This process of rationalization, which occurred only a few years before the start of the crisis in 2008, made the overall economy resilient and in a better position to weather adverse events in external markets. Post-2008 growth was enabled by the smooth entry into the Euro area, which coincided with the start of the crisis in 2008. The transition was facilitated by the fact that in the preceding decades, there was no recourse to monetary financing of government debt, generally no recourse to currency depreciation to offset internal competitiveness issues, while fiscal policies were in large part prudent. BIS central bankers’ speeches  1  Another consideration relates to the growth of new sectors which improved the capacity of the economy to offset downturns in external demand. Diversification is often more difficult to achieve in relatively small economies. However, the degree of diversification in the private sector in Malta is remarkable, and has resulted primarily from the growth of financial services, internet related services and aviation servicing, along with the reorientation of both the tourist sector and manufacturing. Although we have experienced higher GDP growth, we must be aware that some of our competitors are starting to benefit from the structural reforms and internal devaluation that they went through in response to the impact of the financial crisis on their economies. Chart 2 displays unit labour costs in the Euro area since 2002, distinguishing between the stressed economies and the relatively unstressed ones. The path of Malta’s ULC is displayed separately.

Indeed, the financial crisis hit the European economies at a time when a number of Member States had unsustainably high public debt levels, leaving less room for demand management. Major structural reforms and internal devaluations, which included outright cuts in nominal wages, were inevitable, and these had to be effected without the possibility of complementing them with appropriate compensation on the demand side. The result is a prolonged and painful recovery with permanent effects on potential economic growth, in some countries driving a disinflationary process. A further challenge arises from the fact that in the Eurosystem the centralised monetary stance is accompanied by a fragmented fiscal effort on the part of the various national governments. This contrasts with, for example, the United States where both monetary and fiscal policies are more centralised and hence they can be harmonised towards a common goal. While these limits on national fiscal policies have influenced the slow momentum of recovery, there are still various options that can address this weakness. On the fiscal side, the recent proposal by the Commission to create a European Fund for Strategic Investments is one way of funding large scale investment projects that would promote competitiveness and boost activity in stressed areas. The Fund would be backed by guarantees from the EU budget and the European Investment Bank. A complementary policy is the switching of government  2  BIS central bankers’ speeches  expenditure to more investment and growth friendly areas, while reducing bureaucracy and other inefficient expenditure.