your second question reflects the view that the fixed nature of the exchange rate as well as the level at which the lira was pegged to the euro in erm ii are both inappropriate and are stifling malta ’ s competitiveness. let me first address the issue of the fixed peg. this has been a mainstay of our monetary policy for over three decades. it is what maltese traders and investors, and the public at large, have become accustomed to. the resulting exchange rate and price stability have made a vital contribution to the country ’ s economic development. opting for a new and unfamiliar regime, which is what the 15 per cent band arrangement amounts to, in the midst of the uncertainty prevailing early last year would not have been prudent. the decision to opt for continuity by pegging the lira to the euro at the central parity rate, moreover, was also supported by our study on the equilibrium exchange rate, available on the bank ’ s website, which did not produce evidence of a significant misalignment ; and by our conviction – which is shared by expert opinion in malta and abroad – that given the openness of the economy and the speed of the nominal exchange rate pass - through to prices, a possible devaluation is anyway unlikely to have lasting beneficial effects. the 1992 experience proved that devaluation is not the correct antidote for structural problems. in less than three years, the inflationary pressures resulting from that decision wiped out whatever competitiveness gain had been achieved. in the event, the commitment to keep the lira / euro peg at the central parity rate – which was also welcomed by the imf - seems to have reassured both the business community and investors as calm returned to the financial markets. the downward trend in the reserves was first interrupted and then reversed, as capital inflows resumed, including a considerable amount resulting from the redenomination of domestic loans into euro to take advantage of the lower interest rate. in these circumstances, had we allowed the exchange rate to adjust to market pressures within the 15 per cent band, the currency would have appreciated. 5. you seem to be playing down the efficacy of the fiscal deficit and of exchange rate adjustment as a means of jump starting the economy. what would you suggest instead? as i have already pointed out, the domestic factors which are contributing to the economy ’ s anaemic growth record are largely microeconomic in nature. i have also explained why deficit financing and changes in the

public awareness of the importance of productivity and competitiveness, and a consensus on steps that can be taken with minimal social disruption to enhance the country ’ s international competitiveness. thomas f. huertas, crisis cause, containment and cure, 2e, palgrave macmillan, 2010. andrew w. lo, “ reading about the financial crisis : a twenty - one - book review ” journal of economic literature 2012, 50 : 1, pp. 151 – 178. stefan walter, “ basel iii : stronger banks and a more resilient financial system ”, financial stability institute, 6 april 2011. bis central bankers ’ speeches as you know, competitiveness depends on the relationship between changes in productivity and changes in costs, including wages. i have to note that unit labour costs ( ulc ), which are based on the relationship between compensation and productivity, have generally moved in line with those in the euro area. however, in recent quarters, malta ’ s unit labour costs have pulled ahead of those in the euro area, as shown in chart 6. in this respect, the wage setting process and efficient labour market practices are of critical importance. the fact that collective agreements in malta are negotiated at the level of the individual firm helps to ensure that wage growth is compatible with the realities of the markets where the firm sells its products. still, further steps could be taken to improve productivity levels and increase the employment rate. also, as i argued recently, cola increases should not be superimposed on wage increases agreed in collective agreements, but should form part of the negotiation process, so as to ensure that firms are able to match all wage increases with productivity increases. faster productivity growth depends on many factors, including investment, the infrastructure, the quality of the human resources and bis central bankers ’ speeches hence the quality of the educational system and its ability to meet the skills requirements of a growing economy. measures that increase the employment rate could include further policies that incentivise a higher female participation rate, as well as measures that facilitate more flexible work conditions, including part - time employment. a further requirement for economic growth is the smooth functioning of the financial system. particularly during these turbulent times, continued economic growth depends also on the uninterrupted supply of credit by the financial sector to firms and households, and to that end the stability of the financial system is essential. it is important to note that although its rate of growth has declined, bank credit has continued to increase in malta, unlike the situation