
market developments warrant close monitoring. The long-term sustainability of public 
finances requires policy attention. 

On  30April  2013,  Malta  submitted  its  2013  stability  programme  covering  the  period 
2012-2016 and its 2013 national reform programme. In order to take account of their 
interlinkages, the two programmes have been assessed at the same time. 

Based  on  the  assessment  of  the  2012  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  budgetary  projections  in  the  programme  is  plausible.  The 
Council  abrogated  its  decision  on  the  existence  of  an  excessive  deficit  in  Malta  on 

Council Decision 2013/208/EU of 22 April 2013. 
COM(2012) 750 final. 
COM(2012) 751 final. 
SWD(2013) 120 final. 

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4 December  2012,  on  account  of  its  correction  in  2011,  which  based  on  the 
Commission’s  2012  autumn  forecast  appeared  durable.  However,  in  2012  Malta 
recorded  a  general  government  deficit  of  3.3%  of  GDP,  again  above  the  reference 
value  of  3%  of  GDP.  The  objective  of  the  budgetary  strategy  outlined  in  the 
programme is to gradually reduce  the deficit from 3.3% of GDP in 2012 to 0.8% of 
GDP  in  2016,  implying  gradual  progress  towards  the  medium-term  objective.  The 
programme  confirms  the  medium-term  objective  of  a  balanced  position  in  structural 
terms, which is more ambitious than required by the Stability and Growth Pact, but its 
achievement  is  not  planned  within  the  programme  period.  The  2013  deficit  target  in 
the programme relies on relatively high growth in tax revenues, which does not appear 
to be fully explained by the underlying macroeconomic scenario. In addition, it is not 
sufficiently  supported  by  detailed  measures,  as  is  also  the  case  for  the  subsequent 
years.  As  a  result,  the  change  in  the  planned  (recalculated)  structural  balance  is 
significantly  higher  than  in  the  Commission’s  forecast.  According  to  the  latter,  the 
structural  balance  improves  by  just  ¼  pp.  of  GDP  in  2013  and  only  marginally  in 
2014,  on  a  no-policy-change  basis.  General  government  debt  is  projected  to  remain 
above  the  60%  of  GDP  threshold  over  the  whole  programme  horizon.  The  national 
authorities project the debt to increase to 74.2% of GDP in 2014 and subsequently to 
start decreasing to 70% by 2016. In the Commission’s 2013 spring forecast, the debt-
to-GDP ratio is expected to increase slightly faster, to 74.9% in 2014, as the primary 
deficit is expected to continue expanding. Given the correction of the excessive deficit 
in  2011,  Malta  is  in  a  three-year  transition  period  as  regards  the  applicability  of  the 
debt  reduction  benchmark,  starting  in  2012.  Malta  did  not  make  sufficient  progress 
towards  compliance  with  the  debt  criterion  in  2012  and  is  not  projected  to  do  so  in 
2013-14. While Malta’s fiscal framework is quite flexible, its non-binding nature and 
the  short  horizon  of  fiscal  planning  are  not  supportive  of  a  sound  fiscal  position. 
Directive  2011/85/EU  on  budgetary  frameworks  has  not  yet  been  transposed  and  a 
structural budget balance rule, as provided for in the Treaty on Stability, Coordination 
and  Governance,  has  not  yet  been  introduced  into  national  law.  The  stability 
programme  states  the  intention  of  the  government  to  set  up  a  fiscal  council,  but  no 
concrete plans are laid out.  

(10)  Tax  compliance  and  evasion  continue  to  pose  a  challenge  to  the  quality  of  public 
finances.  The  authorities  have  introduced  a  number  of  relevant  measures  and 
additional ones are in the pipeline, but implementation needs to be monitored closely 
as concrete results are yet to materialise. Tax incentives for companies to take on debt 
are still very high. In 2012, Malta stood out as the country with the second highest gap 
between  the  tax  treatment  of  debt  and  equity  financing  of  new  investment.This  debt 
bias  may  lead  to  excessively  high  corporate  leverage  and  inefficient  allocation  of 
capital. Malta is among the few Member States without any provisions to counter the 
debt bias.  

