increased cost of pensions and healthcare, and will continue to rise thereafter. the fiscal correction required to bridge the implied sustainability gap clearly cannot be achieved without a culture change regarding the welfare state. put simply, it needs to be understood that you cannot give away what you do not have. we must, therefore, adopt a more cost - efficient approach to the provision of public goods and services, whereby only those demonstrably in need would benefit. access to social benefits, healthcare and subsidies should be streamlined through a combination of means testing and market - based mechanisms. in addition, the benefits structure could be further refined beyond the recent budget measures with a view to making work pay and reducing the disincentives to enter the labour market. conclusion the maltese economy is experiencing its first major test since it adopted the euro. while membership of the euro area has provided a degree of protection during the crisis, in particular exchange rate stability, the road ahead is still fraught with challenges. rigidities, whether in institutions, markets or work practices, that impede progress towards cost the sustainability of malta ’ s social security system : a glimpse at malta ’ s welfare state and suggestions for a radical change of policy, today public policy institute, july 2009 and sustainability report 2009, european commission. competitiveness and higher productivity are incompatible with enduring membership of the currency union. they also render the common objective of raising living standards less likely to be achieved. needed structural reforms are being implemented, but given the uncertain growth prospects in export markets, the change process needs to be accelerated and given greater focus. the directions for change i have suggested are by no means original because they emerge spontaneously from an analysis of the current state of the economy. they do, however, imply difficult policy choices, not least because they often entail a departure from established practices and the loss of acquired rights. this is undoubtedly a major challenge, but it is also one that cannot be avoided if we want malta ’ s boat to be lifted by the rising tide, when it comes, along with those of other countries.

in access to credit on more favourable terms. some of these benefits will indeed materialise ahead of entry in the euro area. you will recall that in erm ii the maltese lira will be fully pegged to the euro, so that the variability, albeit limited, in the lira / euro exchange rate associated with the fact that the euro has a weight of 70 % in the maltese lira currency basket will disappear. on the other hand, some variability could nevertheless manifest itself to the extent that the currency fluctuates within the erm ii band. the advantages of pegging fully to the euro area should nonetheless be considerable, as the euro area already accounts for more than half of malta ’ s external trade in non - primary products. for the eu as a whole, the share is even higher. this share is set to increase as malta integrates further with the eu and as more of the current non - euro area member states join the euro area. while prospects for the uk ’ s entry in the euro area remain uncertain, the analysis does not change much, as a large number of companies operating in the uk have already switched to the euro as an accounting currency to gain exposure on international markets and to preserve their competitiveness. this trend is set to continue and is likely to spread to other countries as the euro continues to establish itself as an international currency. this means that the local business community could face pressures to make payments in euro even while malta is outside the euro area, acquiring new currency mismatches in the process. there comes a point, therefore, when delaying adoption of the euro results in more pain than gain. membership of the euro area will also present considerable financing opportunities associated with the large size and liquidity of financial markets in euro. businesses will be in a better position to shop around for the cheapest terms and the highest return. these advantages are an inevitable outcome of the presence of a large number of market participants and the further unfolding of the financial services action plan, which will enhance the tradability of euro assets in the euro area and beyond. participation in the single currency area provides scope for further cost savings in the form of lower risk premia resulting from adherence to the eu ’ s strict macroeconomic policy framework. this aspect is particularly relevant in the maltese context, as the small size of the country and the prevalence of micro - enterprises make the economy highly susceptible to developments abroad. foreign banks and suppliers seek to cover this perceived risk by building a higher