The euro crisis: defending Malta’s real interests

The euro crisis, or as some prefer to call it, the European debt crisis, has become lethal as policymakers struggle to keep up with developments in financial markets that are preparing for a Greek default. As soon as political consensus starts to take shape, dissenting voices among the eurozone’s 17 leaders unnerve investors who resort to panic selling of bonds and shares thereby perpetuating market volatility that is affecting the real economy.

As part of the eurozone bloc we are deeply affected by whatever policy is adopted by the political leadership of this area. After various failed attempts to reassure the financial markets that all eurozone states stood solidly behind Greece in its attempt to control its debt problems, a new three-pronged approach seems to be taking shape to bring to an end this crisis. Although EU senior officials deny that they are in fact considering any such plans, they acknowledge privately that they are in fact moving on three fronts to address the Greek debt issue.

The latest plan is aimed at enforcing a structured write-down of 50 per cent of Greek debt so that the debt to GDP ratio of Greece would be brought down to a more manageable 80 per cent. This write-down would necessitate the recapitalisation of several banks in Europe that hold substantial amounts of Greek debt. Maltese banks are unlikely to be affected by these two measures as they do not hold significant amounts of Greek debt.

The third measure is more controversial as it envisages that the 17 eurozone states should once again contribute to the strengthening of the European Financial Stability Facility (EFSF) that should now have an effective capacity of €440 billion. The Achilles heel of this proposal, that will go some way towards calming financial markets, is the vociferous political opposition by the electorate of certain states to the idea of bailing out profligate countries like Greece with their taxes.

Finland was the first to demand that its contribution to the EFSF should be guaranteed with tangible security. Other member states, including Malta, may not want to be taken for granted and may still insist on getting tangible guarantees for the money they put in the EFSF. If the current plan does not tackle the Greek debt problem effectively, many economists believe that Italy and Spain will be the next countries needing support from the EFSF, in which case more money would have to pour in from other eurozone countries.

The technical solutions being proposed to the Greek debt crisis are ineffective because the market believes that eurozone political leaders do not have what it takes to restructure the governance framework of the euro that had proven inadequate in times of crisis. Yet, saving the euro, as rightly pointed out by the German Chancellor Angela Merkel, is a prerequisite to saving the EU itself from disintegration.

The critical success factor that can bring this crisis to an end is the consensus that all the 17 eurozone heads of state should aim to achieve, even if for some this could bring unfavourable political consequences. Malta has its role to play in this evolving crisis. Our commitment to save Greece from a disruptive default will eventually be in our own interest. If Greece defaults because of a failure of the fragmented political will of EU leaders, Malta’s economy will suffer. It is in Malta’s best interest that the government and the opposition adopt a common stand to support Greece and the future of the eurozone.