Central banking history is hardly a subject that will pump adrenaline in the veins of financial services practitioners or students. Yet the activities organised by the Central Bank of Malta on its 50th anniversary have provided some exciting events that highlight the economic progress that Malta achieved since independence.

A seminar organised by the CBM focused on how central banking has changed since the financial crisis. The well-attended seminar saw the Minister of Finance, Edward Scicluna, give a lively summary of the evolution of monetary policy in Malta in the last 50 years.

The good old days when the Central Bank set interest rates and banks had to abide by them are long gone. They provided the economy of an independent Malta that could no longer rely on handouts from Britain with the chance to diversify without significant setbacks caused by interest and exchange rate shocks. Of course, with hindsight, one can say that some mistakes were made. But the steady economic growth of Malta in the last five decades shows that the local monetary policy evolution served us well.

The keynote address was made by Vitor Constancio, the outgoing vice-president of the European Central Bank. Dr Constancio’s technical evaluation of the tools used by the European Central Bank used to stabilise the EU economy in the last decade was exhaustive and interesting primarily for students of economics and finance. The big question of course is: where do we go from here?

Governments need to do more to reform their economies and balance monetary policy with a prudent fiscal policy to encourage growth, reduce unemployment and promote more social equity in the EU

Keeping interest rates at their lowest ever levels to encourage investment and buying sovereign and corporate debt to boost confidence in the debt market and provide the much-needed liquidity seems to have done the trick of saving the weaker EU economies from meltdown. It may have also proven that the euro is a currency that can survive severe shocks. But monetary policy has its limitations.

As rightly pointed out by a  former CBM governor, governments need to do more to reform their economies and balance monetary policy with a prudent fiscal policy to encourage growth, reduce unemployment and promote more social equity in the EU.

My preferred contribution in this seminar was that of Aaron Grech, chief economist of the CBM. He gave a very quick and focused overlook at the different phases of Malta’s economic history since independence. The impressive average GDP growth of over five per cent in the last 50 years shows that despite the political noise that often dominates our lives, Malta has done very well economically under different political administrations. Independence, the abandonment of a military dependent economy, trade liberalisation and membership of the EU were the right decisions for Malta.

Despite its lack of widespread appeal, central banking remains very relevant. I believe that the EU still faces significant existential challenges that need to be resolved if the Union is to survive in the next 50 years. Monetary policy on its own will never be enough to avoid the worst economic consequences of another financial crisis. 

The leaders of the EU member states need to do more to reform their economies. In Malta’s case, our Achilles heel could well be the weak educational achievement records when compared to other EU states. We also face challenges of social cohesion with a growing number of working poor mainly as a result of them being unqualified for the kind of well-paid jobs that the modern economy can provide. We also have an ageing population that will create even more pressures on our social and health services in the decades to come.

A small open economy can only prosper if it continues to renew itself practically on a continuous basis. We will have to accept that our future will often depend on decisions taken in Brussels and Frankfurt that are the power hubs of the EU. We will be short-sighted if we assume that the present economic boom will last forever.

Former British prime minister Gordon Brown once said that the days of economic booms and busts are over. He will be the first to admit how wrong such messianic messages can be. Economic cycles are inevitable. What we can do is to prepare our workforce to have the skills needed for an evolving economy and to foster social cohesion in a world where income inequality continues to grow.

I share the view expressed by CBM governor Mario Vella who commented that, fortunately, the real economy is not just about banking and finance.

johncassarwhite@yahoo.com

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