(11)  Malta still faces challenges regarding the sustainability of its public finances in view 
of the budgetary impact of ageing which is projected  to  considerably exceed the EU 
average  the  increase  in  pension  expenditure  accounts  for  more  than  half  of  the  total 
projected increase in age-related expenditure, while when compared to other Member 
States  the  statutory  retirement  age  remains  low  and  the  increase  legislated  with  the 
2006  reform  is  slow.  A  further  reform  is  necessary  to  ensure  sustainability  while 
safeguarding  adequacy  and  addressing  intergenerational  equity  concerns.  While 
discussions  were  held  with  social  partners  no  concrete  proposals  for  further  pension 
reform  were  put  forward.  the  employment  rate  of  older  workers  is  low  and  a 
comprehensive active ageing strategy has still to be developed. Limited primary care 

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provision,  combined  with  the  projected  ageing  of  the  population  may  lead  to  high 
healthcare  costs  in  the  long  term.  The  administrative  capacity  in  the  area  of  public 
procurement is weak, leading to complicated and lengthy procedures.  

(12)  Measures taken to reduce the rate of early school leaving, including the recent launch 
of  the  preparatory  process  leading  to  an  early  school  leaving  strategy  are  welcome, 
also with a view to reducing the mismatch between the demand and supply of skills. 
The  effectiveness  of  the  policy  efforts  made  will  depend  on  proper  and  timely 
implementation  which  will  have  to  be  closely  monitored.  However,  the  insufficient 
link  of  education  and  training  to  the  labour  market  needs  is  a  major  bottleneck.  The 
envisaged  creation  of  a  single  apprenticeship  scheme  covering  more  qualification 
levels is also expected to contribute to fostering a workforce geared to labour market 
needs.  

(13)  Malta has also taken significant steps to increase participation by women in the labour 
force,  mainly  aimed  at  improving  reconciliation  of  work  and  family  life.  Also 
benefitting from a favourable cohort effect, the employment rate of women continues 
to rise. However, there is room for improvement: the employment rate of women still 
remains low, parenthood still has a significant effect on the participation of women on 
the labour market, and the gender employment gap is the highest in the EU. Promoting 
flexible  working  arrangements  and  providing  affordable  childcare  and  afterschool 
facilities to a wider segment of the population can contribute to further increasing the 
employment rate of women. 

(14)  Malta’s cost-of-living adjustment mechanism has specific characteristics which appear 
to  mitigate  its  negative  effect  on  overall  labour-market  performance  and  wage 
adjustment:  the  mechanism  grants  a  flat  rate  increase,  thus  representing  only  partial 
compensation  for  inflation  to  wages  above  the  ‘reference’  basic  wage,  micro-  and 
is  fully 
macro-level  derogation  clauses  are  available,  and  wage  bargaining 
decentralised. Nevertheless in the event of very adverse phases of the economic cycle, 
the  system  still  poses  a  potential  challenge  to  the  flexibility  of  real  wages,  thereby 
hindering labour market adjustment and hampering competitiveness. The volatility of 
prices  of  some  components  of  the  price  index  used  in  the  mechanism,  in  particular 
energy  prices  could  put  pressure  on  inflation  through  wage-price  spirals.  Therefore, 
the collection of wage and productivity data on sectoral level, and a close monitoring 
of  the  impact  of  the  wage  indexation  system  will  be  essential  to  mitigate  potential 
risks. The Maltese authorities should closely monitor the impact of the mechanism on 
the economy and stand ready to reform it as appropriate.  

(15)  Malta’s competitiveness remains at risk in view of the very limited diversification and 
poor environmental performance of its energy supply leading to high electricity tariffs. 
The  dire  financial  state  of  the  main  energy  provider  (Enemalta),  adds  to  this 
insecurity, but the electricity connector with Sicily is expected to provide relief after 
2014. While a number of initiatives have been further pursued, such as the uptake of 
photovoltaic  power,  the  share  of  renewable  energy  sources  remains  particularly  low 
and the feasibility of major projects, such as the development of wind farms, seems to 
be at stake. Progress was registered in energy efficiency, notably for public buildings, 
supported  through  Union  funding.  The  environmental  performance  of  Malta’s 
transport  system  is  also  poor.  Malta  would  benefit  from  a  comprehensive  transport 
strategy that seeks to improve public transport, the road network, the system’s carbon 
performance  and  to  further  encourage  the  use  of  other  types  of  transport  than 
passenger cars.  

