It is common sense that one cannot square a circle. However, there are some events in life where it does really appear that the circle is being squared. This happens for one of two reasons. The first is that there may have been two circles (or two squares for that matter) in the first place and poor vision would have made us think that they were two different shapes. The second is that someone manages to transform the circle into a square or vice-versa and therefore manages to create two similar shapes. Either way it takes courage, imagination, creativity and a can-do attitude.
Where is this seemingly philosophical argument taking us? Let me first draw the broader context. This week the credit agency Moody’s decided to relegate to the level of “junk” the bonds of the Irish government. It had done the same thing in relation to the bonds issued by the Greek government and the Portuguese government. Also this week, Italy came under intense pressure and the spread between the bonds issued by the German government and those issued by the Italian government had risen to three hundred basis points.
It was evident that the specul-ators were having a field day once more and the relegation of Italian bonds to the level of “junk” was becoming a distinct possibility.
The Italian government reacted very quickly and reached an agreement with the opposition that, although there would not be the opposition’s approval to the Budget, they would not lengthen the parliamentary process beyond Friday (today). Thus the measures that need to be taken to control the deficit can be implemented in a fairly short period .
This seemed to have its positive effect on the financial markets, and the speculators seem to be diverting their attention to something else, even if the economic uncertainty within the eurozone remains.
Last week, the outgoing president of the European Central Bank was quite scathing in his criticism of the credit rating agencies. He described the system as an oligopoly, with just three players, who seem to have quite a lot of influence in the market. However, he admitted that there is no replacement available as yet and so we have to manage the chaos that these credit agencies create with their analyses.
Malta’s credit rating is also assessed by these agencies, and there is nothing that can guarantee us that they will not take a view similar to the view taken on Greece, Ireland and Portugal.
Meanwhile in Malta the process of the preparation of the Budget has started. Usually the pre-Budget document is published sometime in early July to trigger the start of a period when the government consults with the social partners and the NGOs. The Budget is usually then presented in October, followed by a debate on the performance of the economy and the fiscal policy measures that the government would be proposing to adopt. This is where the need to square the circle comes in.
It is becoming increasingly clear that some of the decisions being taken today will have an impact in the years to come. Some may even be very costly, if not impossible, to reverse. Although it is impossible to achieve consensus on the single decisions being taken, I do not believe that it is impossible to achieve consensus on the para-meters within which those decisions are taken. Squaring the circle means undertaking a herculean effort to achieve consensus on these parameters. I strongly believe that the country today needs an agreement between the government, the opposition, the social partners and NGOs on the broad thrust of economic policy.
Aspects would include a ceiling for our fiscal deficit, namely to have a fiscal deficit that is not higher than, say, one per cent of GDP. We would also have an agreement among all parties on the size of the public sector, the development of renewable sources of energy (and measures to address the Enemalta Corpor-ation situation), the structure of the Maltese economy (that is, the split between agriculture, manufacturing, financial services and other services), and supporting the local banking system to face up to the challenge being created by the speculators within the eurozone. These are just five items on which each political party can then build its own economic and social policies.
Someone might argue that some aspects may already exist under EU rules. But history has shown us that other countries have ignored the parameters of the EU Growth and Stability Pact and run up unsustainable deficits. We need to go beyond the EU rules and set down some rules for ourselves to avoid trouble for everyone in future. Some years ago the Union Ħaddiema Magħqudin floated the idea of the Social Pact. Unfortunately, the idea was shot down. What I am suggesting is an Economic Pact also involving the parliamentary opposition to give more credibility to our country for the long-term benefit of the Maltese.