The euro and inflation

One of the most stupid accusations made recently by the Leader of the Opposition was that the fact that the Prime Minister had not fixed a date for the election was a sign of Dr Gonzi's lack of decisiveness. The calling of an election in our British-type system is the Prime Minister's prerogative and his alone. It is not by any stretch of the imagination the Leader of the Opposition's. Dr Sant's assertion is nothing but a sign of arrogance and frustration.

The Labour Party strategists were more than sure that the election was to be held just after the budget. They reasoned that was why the budget was held earlier than last year. Moreover, they assumed that the government could not hazard an election after the introduction of the euro because they had concluded that the change in currency would inevitably bring about a steep rise in prices. This last point was sadly frequently emphasised too by independent opinion makers. It seems everybody assumes that the timing of an election is always and invariably fixed by partisan considerations. Labour might also have concluded that Dr Gonzi, like Eddie Fenech Adami before him, would prefer an early election, especially since the feeling of an impending election would cause a sharp deceleration of the economy.

Labour was wrong on all counts. First of all, the Prime Minister has repeatedly taken unpopular decisions because they were in the national interest. The government, during these last three years, had year after year edged the budget forward. First it was the CHOGM meeting in Malta. Then the government clearly stated it did not like the budget debates to linger on up to Christmas. Labour saw in these statements an attempt to put them off their guard. They had become fixated on a late November date. They also hoped to disrupt the economy. The fact that the economy has picked up and continued gaining traction speaks volumes on the lack of credibility of the MLP as now led.

But it must have been the euro issue that baffled Labour and others. It had been officially stated months back that the country could not afford to hold an election on the eve of euro adoption. Not especially in November or December, when the security forces would have their hands full due to the movement of millions of notes and coins in new currency. Alas, last week's daring robbery proved the government's argument 100 per cent right. Moreover, this government is not afraid of the new currency issue. NECC has done sterling (no pun intended) and meticulous work. It has studied best practice and vastly improved upon it. The European Commission has urged other countries aspiring to join the eurozone to adopt some aspects of the local strategies and information campaign. The people have progressively gained confidence in NECC, notwithstanding the decimalisation experience over 30 years ago and the recent bad experience in some neighbouring countries. It is true that the proof of the pudding is in the eating and the pudding is not ready yet. But it is looking more likely that the euro will prove a feather in the government's cap, rather than the expected albatross round its neck. Again, Labour has been proven wrong on the umpteenth issue. Labour viewed the introduction of the euro as a necessary evil, a disadvantage of joining the EU, to be postponed for as long as possible. All minuses were harped on monotonously for months on end, especially the loss of monetary sovereignty and the expected inflation. At least, we should wait until the economy was strong enough. A three to four per cent increase in GDP would give us the signal to adopt the euro since we could not postpone it forever.

For the government, the euro is a plus, a further tool in the competitiveness issue. Joining the eurozone would instil confidence in foreign and local investors, thus enhancing the economy. Today, there is no doubt who was right on this count. The nigh Lm600 million foreign investments in 2006 speak volumes. As to competitiveness, every outgoing tourist who travels to the eurozone could have told the Labour leadership how much they stood to save in exchange charges. Imagine the savings on imports and exports! As time rolled by, someone must have convinced Dr Sant that he was making the same crass, strategic blunder as with the EU issue and he was cooking a recipe for certain electoral defeat. So he changed tack. He announced that a Labour government would proceed with the currency changeover as planned. Doing otherwise would cause irreparable economic disruption now that things had gone so far. A lame excuse for a retreat! But thank God and whoever convinced Dr Sant for that.

The fact that Labour had accepted the government's position removed an enormous obstacle to a smooth changeover. But Labour having wisely removed the euro as an electoral issue could not make the u-turn gracefully. They tried to make the government's task as problematic as could be. They harp and harp on the inflation issue. They were determined that any increase in prices would be attributed to the euro and hence to the government's ineptness. If the change in currency necessarily causes inflation it does not matter when it takes place. So the argument holds no water.

Luckily for Labour, besides the price of crude oil, which had risen steeply in 2005, in the middle of this year the world was faced with a steep rise in cereal prices. Hence, the across-the-board rise in the prices of those food items that depended directly or indirectly on cereals. In the circumstances, the government's task is twofold. See that the increase in prices is justified and not nudged locally. Ensure that everybody could afford the justified increase. This it did by subsidising the price of bread as well as animal fodder and by putting more money in people's pockets. In the recent budget it has granted an extra Lm1 in the cost-of-living increase to make up for the expected increase in prices. The increase was for the first time ever given full to pensioners.

Budget measures moreover were mostly family-centred. Many families with young children will gain over Lm500 a year and those in need will gain more. Already in last year's budget almost 30,000 families were totally or partially exempted from paying the utility surcharge.

There is a widespread belief that under Labour prices rise less than under Nationalist governments. Nothing is further from the truth. In 1981, retail prices increased by 15 per cent and 10 years back, under Dr Sant, inflation hovered around four per cent mostly caused by the Labour government's increased taxation and charges. One of our grave responsibilities is to decouple the euro from any real rise in prices, besides convincing the people that this government can both create work and wealth as well as distribute it better than Labour. At this stage of development, Malta cannot afford to have a government led by the present Labour incompetent leadership.

Dr Deguara is Minister of Health, Community Care and the Elderly.