Is it a question of confidence?

The international economy is still in turmoil in spite of the measures taken by governments to bring in an element of stability. The events of the past days continue to demonstrate the lack of stability, even after billions and billions have been spent on bailouts.

In the US there is still no green light for the government to support the automotive industry. Meanwhile, interest rates in that country have been pushed downwards to near zero per cent. Yet nothing seems to be working. The US economy is not on its own. The economy of the UK is also in a bad shape as evidenced by the free fall of the sterling and the eurozone economy is said to be "technically in recession".

We need to remember that all this started because there was concerted severe mismanagement by a number of operating and regulatory institutions. By concerted I do not mean it was agreed between these institutions, but what I do mean is that such institutions, even though acting independently of each other, have mismanaged their activities to such an extent that we were really risking a global collapse. What is even more worrying at this stage is that in spite of all good intentions and G20 summits, there is still no agreement by the big and the powerful (I doubt how powerful they still are) on how to address the situation in a definite way.

This should not be a surprise when one seeks to assess what has been going on since the bailout of the financial system with the taxpayers' money. In spite of the efforts made, bankers do not seem to be very grateful towards those that paid for their bailout.

All of a sudden these persons (that in the past years have done the abominable with other people's money) have become risk averse and have decided to cut down on their lending. This has caused the so-called real economy, which was already weakened by the increase in the price of fuel and by rising inflation, to move faster into recession. One would have wished that governments would have bailed out the banks but not the bankers.

Thus after the bailout, there is the need for the stimulus. How big should the stimulus be and what type of stimulus should it be? Is this a requirement just for the US economy or is it a requirement for the leading European economies? What should its objective be? Up to the early 1980s, one would not have bothered to ask these questions. However, we have been through 25 years of economic policies that sought to get government spending under control.

There can be various options. A government may continue to support the financial system, but it does not seem to have worked, other than it helped to avoid the financial collapse. Another option may be providing support for specific economic activities, such as the automotive sector, but one really does not know where and when to stop such support. Others are speaking of huge tax cuts. This would provide more money into people's pockets, but it would not work if people do not want to spend that money. The fourth option could be direct investment by the government in the economy.

Technically, with inflation in the world's leading economies at around half what it was just six months ago, the need for an economic stimulus should not be so great. There is a need for such a stimulus because consumer and business sentiment is so negative. Consumers and businesses are bewildered by the developments taking place and can no longer understand what is going on. So the answer to the question posed in the title of this week's contribution is in the affirmative.

And what about little Malta? We did not need the bailout because our banks have traditionally acted very prudently. Although our banks can do more to generate business and consumer confidence. Banks should be rapped hard on their knuckles for not having passed the whole of the interest rate cuts decided by the European Central Bank over the past weeks to their clients. When interest rates go up, banks pass these on to their borrowing customers in no time at all. They have not done so now that interest rates have gone down significantly. This in itself reduces confidence.

Looking beyond the banks, we always need to remind ourselves that whatever happens in the international economy has an important impact on our economy. The government can only seek to mitigate any negative impact and seek to exploit any positive opportunities. I strongly believe that over the years successive governments have been very good at this. We may not have had spectacular growth rates, but we never had the sort of recessions that have hit other economies similar to ours. In this respect we may even be described as being a "boring" economy.

Yet, this "boring" economy has managed to generate confidence in international investors, thereby creating wealth. In these days, our size is to our advantage because the amount of investment that we require is much less than that required by others. However, whatever we do, we cannot afford to lose sight of the need to maintain a healthy level of business and consumer confidence.