EU: Work-in-progress

Fear and uncertainty give rise to negativity and negativity translates into more panic. That is what happened more than 18 months ago when, in the middle of the financial meltdown, Lehmann Brothers were allowed to be dissolved due to its unsustainable business model.

Recently, the same happened when the market feared a default of the Greek economy. What the financial crisis clearly demonstrated was the importance that policy-makers would respond quickly to fast market changes. Otherwise, speculators would take centre-stage and then define the market's reaction.

Clearly, in the latter case involving the huge challenges faced by the Greek economy and the possibility of the spreading of a debt spiral across the eurozone member states in the Mediterranean Sea, the European Union has been widely judged as being very slow in responding to such a big task of calming down the markets and eventually stopping panic from spreading across the EU and, possibly, across the world too.

Rome was not built in a day. And that is what the EU is all about. Historically, the EU has always integrated more following crises. This happened on a number of occasions. During the crisis of the 1980s, the EU was losing its competitiveness when compared to Japan and the US but the problems led to the creation of a more integrated single market in 1986 and 1992 through the Single European Act and the Maastricht Treaty respectively.

The same can be argued with regard to this financial crisis. Many speculated about the disintegration of the euro, which would ultimately translate in the disappearance of the EU. However, yet again, the EU leaders in Brussels and in the capital cities of the 27 member states responded with big determination to build further this European project, even against the opinion of some influential players that oppose Europe.

On May 21, 2010, the EU finance ministers of the 27 member states made four main decisions in their attempt to ensure a more complete monetary union. The problem with the euro has always been that it was mainly a political project but lacking the backing of fiscal and economic union. Up until recently, the euro has never been tested during some major crisis and this scenario illustrated the structural weaknesses of the currency.

Going back to this recent agreement, the EU leaders agreed to increase budgetary discipline, to find ways to reduce the divergences in competitiveness between member states, to establish an effective economic crisis management mechanism and also to strengthen economic governance to be able to act quicker and in a more coordinated and efficient manner to deal with any future economic crises. All four decisions would eventually have direct implications on Malta, especially how national fiscal policy is decided, with the possibility of sanctions for lax decisions.

The above underscores the importance of sound economic and financial governance by every single member state. It is totally unfair having a member state that acts irresponsibly in its financial governance while others act with restrain and discipline when dealing with debt management. What happened since late 2008 was that the huge financial support given by governments to their troubled financial sectors due to inappropriate regulation has been translated into huge debts in the public coffers which, in return, led to hostile policies like, for example, tax increases and cuts in social welfare that affected badly the middle and lower classes.

The debt challenge is a global one. By 2015, most of the western economies will be facing a debt-to-GDP ratio of 100 per cent if the fiscal policies now in place are retained. Although recent speculation has focused mostly on the EU's state of financial health, the most worrying statistics come from the UK, the US and Japan that will be facing debt-to-GDP ratios of more than 150 per cent in 20 years' time if no austerity policies are adopted in order to stop the myth that we can live beyond our means forever.

In this challenging global scenario, the issue of debt directly affects the Maltese economy. Fortunately, due to prudent policies and regulation, the Maltese economy has not been forced to absorb the huge financial burden of supporting its financial sector. However, what happens on the international scene directly affects our economy. And if global economies do not grow due to their high level of indebtedness, then we would not be able to benefit from the increasing wealth of our trading partners. Within this context, our interest is to promote the EU's recent initiatives to promote stricter rules on national budgets along with significant sanctions for irresponsible national financial policies.

However, we should continue to do our "home work" in the most effective manner. Since we are part of the eurozone, our space of manoeuvring is quite limited. As a result, the most suitable option within this scenario is to continue focusing on economic policies that promote higher productivity. Thus, Malta could generate strong productivity gains while rising exports by our pharmaceuticals, technology and financial-services industries could generate better-than-expected income. Combined with frugality, sacrifice and good fortune, Malta would surely be able to come out of this recession in a better shape than other economies that are faced with relatively larger debt burdens.

stefan.gauci.scicluna@gmail.com