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Since its inception, the Central Bank of Malta has played a critical role in the country's economic development. The increasing sophistication, complexity and the rapid rate of change that have characterised the islands' economy over recent decades have surprised many observers. The Bank is committed to provide objective and in-depth analysis of these changes, to explain their underlying causes and to identify related issues. Our mission statement states quite clearly that the Bank has to "undertake economic and financial analysis and research […] and provide independent advice to Government on economic and financial policy issues." This is the third detailed economic study that the Bank has published in less than two years. While Bank economists frequently publish research papers that deal with specific topics in a concise and technical manner, in 2015 senior management undertook to supplement these single topic papers with more holistic ad hoc publications addressing broader research questions. In the first two research publications,1 both of which were highly appreciated by observers of our economy, the focus was on documenting its rapid evolution and the resulting changes in macroeconomic relationships. Successfully answering a question, however, inevitably generates other questions. ; N/A

Over the decades that followed Independence in 1964, the Maltese islands have witnessed fundamental changes in the financial and economic landscape, including accession to the European Union in 2004 and the subsequent adoption of the euro as the national currency in 2008. Despite its small size and its dependence on foreign trade, Malta has managed to outperform its peers in the face of the global economic downturn. Structural adaptation has played a key role in Malta's rapid growth and its consistent resilience to external shocks. Structural change has been visible in the labour market. Employment market imbalances that half a century ago were relieved through outward migration are now resolved by inward migration – mostly from EU countries – alleviating resource and size constraints. ; N/A

With a GDP of around €5.1 billion and a population of 400,000 living in an area of 316 km2, Malta is the smallest and most densely populated EU Member State. In 2006 it had the fifth most open economy in the EU, and its average trade-to-GDP ratio hovered around 81% in recent years. These characteristics constitute a challenge for both policymakers and analysts in that key economic variables are prone to volatility, being highly sensitive to external events and to shocks in specific sectors or individual enterprises which, though small in absolute terms, can have a disproportionately large impact in a small country context. Such an economy clearly stands to benefit from closer economic and monetary integration with the euro area, particularly in terms of greater stability and policy credibility. The Maltese economy, moreover, is well suited to participate in the EU single currency area: it is already closely integrated with the EU through trade and finance; it has close similarities with the euro area in the sectoral composition of output and employment, as well as in terms of business cycle synchronisation; it enjoys a relatively high level of development (per capita GDP in PPS stands at around 74% and 70% of the EU25 and Euro area averages, respectively); and the currency has a long history of stability, with a strong peg to the euro in recent years. ; N/A

Malta joined the euro area on 1 January 2008. It did so under a new framework that is substantially different from that used by the countries that joined before it,3 as they adopted the euro legally first, and in cash form only after a transitional period. When Malta joined the European Union on 1 May 2004, by the same act it also joined the Economic and Monetary Union (EMU) as a member of EMU with a derogation. Becoming a full member of the single currency area may be summed up legally as the removal of this derogation. In fact, by means of the Treaty of Accession, Malta undertook to converge with the Maastricht criteria and EMU acquis to achieve full EMU membership and the adoption of the euro – thus implying the removal of that derogation. ; N/A

This study discusses the concept of fiscal sustainability and, by so doing, sheds light on government debt dynamics. It then presents a conventional debt sustainability analysis (DSA) exercise to gauge the sustainability of Maltese general government debt over the medium to long term. The exercise consists of two alternative scenarios which reveal how the government debt-to-GDP ratio might evolve over the next decade. For robustness, each scenario is subjected to a number of adverse shocks. The results suggest that Maltese government debt is sustainable, but this comes with important caveats. ; N/A

This note provides an account of the major milestones in the evolution of the economic governance in the European monetary union, assessing the reforms in governance frameworks of the EMU from 1997 up to mid-2013. It mainly focuses on the post-2010 reforms, where the financial crisis and the ensuing sovereign debt crisis exposed the weakness of the economic governance framework of EMU in Europe. It also highlights the on-going proposals for further coordination and cooperation that have been brought forward but still require agreement among Member States. The note suggests that while the commitment shown to introduce stricter fiscal rules and enhanced surveillance was a necessary step forward for sustaining the credibility of the single European currency, further reforms focusing on deepening European integration are still needed. ; N/A