This is a multi-faceted concept incorporating both higher product quality and lower costs than those of competitors. The erosion in competitiveness experienced since the start of this decade is partly explained by relatively higher prices and unit labour costs than in our trading partners. This process needs to be reversed. One way of addressing this challenge would be to ensure more competition in certain product markets. Another would be to replace the national wage indexation mechanism with a productivity-linked wage adjustment system at the enterprise level. Yet another would be to step up efforts to ease the bottlenecks that are constraining the country’s growth potential. The revamped EU2020 Agenda could be a useful guide in this respect since it focuses on a number of supply-side initiatives in areas where Malta has lagged behind in the past, such as employment rates, spending on R&D, education-related indicators and clean sources of energy. The achievement of such goals does not depend only on releasing substantial resources through a reordering of fiscal spending priorities. It also requires the adoption of micro-level  9  European Commission Forecasts. 10  Sustainable Report 2009, pp. 23, 125. 4  BIS Review 73/2010  policies that create incentives to encourage private initiative and risk taking, that make work pay and that help to change the still prevalent culture of dependence on the State. Conclusion To sum up, Malta has not been unduly affected by the global financial crisis and the subsequent recession, and the latest forecasts suggest that it is recovering, albeit modestly.

8 They call for improvements in both the preventive and corrective arms of the Stability and Growth Pact, more emphasis on debt  6  European Commission European Economic Forecast, Spring 2010. 7  European Commission European Economic Forecast, Spring 2010, page 118. 8  EC Document COM (2101) 250, entitled Reinforcing economic policy coordination published on 12 May 2010. BIS Review 73/2010  3  sustainability and the extension of peer surveillance beyond the budgetary dimension to other macroeconomic imbalances, such as losses in competitiveness, asset price booms fuelled by excessive credit growth and rigidities in product and labour markets. While Malta’s situation is clearly less worrisome than that of some of the peripheral euro area countries, these proposals would benefit our economy as well. The persistence of current account deficits, for example, suggests an erosion of competitiveness and, therefore, the need for higher productivity, the removal of remaining constraints on market efficiency and increased investment in high value added, export-oriented activities. Indeed, the economy’s strong performance up to 2006 owed more to domestic consumption than to exports. Export growth, upon which the sustainability of a small, open economy depends to a large extent, has been insufficient over the past decade, and the consequent loss of market share partly explains why Malta’s income gap with the euro area has not narrowed in recent years. With regard to the internal imbalance, the events of the last two years have brought to a halt the substantial fiscal consolidation that was achieved in the run-up to euro adoption.