employment rate, as both the average working week and the share of persons of working age in the total population are higher in malta than in the eu. since 2003, in fact, malta ’ s employment rate declined from around 87 % to 84 % of the eu average. this reflected a steadily falling male employment rate, the lowest female employment rate in the eu, a declining rate among older workers and the lowest average exit age in the eu of workers from the labour market. apart from such supply - side considerations, there are other factors which may hinder the ability of the economy to generate sustainable growth. for instance, despite the widespread recognition that exports should be the engine of growth in a small open economy like malta ’ s, insufficient attention has been devoted to the fact that between 2005 and 2008 gdp growth was largely driven by domestic demand. the average level of combined private and public consumption was around 85 % of gdp during this period, against 78 % in the eu. consumption at this level cannot be sustained unless substantially more resources are allocated to investment and to other growth - enhancing activities. at this point it is necessary to extend the analysis to two important dimensions of membership of a monetary union, namely the role of price and cost competitiveness and fiscal policy. persistently faster increases in prices and costs in malta relative to the euro area average lead inevitably to a loss of competitiveness. since the interest rate and exchange rate policy tools are not available to euro area members, the necessary adjustments have to take place through domestic price and wage levels or in real variables such as output and employment. it is, therefore, important to avoid any such divergencies. the failure of domestic food prices to decline in line with trends abroad in recent months is a case in point and suggests the presence of market imperfections. the harmful effect of such a similar analysis is presented by papademos, lucas, determinants of growth and the role of structural reforms and macroeconomic policies in europe, a speech delivered at the 2004 ludwig erhard lecture on the state of the european economy at the lisbon council ’ s board of economists in december 2004 and in a box entitled labour utilization and economic convergence, published in the central bank of malta, quarterly review 2008 : 2, pages 46 - 48. rigidities is magnified when nominal wages are partly indexed to consumer prices, as they are in malta, because temporary price shocks can lead to permanent wage and price deviations from the euro area average. the wage determination process must, therefore

of thumb that underlie our prescriptions if you like. and i will conclude by raising some challenges that macro - prudential policy is facing now, including my thoughts on the road ahead. through that, i hope to set out how we need constantly to adapt macro - prudential policies, as we do with our health - care plans as lifestyles evolve. interactions between financial stability and sustainable growth and the role for macroprudential policy why is financial stability important? to understand why we place so much emphasis on a well - grounded macro - prudential framework, it ’ s important to understand why we care about financial stability in the first place. in brief, it is because we believe that financial stability is a precondition for sustainable economic 1 / 7 bis central bankers'speeches growth. 2 a stable and well - functioning financial system exists to serve us all. it enables the efficient allocation of resources, so that businesses can exploit productive opportunities and households can meet their needs. and it allows the risks incurred in the course of generating economic growth to be shared. the banking system supplies credit to households, to buy homes or spend more than they currently earn ; and to businesses, so that they can hire more workers, invest in capital, and innovate and expand. non - bank financial firms further transform long - term savings into new investments via bond and stock purchases ; and they enable both households and businesses to insure themselves against risks that could prove costly were they to crystallise. the financial system also facilitates payments, so that households and businesses can pay safely for the goods and services they choose to receive. a stable financial system is one that is resilient to shocks and so is able reliably to support households and businesses through the consistent supply of the vital services that they demand. financial stability thus supports growth and prosperity, just as good health supports us in our daily lives. the role of macro - prudential policy historically, there was a view among policymakers that as long as monetary policy guaranteed low and stable inflation, and micro - prudential regulation was successful in ensuring the balance sheets of individual institutions were robust to shocks, the financial system could take care of itself, and financial stability would follow. however, the global financial crisis revealed the flaws in this view : while monetary policy sets the benchmark interest rate for financial transactions and “ gets into all the cracks ” in the financial system, it isn ’ t sufficient to ensure that those transactions are undertaken