Even in the context of a stagnating global economy, the economic outlook for the European Union in 2019 – as described by Bloomberg recently – has gone “from bad to worse”. Characterised by a loss of momentum in two of the bloc’s largest economies – Germany and Italy – disappointingly weak indicators have persisted, and the list of one-off growth inhibitors has gotten longer, resulting in several institutions having downgraded their forecasts for the area. There are further grey clouds on the horizon too – with the potentially disruptive impact from Brexit, and abrupt fiscal tightening in the US looming largest amongst them.
However, amid this gloomy global and regional landscape, there are a few beams of light bursting through. Within the EU, it is the economy of the tiny, Mediterranean island-nation of Malta that perhaps shines brightest.
Despite GDP growth easing from 6.2 percent to 5.2 percent in 2019, the Maltese economy is still expected to top the EU’s growth chart this year and the next – and was described by the European Commission (EC) in February as being “one of the most dynamic” in the whole bloc.
According to the EC, this dynamism is a result of buoyant private consumption, strong employment growth, increasing disposable income and a large accumulation of savings that reflects the significant trade surplus of the country’s internationally-oriented services sector. This is additionally supported by an expected pick up in investment growth due to large-scale infrastructure projects in the health, tourism and real estate sectors.
The Commission’s glowing appraisal will have been music to the ears of Malta’s Minister of Finance, Edward Scicluna, particularly given the much weaker external environment. But to what does he attribute the country’s recent economic success?
“We turned [to] our weaknesses and addressed them”, he says candidly. “We had complete reliance on oil, now that’s history, and we’ve moved towards gas. We also had a very low female participation. We’ve addressed that, and now it has really increased to very close to European standards. Early school leaving, you name it, things which we were not proud of, but [things we] had to address squarely, and we did. You have to listen and act fast, especially on the regulatory front.”
The Keys: Disruptive Regulation and Flexibility
“In Malta if we hear of a disruptive idea, which you sense that is going to be the next big wave of economic activity, [we] grab it and run with it and build a regulatory framework for it.” Minister Scicluna. Copyright: South EU Summit
One of the principal reasons why Malta is now enjoying its status as the top-performing EU economy, as the Finance Minister alludes, can be attributed to its fiscal policy over the last few years, with a combination of various reforms implemented over a period of time. To get to this point, however, the government had to not only come up with and implement brand new legislation relating to innovative industries, but also to address the underlying challenges.
“Many countries are much more advanced than Malta, but they get it wrong when it comes to regulation”, explains Scicluna. “They are so heavy and so bureaucratic, and it takes time, while in Malta if we hear of a disruptive idea, which you sense that is going to be the next big wave of economic activity, [we] grab it and run with it and build a regulatory framework for it.”
Owing to Malta’s geographical and demographical constraints, its economy has needed to be flexible to compete. But it’s also down to its small size, and the government’s philosophy to openly embrace digital disruption, that it has been quicker to adapt than most – leading to the recent creation of genuine world-leading industries in the emerging spheres of iGaming and Distributed Ledger Technologies (DLT).
As one of the first countries globally to legislate for DLT and its use across different sectors, today, DLT – and specifically blockchain – is touted for adoption across multiple sectors in the country, and has become one of the main selling points for Malta’s financial services sector, even leading to the nickname ‘Blockchain Island’.
Punching Above its Weight
This progressive nature when it comes to the implementation of reforms has, in a relatively short space of time, led to the country establishing itself as an important player at an EU level with regards to EU monetary policy, fiscal reforms and EU budget. Indeed, Malta has found a big voice that defies its diminutive stature.
The island and its Finance Ministry, as part of the Eurozone, is particularly outspoken when it comes to the EU Banking Union and the problem of economic integration between EU member states – a pertinent issue when considering the current prevailing economic environment of the bloc and its vulnerability to potential future shocks.
“First, we need to make sure that those countries who have a high ratio of non-performing loans or are highly indebted, come to at least modest ratios, and then you start sharing the risk”, says Scicluna. “This is really the difficulty with the Banking Union, and also about other targets for the Eurozone in general, that some countries are quite far behind and we just have to help them catch up, because the risk sharing will not advance that much if this doesn’t happen.”
“It’s not because we don’t want to move. The moral hazard is that rich countries don’t mind subsidising and helping out other countries who are weaker, but they have to show that they are helping themselves.”
The Finance Minister also stresses that additional measures will need to be pushed forward, at a policy level, to safeguard the Eurozone, particularly given the uncertainty surrounding Brexit.
