excessive private indebtedness. preventive recommendations are provided to member countries at an early stage in the formation of imbalances. the severity of the financial crisis has also exposed the inadequacy of the current financialsector regulation and supervision. as already indicated, macro - prudential risks were overlooked and the link between sovereigns and banks was underestimated. in reaction to this, european institutions and member states have engaged in a major overhaul of bank regulation and supervision with the objective of creating safer, sounder and more transparent financial institutions. one of the major initiatives to strengthen the governance framework was the establishment of the european systemic risk board ( esrb ). in its first year of operation, the esrb tackled key issues relating to the interaction between three factors : the creditworthiness of european sovereigns, the increasing difficulty of banks in raising funds, and weakening economic growth. furthermore, the esrb adopted three public recommendations on : i ) the macro - prudential mandate of national authorities ; ii ) lending in foreign currencies ; iii ) us dollar - denominated funding of credit institutions. it is important to note that the voting members of the general board of the esrb include the governors of national central banks. indeed, esrb activities are based on strong cooperation between its members. a key part of the esrb ’ s work is to combine the analysis produced by the micro - supervisors and central banks. clearly, the central bank ’ s role of ensuring financial stability has extended to the international level, implying further responsibility in decision - making. in malta, the cooperation between micro - and macro - supervision is embodied in the setting up of the joint financial stability board. the central bank of malta, in its capacity as the macro - prudential authority, has agreed with the mfsa to set up a joint financial stability board which will be formally constituted in a few weeks. the objective is to enhance the cooperation between the two bodies for the assurance of the stability of the financial system. the intention is to strengthen the resilience of the financial system and to mitigate the buildup of systemic risks. to these ends, the board ’ s mandate includes the development of mechanisms that would identify risks to financial stability, and the establishment of the necessary macro - prudential policy tools. the joint financial stability board will also be able to make recommendations to the cbm or mfsa boards on macro or micro prudential issues, as the case

explained exclusively in terms of a cyclical downturn. delays in implementing effective competitiveness - enhancing reforms were also a factor. as a result, the economy was not fully prepared to exploit the single market. 3. in these circumstances, isn ’ t this the worst time to be strait - jacketed by the conditions for euro adoption? wouldn ’ t a fiscal boost speed up economic growth, now that your already limited monetary policy tools have been put in the shed? allow me first to correct two misconceptions implicit in your second question. for a start, our monetary policy tools have not been put away but are available for use if needed, as was the case in april last year when the bank ’ s central intervention rate was raised by 25 basis points. the primary objective of our monetary policy, moreover, is not to influence the level of economic activity. it is to maintain price stability, which we pursue through the operation of a fixed exchange rate. we, therefore, use our monetary policy tools in the first instance to provide support for the currency. now your question echoes the view of those who argue that if only we were to delay adopting the euro, the government would be able to spend more and run a higher budget deficit because it would not have to meet the deficit criterion this year, and thereby help the economy grow faster. it sounds very attractive, but would it work? first, the argument is based on the premise that increased government spending produces jobs and growth. in a small, open economy, things are not that simple. if more money is spent on infrastructure projects, there will be increased imports of raw materials and other inputs ; and of the money that remains in malta in the form of wages, a high proportion will also be spent on imports. these leakages will diminish the benefit to the economy from the multiplier effect of the increased spending. thus, for example, our calculations suggest that had the government invested lm18. 5 million more in 2005, keeping the deficit at the 2004 level, the gdp would have been around lm14. 5 million higher last year. against this benefit, moreover, one would have to set off the costs. for example, a higher deficit means an increase in the public debt of equal amount, and thus more annual interest to be paid out of recurrent revenue. besides, for the reasons i gave earlier, a higher deficit translates into a wider trade gap ( by an estimated lm7. 5 million in the