of last year and is currently in a moderate cyclical upswing underpinned by more favourable external conditions. merchandise exports increased markedly in the first quarter of this year and survey indicators point to a sustained improvement in economic sentiment. tourism activity also seems to be recovering. the latest unemployment rate – 6. 9 % in march 2010 – is one of the lowest in the euro area, where the average stands at 10 %. looking ahead, forecasts by the central bank of malta and the european commission ( ec ) anticipate gdp growth of 1. 1 % and 1. 2 %, respectively this year, followed by 1. 7 % and 1. 8 % in 2011. 6 domestic demand is expected to be the main engine of growth, mainly driven by a pick - up in investment, but the contribution of net exports is thought to be negative in both years, as imports are projected to grow at a faster pace than exports. labour market conditions are expected to remain soft, reflecting the usual lagged response to the recovery in output. the unemployment rate is thus foreseen to stay slightly above 7 % in both years. inflation is also projected to remain subdued at around 2 %, but it will still be somewhat higher than the euro area average. similarly, compensation per employee is forecast to rise by around 2 %. as this increase in nominal wages is more reflective of inflation developments rather than productivity gains, it could put pressure on cost competitiveness. 7 forecasts are of course subject to uncertainty at the best of times. in the present period of renewed crisis, the risk to the projections is clearly on the downside, mainly because of the clouded outlook for demand in malta ’ s main trading partners and the likely spillover from the deflationary fiscal policies being adopted in many countries. the recovery in europe is also constrained by the deleveraging process currently underway in the banking sector and in the private sector generally. together with the fiscal tightening, this balance sheet consolidation largely explains why the ec is forecasting only a modest recovery in the euro area and the eu this year, with growth rates of 0. 9 % and 1. 0 %, respectively. lessons learned and the way forward several lessons can be drawn from the crisis, but two come to mind more readily. the first is that those countries which entered the recession already burdened with imbalances – both internal and external – have performed more poorly than those with sounder economic fundamentals. the second is a universal law that often

comes with a precise timeline. it is likely that malta ’ s eligibility for eu structural funds will decline after 2013, and the burden of an ageing population in terms of health and pension expenditures will be much heavier than it is today. it will, therefore, be imperative to have invested massively and wisely in the meantime such that the economy will be generating sufficient wealth and, therefore, tax revenues to bridge any budgetary shortfall. my conclusions are supported by both theory and experience. in the neo - classical growth model the rates of saving and investment are the fundamental determinants of living standards in the long run. in other words, countries that save or invest more than others will enjoy a higher per capita income. newer growth theories go beyond this and distinguish between two types of capital, physical and human. empirical evidence clearly shows that differences in living standards across countries can be explained by differences in investment in human capital. unfortunately, advice on the importance of saving and investment often goes unheeded because higher saving entails lower consumption. in other words, prosperity tomorrow can only be achieved by making sacrifices today. even if this lesson is not fully taken on board, the need for continued fiscal prudence will ensure that choices between alternative uses of public funds will have to be made more frequently, and spending cuts made in sensitive areas. such decisions would be taken much faster and more effectively if a bipartisan approach were adopted. other countries in europe have taken this road, but there are precedents in malta too. the financial services legislation, for example, was adopted unanimously by parliament. the impressive growth of the financial sector indeed testifies to what a bipartisan approach to strategic economic choices can achieve. the national consensus on the adoption of the euro is another example. it would greatly strengthen the economy ’ s capacity to benefit from membership of the euro area if this consensus were extended to a recognition of the need to increase the share of government revenue devoted to investment in the country ’ s future. mr president, i make no claim to originality in voicing these concerns. in a recent letter to a local newspaper, a mr v. spiteri wrote, “ vague promises and assurances that if we vote for one side instead of the other we can retain free medical care, retire at 61, afford to eat out more often, take at least one holiday abroad and drive a new car, is a dream we would do well to wake up from ”. how very true! higher living standards cannot be