“You have an institution which is very successful, which is the European Stability Mechanism. [It is] very successfully run, so can offer a ‘rainy-day fund’ and enlarge its functions so that it [could] support the Eurozone for the future. It’d be the European Monetary Fund, or [something] similar.
“That’s where Malta would like to go, along that path. You will find us with a group of level-headed countries without any political agendas. We want the Eurozone to succeed, [so] you’ll find Malta talking a lot of sense in the Eurozone meetings.”
Despite its newfound political clout on these issues, like every country within the EU, Malta is also facing its own challenges – and the island’s thriving financial services sector is not immune.
Tackling the White Elephant
“No financial centre in the world can really put its hand on its heart and say ‘Look, I can guarantee there is no money laundering passing through any of our institutions.” Minister Scicluna. Copyright: South EU Summit
At both a European and a global level, there are voices of concern regarding Malta’s capacity to maintain its current growth rate, while continuing to improve transparency and protect the integrity of its financial systems. In February 2019, the International Monetary Fund stated that the promotion and growth of blockchain in Malta, in particular, posed a significant risk of money laundering and the financing of terrorism, recommending that the Maltese authorities apply stricter regulations and sanctions.
“When it comes to financial services, the concerns are really specific”, says Scicluna. “Potential regulation and financial stability, and also money laundering concerns: these are all associated. But no financial centre in the world can really put its hand on its heart and say ‘Look, I can guarantee there is no money laundering passing through any of our institutions’. It’s a question that you’re doing your best to monitor it, combat it, prevent it, reduce it, and prosecute and investigate, and take it to its conclusion in order to deter crime.”
“So yes, it is a concern”, he emphasises. “[But] it’s a question of whether the government takes that concern seriously and strengthens institutions – which we’re doing.”
While the Maltese Finance Ministry looks to deal with these inherent risks effectively, it must also play a vital role in ensuring that adequate fiscal policy caters to the growing demand of a fast-developing economy, and meets the needs of its investors. This is bearing in mind that continued investment will be key to ensuring the sustainability of Malta’s upward economic trajectory.
As a result, Malta has become laser-focused on establishing itself as a hub for various business and investment activities, and today boasts one of the EU’s most attractive tax schemes. The general strategy, notably with incentives such as its Individual Investor Programme (IIP), is to boost growth of the economy by investment, and not by way of indebting the country.
Enabling Investment Driven Growth
However, similarly to the promotion of blockchain, the IIP has also made for a controversial topic in Brussels, which Scicluna says is unjust.
“This scheme, or the fact that you give citizenship not by family connections, but as a gift, has existed for many, many years”, explains the Minister. “I remember the US had it, Canada had it, the UK had it. In other words, they welcomed investment. Smaller countries, especially Southern EU countries, have pushed this further, I would say. Once they started doing that, the European Parliament got very critical of them and they started talking about concerns about taxation, about money laundering, criminality and so on. But [for] every activity you have to address the concerns.”
Scicluna points out for the relatively small number of citizenship applications that Malta receives, a much more stringent vetting process can be carried out compared to other, larger jurisdictions.
“In Malta’s case we refuse 25 percent of the applicants”, he says. “Not because they are criminals, but they haven’t given proof enough of the source of income and so on and so forth. [If] it’s not satisfactory, [it’s] put by the wayside. There is a lot of due diligence done. But the point is, we’ve got somebody who believes in the country, is going to invest, whether in industry or in corporate bonds or in government bonds, and just like the scheme that [countries like] the UK had, you’re going to thank them by providing the citizenship.”
With Malta looking to continue to prioritise the promotion of investment in the country, the Finance Minister says the island’s authorities will also continue their bold approach to governance, in order to position the island-nation as a disruptive economy – one that continues to challenge itself and uses its small size to its benefit through the fast implementation of reforms, flexibility, and inclusiveness.
“[We will] continue applying this open secret, in other words, the fact that you take decisions quickly, even at the sake that you make a mistake. If you don’t want to make mistakes, don’t take decisions – just lay back and postpone – which [to us] is not the right thing to do.”
“Our target is to grow higher than the rich countries in Europe, because that’s the way you achieve convergence. You don’t achieve convergence if you grow at the same rate as Germany or France – the gap will remain. We want our people to have the same standard of living in those countries, and all you need is to grow even one percent more. With the economy, you try to make it congenial for business people and let it grow.”
