A window of opportunity
The vicissitudes of the euro and the economies within the eurozone continue. This has forced the Italian government to rethink the austerity measures it had passed last July and seek to implement further measures.
The summer lull may have kept the speculators at bay and the credit rating agencies in check (especially after the debacle of wrong calculations in the assessment of the US economy). With summer nearly over, during this month we will continue to see volatility in the financial markets, probably in a more accentuated manner.
In the meantime we had the Franco-German summit, which discussed a range of aspects connected with the crisis in some eurozone countries. Yet it would seem that the only topic that emerged from that discussion (as this seems to be the only topic that analysts are talking about) is whether or not to issue euro bonds.
What this would mean is that all the public debt within the eurozone would be assumed under one umbrella in order to avoid the risk of a default by some states. Germany is against the euro bonds, but the governments of the economies most in danger of a default want to push ahead.
That Germany is against the idea of euro bonds should be no surprise at all as it would be tantamount to asking the German taxpayer to guarantee all the public debt within the eurozone.
We need to appreciate that the German taxpayer has already had to pay singlehandedly the price of German unification (and hence the end of the Cold War). The German taxpayer continues to be the largest contributor to the EU Budget. The main contributors to the bailout package agreed within the EU and the ECB are the Germans.
So they feel that they have paid enough already and one should not wonder why the Germans do not wish to go into this further commitment, especially since there seems to be no solid commitment on the part of some governments to go for a balanced budget.
Where does the window of opportunity lie? Certainly not in issuing euro bonds, as that would allow the fiscal deficit in some countries to continue to pile up.
It lies in the news of last week that the German economy has slowed down. It is still growing but not at the rate that it had been growing in the past year. So Germany can no longer be expected to be paymaster of those countries that cannot manage their public finances within the commitments that they have entered into.
The slowdown of the German economy and the structural weaknesses in certain members of the eurozone do not allow for soft solutions but require tough action – hence the window of opportuntiy.
These tough actions can be grouped under two headings. First is the containment and effective management of public debt. I have been referring in past weeks to the need to introduce in our legislation the concept of the balanced budget.
Some may argue that economic circumstances may dictate that a country needs to have a fiscal deficit in any one particular year, but should balance its budget over an economic cycle. Probably this would be an escape route for weaker governments and would bring us back to a position similar to that where we are today. Thus eurozone governments need to find a solution that does not allow much elbow room for politicking and fiscal manoeuvring.
This brings us to the second group of actions that need to be taken. Governments have to adopt policies and take structural measures to address those areas that are hindering economic growth. Some of these may be cuts in unnecessary public expenditure. Others may be raising revenues for services that are today given for free.
It may also be removing chunks of legislation that have led to bureaucratic processes that are only serving for stifling investment.
The objective should be achieving economic growth and maintaining social equity through a balanced budget.
Unless we work for this ultimate goal, then there is the real risk that certain states would have to leave the eurozone. Little Malta may seem to be extraneous to all this, especially since we placed on the map, south to the countries with the largest problems, namely Portugal, Italy, Spain and Greece.
We are south of the periphery. We may seem to be extraneous to all these issues as our economy appears to be performing well, especially when compared to other countries. This presents a window of opportunity also for us. With an economic performance that is more than acceptable but with a level of public debt that looks frightening, we should seriously consider having a balanced budget by law and address structural weaknesses in our economy to enhance growth.