Although the debt ratio has been considerably below that of the euro area as a whole, the government’s determination to achieve its fiscal targets is welcome. Strong efforts need to be made in order to adhere to these targets, particularly during times of slow economic growth. Recent experience has shown that with the adoption of targeted and limited spending measures, the economy has proved relatively resilient to external shocks. Still, at this juncture, the continuing slowdown in external demand is likely to impact the economic growth rate, adding further pressure on the fiscal balance at a time of heightened institutional and market scrutiny. This will introduce a delicate balance between two considerations. First, cutting the deficit is important in order to reduce macroeconomic imbalances that in the longer run hinder economic growth. Secondly the immediate effect is to reduce aggregate demand, whether via spending cuts or through higher taxation, which would slow the economy down. 6  BIS central bankers’ speeches  Given the desirability of avoiding such dilemmas, this may be the time to follow the lead of other countries and consider the adoption of self-enforced regulations, such as expenditure rules.5 Spending decisions involve the reconciliation of various spending needs. While it is the cabinet of ministers that collectively sign off on the budget, the compilation of the budget document involves the reconciliation of diverse demands. If, as is likely, the sum of the separate demands exceeds the previous year’s spending total, the end result is the observed and inefficient upward creep in total spending.

One step in this direction is to harness the ample immovable property of the government which presently may not be rendering an adequate return. It appears that the setting up of special purpose vehicles may be addressing in part this issue. Perhaps, however, we should go a step further by considering the establishment of a development bank which would utilise various assets of government that are presently underutilised as well as other sources of funding, on similar lines that exist in many EU countries, particularly Germany, where development banks at the regional level undertake very successfully a role in promoting the economy and assisting the government in social and environmental projects. Let me turn now to the domestic banking system. On taking on my responsibilities as Governor of the Central Bank of Malta, I actively involved myself in financial stability issues given my concern with financial markets overseas that were characterised by volatile trading conditions and the contagion effects of the sovereign debt crisis. There is no doubt that the impact of the sovereign debt crisis highlights the importance of ensuring a stable domestic financial system. In fact the case of Ireland shows us that imprudent bank policies can have devastating effects on the economy. In contrast, the domestic banking system played a crucial role in preventing a more severe downturn in economic activity after 2008, and in averting a sharper deterioration in public finances, because of prudent behaviour on the part of the banks in both asset and liability management.