The fiscal compact : relevant for Malta?

Abstract

The eurozone crisis has resulted into large output shortfall in various member states. The financial and economic turmoil that has reverberated throughout the European Union has prompted to the establishment of the fiscal compact to deal with the contemporary situation and also to try and avoid or at least minimize future economic crises. This dissertation examines whether this treaty is of significance for the Maltese context and whether it will indeed minimize the risks of crises for Malta. This study first focuses on the theoretical background and implications of the fiscal compact. Then it tries to analyse and examine whether the aims and rules that the fiscal compact presents are truly effective for Malta. The dissertation tries to empirically estimate the relationship between economic crises, resulting from considerable output shortfalls in the real GDP, and fiscal deficits. This is done through the use of two econometric model specifications. For both models I analyse their economic and econometric features. I find that there is some kind of connection between real GDP growth and fiscal deficit and thus we conclude that public sector deficits play a role in the manifestation of such crises. From the results I also find that the private sector and external influences, coming from European Union member states, also influence Malta‟s output growth. I conclude that the fiscal compact is significant for the Maltese context and that the rules it sets for the European Union member states in general, will indeed help Malta in minimizing its risks towards the present and any future crises.