Implications of EU pact

I do not believe they said so in public, but I am sure the Prime Minister and the Leader of the Opposition met behind the scenes to discuss Malta’s stand at last Thursday’s meeting of the leaders of the EU. Their subsequent common position in the House of Representatives regarding the outcome of the meeting confirms my belief. The two main political parties have been following a bipartisan policy on certain financial issues since the middle 1990s.

At the time John Dalli, then Minister of Finance, and I, his opposition shadow, helped to bring about combined agreement on a financial package intended to build a framework designed to promote Malta as a financial centre. Collaboration in that field has remained unbroken. Thursday night’s EU leaders’ meeting went beyond financial services.

It reflected belated recognition that EU leaders had to take political action to move the union forward, away from the lax attitude of some of its members that had led to the almighty crisis that has been threatening to rend the EU asunder. Still, the embedded bipartisan experience on financial legislation would have helped the two Maltese leaders to discuss manfully and reach common ground.

That was not fully achieved by the 27 leaders of the EU. The British Prime Minister threw a spanner in wheels, vetoing full agreement. He wanted to defend Britain’s interests as he somewhat short-sightedly saw them driven by euro-sceptics in his party, and he also had an agenda to claw back factors of cooperation ceded by Britain years ago in return for handsome monetary treatment.

In the end, the British spanner did not stop the EU wheel from running. The other 26 members decided to move ahead, leaving the United Kingdom in the lurch. Time will tell who was right. At the moment the UK seems to be emarginated and could be damaged eventually.

The coming three months will also tell whether the accord reached on Thursday night in the form of a fiscal pact will be translated into a mechanism that can work efficiently and sensibly, and also convince the financial markets, especially the credit sector within it, that the eurozone (plus others who are not members of it) is solid and can regulate itself.

At the heart of the pact is a commitment by those countries to embed the objective of a balanced budget in their legislation (with a structural deficit of no more than half a percentage point relative to GDP). The two Maltese leaders are agreed on the need for a constitutional amendment to give effect to this commitment.

Incidentally, then Prime Minister Dom Mintoff brought up the possibility of legislating for a balanced budget around 30 years ago. At the time, as head of the Central Bank, I had argued that there was no clear need for that. My bent towards Keynesian economics made me feel that deficit budgeting might be necessary at times. Little did I anticipate that Malta, among other countries, would start having far too many structural deficits, thereby racking up the public debt and the accompanying heavy cost of financing it.

While the PM and the Opposition Leader agreed on Malta’s Thursday stance, both were careful in describing their decision. The need to avoid consolidation of the tax base – which would take control of tax rates from national hands – was highlighted. So was sovereignty.

In reality, if my information about the fiscal pact is correct, sovereignty in budgetary matters would only be impinged if a structural deficit higher that 0.5 per cent of GDP developed and was not rectified within three years.

The Prime Minister said that he was satisfied that Malta’s interests had been safeguarded on that historic Thursday night. He should give fuller details in due course. Moving on, we as a people will have to learn that government spending cannot be an endless gravy train unless there are sustainable resources to feed it.

One good thing about the fiscal pact, in fact, could come about at the socio-political level of those who subscribe to it. It should no longer be possible for political parties to promise all that and heaven too in the run-up to elections. As popular knowledge grows about the extent to which a government’s hands will be tied, voters should be able to recognise vote-catching promises for what they are much more easily.