beyond the natural creep caused by existing commitments such as pensions is clearly not an option. such spending is already equivalent to 47 % of gdp. the same applies to taxation, which stands at 36 % of gdp. the only way forward is to pursue the medium - term objective of a balanced budget over the business cycle by reducing recurrent expenditure, by redistributing the resources available and by making the most efficient use possible of both domestic and eu funds. an additional advantage of lower spending commitments is that this would make further tax cuts possible that would, in turn, stimulate private initiative and investment. the course of action i am suggesting, therefore, would bring the country ’ s spending priorities more closely into line with its lisbon strategy goals. if malta is to move up the value chain, it must acknowledge global realities. it is clear, for example, that there are increasing rewards from innovation ; and that ict has become a major driver of economic growth. a growing proportion of world manufactured products, moreover, are in the high - tech category, 28 % in 2000, double the percentage twenty years earlier ; and knowledge intensive services are the largest source of employment growth in the eu15, with over 7 million new jobs created between 1997 and 2002 2. these trends should leave us in no doubt as to the direction in which the wind is blowing. financing the necessary investment so where is the money to be found to promote improved higher education and ict - related skills, entrepreneurship and innovation, or to be able to offer foreign investors custom - built premises at relatively short notice and of the standard they have come to expect, when almost 80 % of recurrent government expenditure goes on transfer payments and wages? as for the remainder, there is no room for discretionary cuts either : almost 9 % represent interest payments on the public debt, and the balance is spent on essential supplies. since eu funds alone will not be sufficient, the solution must encompass a further contraction of the public sector and a rethinking of the philosophy behind social spending programmes and other transfer payments. compensation of public sector employees has been stable at 36 % of recurrent expenditure. as a proportion of gdp, it peaked at just over 15 % in 2004 and is projected to decline to 13 % in 2008, reflecting moderate wage increases and a declining workforce. it is important that these trends continue. as for transfer payments, these account for some 40 % of total recurrent expenditure. social spending alone absorbs a third of the total. growth in

michael c bonello : the adoption of the euro by new member states challenges and vulnerabilities speech by mr michael c bonello, governor of the central bank of malta, at the suerf seminar organised by the central bank of malta, valletta, 4 may 2006. the references for the speech can be found on the central bank of malta ’ s website. * * * distinguished guests, ladies and gentlemen i would first like to welcome you all to this seminar which has been jointly organised by the european money and finance forum ( suerf ) and the central bank of malta. a special greeting goes to our foreign participants and guests, including some fifty members of suerf from twenty - three countries. the topic chosen for the seminar is particularly appropriate at a time when the ten nms have just entered their third year of eu membership and are increasingly focusing their attention on monetary union. in these introductory comments i shall, therefore, attempt to highlight some key issues which must be dealt with on the path towards the adoption of the euro. as our policy makers have become acutely aware during the past two years, this path is characterised by manifold challenges and vulnerabilities, not least those associated with real convergence, fiscal consolidation and capital account volatility. the orientation of economic policy in these areas will have to focus strongly, at the level of both national authorities and european institutions, on consistency, flexibility and credibility if we are to extract the maximum gains for all out of this next step in european integration. long run net benefits of euro adoption in order to place this topic in its proper context it is first important to recall that the adoption of the euro is expected to produce significant net benefits for the nms in the long run. a consistent body of literature points to the likelihood of substantial output growth arising out of increased external trade in countries forming currency unions. recent studies suggest trade gains of between 6 % and 15 % from the creation of the euro after five years of its existence. 1 on the basis of these estimates, euro adoption could raise gdp by at least 1 % to 2 % over 20 years in the nms. 2 these gains arise from the elimination of exchange rate volatility and risk, lower transaction costs, increased competition and price transparency, all of which lead to trade creation. lower risk premia on borrowing costs and the stronger frameworks for policy discipline prevailing within the euro area are other potential sources of economic growth. such considerations will no doubt have played a part in the recent