German Chancellor Angela Merkel and French President Nicolas Sarkozy met during a summit last Tuesday in an effort to coordinate their policies and strategies in the light of persistent speculation in the financial markets.
There is persistent fiscal deficits in a number of countries that will require EU support over a number of years to come, and sluggish economic growth especially in the second quarter of this year.
The official communiqué did demonstrate that the two sides have reached agreement on a number of points and the message was that, from now, the two countries will take a leadership position in shaping rules regarding public finance within the EU
There were essentially four proposals emerging from this Franco-German summit. Firstly that there would be the creation of the first “true European economic government” with a single appointed leader to strengthen economic management within the eurozone. The EuroCouncil will meet twice a year with the participation of the heads of government of the 17 members of the eurozone. There will be a monthly meeting, presumably with the participation of the economic and finance ministers of the eurozone.
The second proposal is that from now on the two countries will “synchronise” their tax policies. I believe that this proposal needs to be placed within a very specific context. Prior to this meeting, Mr Sarkozy had to cut short his holiday to tackle the fiscal deficit of his country before the speculators went on the attack. Moreover, Mrs Merkel must have known that the news on German economic growth was not positive at all and, as such, the German stock markets could have come under attack from the speculators. So the decision to synchronise tax policies was very much a defensive mechanism against credit rating agencies and speculative activity.
The third proposal is that all members of the eurozone would enshrine balanced budgets in their constitutions. Germany must have been the main proponent of this idea and France must not have been terribly keen on it. However, it is a necessary move to ensure that members of the eurozone control their spending and eliminate tax evasion.
France said that it will hold a referendum on the issue. The other countries will be forced to move on this if they are to get further support. I believe that this is a sane proposal, which however will require time to implement effectively.
The fourth proposal is that there would be the introduction of a Tobin Tax that is a tax on all financial transactions, with the objective of raising funds to ease the debt crisis. France was the main proponent of this proposal. This should make speculative activity less attractive. However, the tax would need to be truly international to reap the desired benefits, as otherwise it would end up penalising European economies and giving an unfair advantage to the non participating economies.
Regarding economic growth strategies nothing or little must have been said as they did not feature in the final communiqué.
An interesting comment was that of Christine Lagarde, the recently appointed director general of the International Monetary Fund. She said that it is important to contain the public deficit but we should never forget about economic growth.
She claimed that we should not allow the need to reduce the fiscal deficit to limit world economic growth. The process to achieve a balanced budget should not be too slow to win back the confidence of financial markets, but neither should it be too fast such that it chokes economic growth.
In this regard there need to be in place fiscal policies that do reduce the deficit, while at the same time stimulating economic growth and achieving a more equitable distribution of income. Frankly, new economic and political thinking is required to achieve this objective.
What does all this mean to Malta? We have our own challenge to reduce the fiscal deficit and to contain public debt. The proposal to enshrine a balanced budget in the Constitution is something I have referred to in the past and we should do it as soon as possible. The setting up of an economic government for the eurozone is important but deficit containment should not be its only priority. Moreover, as a small country we need to be allowed flexibility in our tax regime. This brings me to the tax on financial transactions. As long as the tax is on speculative activities, then it should not be seen as a problem. However, if it is a tax on other financial transactions, then we need to be wary of it.
I think we are getting to the stage where we need to bring up again the proposal of the UĦM to have a Social Pact. Any decisions related to economic management cannot be seen in isolation from social and political considerations. Nor can they be seen from a purely short term perspective.
Trade unions, the organisations representing the business sector, and the Opposition should sit down with government and agree on a set of economic policies that go beyond electoral mandates and cut across political and social beliefs. We should seize the initiative and not simply react to the aftermath of the Franco-German summit