systems. this explains why the fallout from the crisis has been fairly limited. like investors everywhere, however, all our banks and other investors are seeing the value of their investment portfolios decline as a result of the generalised decline in asset prices. this will result in lower profits, but since our banks are well capitalised they are able to cope with it. this does not mean there should be room for complacency, particularly at times of unprecedented market dysfunctionality and a looming global recession. a small banking system like ours is inevitably characterised by a degree of concentration risk and, because of a typical maltese idiosyncrasy, our banks are heavily exposed to the construction and property sectors. since our economy is likely to be affected by the oncoming recession and will experience a slowdown next year, it would be advisable for the banks to strengthen their balance sheets further. would you say that the worst is over for local banks? can you envisage a scenario where one of the banks will go down? there is no direct threat from the crisis – they are not directly exposed. if the economy slows down, certain borrowers might be overextended and there might be an increase in nonperforming loans. during a press conference in frankfurt last week, ecb president jean - claude trichet said he did not exclude further interest rate cuts. why the need for further cuts and are you optimistic that these cuts are the solution? during the ecb governing council of november 6, we concluded that the outlook for price stability had improved further because inflation rates are expected to continue declining. market expectations about medium - term inflation based on information extracted from the bond markets have fallen to just over two per cent. while the governing council does not pre - commit itself, should the data available at our december meeting point to a further alleviation of upside risks to price stability, then the conditions would be ripe for another cut in interest rates. lower interest rates should contribute to easing current tensions in the financial markets and also to facilitating the flow of credit. but monetary policy alone cannot resolve the financial and economic crisis. corrective actions at other levels of policy are required, and these have indeed been taken by national governments and central banks as well as by international institutions. it will, however, take a while for confidence to return to a level that would permit the financial system to fully service the needs of a globalised economy. so why did the ecb increase rates in

the current situation characterised by high fiscal and external deficits, moreover, the stimulation of aggregate demand would do more harm than good to the country ’ s economic prospects. living standards can only be raised on a sustained basis if we succeed in adding value to imported inputs and by providing services in a manner that is cost - effective in relation to our competitors. with regard to growth - oriented policies, inspiration can be obtained from a number of eu programmes, including the lisbon agenda for competitiveness and the stability and growth pact. although most member states have fallen behind in meeting the targets of the lisbon agenda, malta must make even more pronounced efforts to achieve them, particularly in the areas of human resource development and innovation. the national action plan for employment is a step in the right direction, but it can only produce the desired results if all social partners take ownership of it. with regard to macroeconomic stabilisation, the successful achievement of the convergence programme objectives would restore the use of fiscal policy as an instrument of economic management and lead to a better allocation of resources in the economy. it would also contribute to a smooth transition through erm ii and towards the adoption of the euro. as a small and highly open economy, malta stands to benefit significantly from the introduction of the single currency, mainly through the elimination of exchange rate risk and uncertainty and lower interest rates and transaction costs. on the microeconomic level there are a number of issues which need to be tackled to improve the efficient allocation and use of resources and to raise productivity. unlike macroeconomic policies, which tend to yield results only in the medium - term, efficiency improvements at the micro level are likely to produce more immediate benefits in terms of new economic activity and job creation. the truth is that sustained improvements in the country ’ s economic fundamentals cannot be attained without enhanced efficiency and productivity in both the public and private sectors. the achievement of such improvements requires efforts on a number of fronts. first, it must be understood that the quest for competitiveness can only succeed if it takes the form of a collective effort whose sole purpose is to boost the economy ’ s value added. without the latter, higher wages and profits cannot be paid. it cannot be an exercise in which one of the parties attempts to crowd out the other. it is clear, therefore, that a more focused social dialogue is needed that takes a stronger leadership role in identifying the policies and measures needed to improve malta ’ s international competitiveness and to ensure their implementation. second, there is absolutely no