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(16)  The banking sector in Malta is very large when compared to the domestic economy. 
While  this  is  notably  due  to  non-core  domestic  and  international  banks,  which  have 
limited  exposure  to  the  domestic  economy,  continued  strict  supervision  of  them  is 
warranted  to  prevent  negative  impact  on  financial  stability  from  their  activities. 
Domestic banks remain highly exposed to the property market while specific loan-loss 
provisions are relatively low. Policy discussions have taken place but this still has to 
translate  into  appropriate  regulatory  action.  The  judicial  system  suffers  from 
inefficiencies  that  pose  a  further  risk  to  financial  stability.  The  long  time  needed  to 
resolve  insolvency  cases  obstructs  the  efficient  enforcement  of  collateral  rights.  In 
times  of  economic  stress,  this  may  additionally  burden  banks'  balance  sheets  and 
increase losses, resulting in recapitalisation needs. 

(17) 

(18) 

(19) 

(20) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Malta’s  economic  policy.  It  has  assessed  the  stability 
programme and national reform programme, and presented an in-depth review. It has 
taken into account not only their relevance for sustainable fiscal and socio-economic 
policy in Malta but also their compliance with EU rules and guidance, given the need 
to reinforce the overall economic governance of the European Union by providing EU-
level  input  into  future  national  decisions.  Its  recommendations  under  the  European 
Semester are reflected in recommendations (1) to (5) below. 

In the light of this assessment, the Council has examined Malta’s stability programme, 
and its opinion9 is reflected in particular in recommendation (1) below. 

In the light of the Commission’s in-depth review and this assessment, the Council has 
the  stability  programme.  Its 
examined 
recommendations  under  Article  6  of  Regulation  (EU)  No  1176/2011  are  reflected  in 
recommendations (2) and (5) below, 

the  national  reform  programme  and 

In  the  context  of  the  European  Semester  the  Commission  has  also  carried  out  an 
analysis of the economic policy of the euro area as a whole. On this basis the Council 
has issued specific recommendations addressed to the Member States whose currency 
is  the  euro.  Malta  also  should  ensure  the  full  and  timely  implementation  of  these 
recommendations. 

HEREBY RECOMMENDS that Malta should take action within the period 2013-2014 to: 

1. 

2. 

Specify  and  implement  the  measures  needed  to  achieve  the  annual  structural 
adjustment effort set out in the Council recommendations under the EDP in order to 
correct  the  excessive  deficit  by  2014  in  a  sustainable  and  growth-friendly  manner, 
limiting  recourse  to  one-off/temporary  measures.  After  correcting  the  excessive 
deficit, pursue the structural adjustment effort at an appropriate pace so as to reach 
the MTO by 2017. Put in place a binding, rule-based multiannual fiscal framework in 
2013.  Ensure  concrete  delivery  of  measures  taken  to  increase  tax  compliance  and 
fight tax evasion, and take action to reduce the debt bias in corporate taxation.  

To ensure the long-term sustainability of public finances, reform the pension system 
to curb the projected increase in expenditure, including by accelerating the increase 
in the statutory retirement age, by introducing a link between the statutory retirement 
age and life expectancy and by encouraging private pension savings. Take measures 
to increase the employment rate of older workers by developing and implementing a 
comprehensive  active  ageing  strategy.  Pursue  health-care  reforms  to  increase  the 
cost-effectiveness  of  the  sector,  in  particular  by  strengthening  public  primary  care 

9 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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3. 

4. 

5. 

provision.  Improve  the  efficiency  and  reduce  the  length  of  public  procurement 
procedures.  

Continue to pursue policy efforts to reduce early school leaving, notably by setting 
up a comprehensive monitoring system, and increase the labour-market relevance of 
education  and  training  to  address  skills  gaps,  including  through  the  announced 
reform  of  the  apprenticeship  system.  Continue  supporting  the  improving  labour-
market  participation  of  women  by  promoting  flexible  working  arrangements,  in 
particular  by  enhancing  the  provision  and  affordability  of  child-care  and  out-of-
school centres. 

Continue efforts to diversify the energy mix and energy sources, in particular through 
increasing  the  take  up  of  renewable  energy  and  the  timely  completion  of  the 
electricity link with Sicily. Maintain efforts to promote energy efficiency and reduce 
emissions from the transport sector. 

Take measures to further strengthen the provisions for loan-impairment losses in the 
banking  sector  to  mitigate  potential  risks  arising  from  exposure  to  the  real  estate 
market. Maintain policy effort to ensure strict banking sector supervision, including 
for  the  non-core  domestic  and  internationally-oriented  banks.  Improve  the  overall 
efficiency of the judicial system, for example by reducing the time needed to resolve 
insolvency cases.  

Done at Brussels,  

For the Council 
The President 

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