‘Europe has to act’

The markets are “obviously” expecting solutions, and Europe has to act, Tonio Fenech tells The Times Business in an interview ahead of today’s crucial European Union summit on the eurozone situation.

I think it is wrong to start debating the break-up of the currency

“There are agreements which have been reached which are being implemented but that implementation needs to be speeded up to restore stability to the European economy,” he says.

He says the eurozone crisis is “obviously a big concern” and the situation is “indeed very difficult”.

Asked whether the government is making contingency plans for the possible break-up of the eurozone he answers: “I think it is wrong to start debating the break-up of the currency. Such talk causes damage. The impact on the world economy and the European project as a whole of such a breakup would be so large that I am sure every EU member state is committed to ensure that the euro does not fail. The euro is still a strong currency and if you look at the international markets it’s still stronger than the dollar.”

He stresses that a number of steps have already been taken to restore confidence in the eurozone such as the “six pack” – a set of new rules for fiscal discipline and economic coordination, the establishment of the EFSF (European Financial Stability Facility) and discussions on how to make the EFSF more effective.

“In my opinion, rather than coming up with new ideas let’s concentrate on implementing what we have decided upon, which is the basis of solving this crisis,” he says.

Why has the crisis dragged on for so long?

“When an element of pessimism comes in trust is difficult to win. The fact that Europe took long to implement some of the agreed upon measures caused markets to be jittery. The markets expect measures to be implemented as soon as possible. We have taken some important decisions but sometimes the problem is of a technical nature, such as how the EFSF will operate.

“There have been some interesting proposals, like how to strengthen the EFSF. I think the French proposal for the EFSF to be given a banking licence, thus making it a real financial institution is very interesting. Europe needs an institution similar to the IMF in order to be able to act.”

Mr Fenech says he expects today’s EU summit to provide a road map for recovery “not the tools themselves”.

Regarding the German – French agreement on new fiscal rules for the eurozone and Chancellor Angela Merkel’s insistence on a fiscal union Mr Fenech says there are a lot of discussions on the term “fiscal union”, and primarily the main focus of a fiscal union is proper economic co-ordination.

“The semester programme (where the EU and eurozone coordinate their budgetary and economic policies) has already established a road map to do this. For example two weeks before the Budget we had to hold discussions with the Commission and we had a good discussion on where we want to get to and what we should aim for, and it worked.

“Following these discussions I also had a meeting with Commissioner Olli Rehn last week, so the semester is starting to work. Now there is a discussion over whether the Commission should be given more powers over national budgets. Here I would draw a bit of a position. We are in agreement in principle that for countries that are either in a programme or significantly deviating from the path there has to be a mechanism that ensures that a country does not keep on diverging. We all agree on that principle,” he says.

“In an emergency the euro member state which has blatantly ignored its responsibilities has to be brought into line and that country, as what happened with Greece, has to act.

“That there is a Council decision that imposes certain obligations on a member state, yes, either following recommendations by the Commission, or that a Commission decision is supported by the Council, we are open to these sorts of discussions.”

He says that while Malta understands the basic thrust of what Germany, France and other countries are talking about, there has to be a grading structure.

“If a country is within the three per cent GDP deficit threshold or close to the 60 per cent debt ratio it’s not the same as a country which is nine per cent and 120 per cent and you can’t adopt the same method of intervention in the two cases because that is unfair.

“If a euro member state is acting responsibly it should be given full flexibility with no intervention. But if a country is beyond that then I’m sorry that country has to pull its socks up and politicians have to assume that responsibility.

“We cannot deny the right of sovereignty, we are a union of states, unless there is an open discussion whether we want a federal Europe, but that’s a completely different discussion. There is no such discussion on the table. The major weakness of the stability and growth pact was that while it had sanctions and responsibilities, countries were not observing them and the enforcement arm was not sufficiently strong to bring them into line. Previously it was thought that governments could never default, but this has changed. Malta is committed to working to ensure that the euro remains a strong currency and a relevant currency in the world economy,” he stresses.

Asked which other eurozone countries shared Malta’s interpretation of fiscal union Mr Fenech says that there is a general agreement on the need for tougher action against countries deviating from the growth and stability pact.

He adds: “Any change in sovereignty cannot be decided on December 8. There are issues of referenda and parliaments having a say. It’s a process, reforms have to be introduced and discussions held. This is the European method, ideas are put forward by countries, discussions are held and a consensus is found.”

Some observers say that a fiscal union is the first step towards tax harmonisation? Is Malta concerned about this?

“There are no new proposals for tax harmonisation,” he answers.

On the question of Eurobonds Mr Fenech says it not just a question of agreeing with this idea. “Who is going to pay for them? Eurobonds have to be repaid. A central treasury will have to find a way of refinancing them. Unless you have a central treasury you can’t sustain Eurobonds. Will the creation of Eurobonds and the creation of a central treasury imply tax harmonisation and a loss of sovereignty in taxation? Malta has a strong position regarding loss of sovereignty in taxation,” he says.

Asked if he believed the European Central Bank should adopt more of an aggressive response to this crisis, as indicated by ECB president Mario Draghi, Mr Fenech stresses that the ECB is an independent institution and it would be wrong for governments to say how they expect it to act.

“Mario Draghi has said the ECB can only act in the right environment. It has treaty obligations which are inflation and ultimate responsibility for stability. The ECB can act but it all depends if the ECB is assuming a role – and here I understand Mr Draghi’s point – which is commensurate and in parallel to a role which is being carried out by national governments and Europe as a whole to provide that stability.

“You can’t have governments working against stability and expect the ECB to intervene. For example you can’t have governments increasing their debt and then expect the ECB to buy that debt. One might say: Look at the US Reserve and the Bank of England, they buy government paper (stock). However, the treaty prohibits that, for a logical reason. If the Central Bank buys the debt of its own government, what is really backing that money?” he says.

Mr Fenech says the performance of both Italy and Spain is crucial to the eurozone’s survival.

“The newly elected Spanish government is committed to financial stability and it has a major challenge because of high unemployment. Italy new technocratic government is led by Mario Monti who is highly experienced and who has political experience having served two terms as a European Commissioner. I hope the Italian Parliament gives him a mandate to act. Spain and Italy are 40 per cent of the European economy. People must understand that the instability in the markets has not been caused by the euro but by the performance of some member states.”

Mr Fenech downplays the possibility of a two tier Europe with Germany and some other northern states in a core eurozone and other countries out of it.

“I don’t believe that will happen and it is in our interest to remain in the euro. The discipline mechanism will change. National governments will no longer only be responsible to their Parliament and electorate but also to the other countries sharing the euro.”

With hindsight, was the original design of the eurozone fundamentally flawed?

“The fiscal discipline mechanism was not strong enough and not enforceable. There are many different types of fiscal union. The US is a fiscal union, but Texas has no state income tax. Germany is a federal republic but has different types of taxation in the states. When people talk about a fiscal union they must say: ‘A fiscal union to me means A,B,C,D.’ Some ideas about fiscal unions are simple that, ideas, with no existing models to back them up.”

On the prospect of treaty change to help solve Europe’s debt crisis Mr Fenech says this has implications for some countries – depending on the extent of treaty change – such as Ireland which might have to have a referendum.