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Avoiding the economic red flag

Recent economic statistics published by Eurostat highlight the risk that we are taking of being shown the economic red flag by rating agencies. Not only are we now officially in recession, but trade figures do not bode well for the coming months.

Our exports fell by a staggering 16.3 per cent in the last quarter of 2008, while gross fixed capital formation, the seed for future growth, also declined by an impressive 16.6 per cent. The trade figures for the first two months of 2009 are even worse.

Household and government consumption expenditure also fell by 10.8 per cent and 14.3 per cent in the last quarter of 2008. It will be no surprise if the first quarter will again show negative growth in GDP since the corresponding figures for the first quarter of 2008 were quite high.

It is hardly any consolation that other members of the eurozone club are faring even worse than Malta. While membership of the eurozone should be viewed as a positive fact in the present difficult economic circumstances, our politicians should stop giving the impression that mere membership of the eurozone will protect us from the pain of even more drastic, but necessary, economic reforms.

If we just consider what two other eurozone countries are going through because they adopted fallacious economic strategies in the past, we can learn an important lesson on the importance of adopting sustainable economic strategies. Spain is going through the most drastic economic recession of all the eurozone countries.

After decades of impressive economic growth, the country is now in deep recession with hundreds of thousands of families in Spain sinking below the breadline. The visible evidence of this downturn is the empty apartment blocks, abandoned building sites and deserted shopping centres in and around Madrid and on the costas. The middle and lower middle classes that did so well during the years of the economic boom built almost exclusively on property development have been the worst losers in this crisis.

The sad result of this economic mismanagement is that today 20 per cent of Spaniards are, according to the anti-poverty organisation Caritas, living below the poverty line. The EU defines poverty as the state of those depending on a monthly income of €550 per person per month.

Ireland's fate is even more sobering for us because their economy has more similarities to our own. The Celtic Tiger's success during the past decade has been fuelled by overinvestment in the property industry and the proliferation of financial services. It also coincided with an unprecedented long period of cheap money that convinced many families to borrow far beyond their ability to repay their debt when the economic situation started to sour. The Irish abandoned the savings culture and now they are paying the price for this short-sighted behaviour.

The tough additional budget measures announced by the Irish Minister of Finance Brian Lenihan early in April will undoubtedly erode the quality of life of hundreds of thousands of Irish families. Children's allowances have been slashed, income levies and health levies doubled, and capital projects shelved in order to bring back public finances in some sort of order.

To get back to the local situation, I believe that no amount of happy talk will save us from a deteriorating economic situation. It is silly to think that we are a special case and that we will get out of this current economic crisis faster and better than everyone else. There is always a lag before world economic events hit us, but hit us they will.

The reality is that we still need major reforms in our economy to make us more competitive and able to achieve above average economic growth in order to catch up with the more advanced EU countries. Two areas that needed to be addressed with some urgency is the reform in our health and other social services and the curbing of cheap credit for personal consumption.

The social services, that most of us believe we have a right to enjoy, are in many cases a figment of our imagination because in reality over the past decades we have built a welfare state that we can no longer afford.
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