Deficits: – 0.5 % not enough

The popular highlight of last week’s EU summit was the veto by David Cameron, the British Prime Minister. That delighted British eurosceptics and infuriated the Liberal Democrats, who partner the Tories in an unlikely coalition. The Liberals have made it clear they will still remain part of the coalition, but things will no longer be the same. That became clearer on Monday when Mr Cameron addressed the House of Commons on the issue. His deputy, Liberal leader Nick Clegg, who usually sits at the PM’s side, stayed away altogether. A furious Tory MP called the Liberals “lickspittle”.

The aim has to be to start shrinking public debt- Lino Spiteri

Worse than the mistrust which has crept into the coalition is the fact that the political score that came out of the Brussels meeting was 26-1. Britain was marginalised. Both within the political class and in the business sector there is apprehension that Britain has lost its strong voice at the top table, though leading European politicians have since insisted that the country remains an integral part of the EU.

The question will be, how integral? Britain wants the single market to continue to flourish. It rejects, and on this there is no division, increased regulation of financial sectors, as well as the introduction of a financial transactions tax.

The situation regarding the latter, which is of high relevance to Malta as well, is unclear. It remains to be seen whether the undisputed drivers of the eurozone – in fact, of the whole European Union bar Britain – will continue to insist on a transactions tax. Lawrence Gonzi apparently thinks not. He stated on his return from Brussels that he had ensured that Malta’s interests were fully protected. Such interests were not clearly defined.

In essence, at the summit they centred on the financial transactions tax. Malta agreed with the proposed objective, to be detailed by the end of March, to tighten up fiscal discipline, such that parameters regulating structural budget deficits are embedded in the Constitution. That should make for fiscal probity, probably over a cycle of three years, following which a deficit-prone country will effectively temporarily lose its sovereignty over its budget.

The details remain to be seen, and that is where the devil usually resides. Meanwhile, while the Prime Minister was right to lodge Malta with the 26, it will be interesting how our relations with the UK will map out. These have always been close, not least within the EU. I have a feeling that Richard Cachia Caruana, Malta’s man in the EU, will be working overtime to ensure that Malta’s bridge with the UK is not unduly damaged.

The broader picture is far bigger than Cameron taking his country to the fringe of the EU. It consists of a huge question mark – will the December 2011 fiscal accord in Brussels be enough to ensure that further unnerving and potentially destructive shocks can be avoided?

The answer is far from a resounding “yes”. The EU already had a stability pact. It was punctured with impunity early on by Germany and France. Much water has flown under the bridge since then, many lessons have been learned. Yet it remains a fact that the fiscal pact is very unlikely to be enough, whether to soothe the credit and equity markets in the short to medium term, and beyond those markets in the longer term.

Fiscal pact and all, even if sound details are worked out, the eurozone will not have common credit support, in the form of jointly issued eurobonds. German Chancellor Angela Merkel remained adamant about that, and French President Nicolas Sarkozy had to give in to her. Nor is it on the cards that there will be political agreement to turn the European Central Bank into a lender of the last resort.

Without that the ECB will not be a real central bank and will remain, if not ineffectual, then certainly not strong enough to stamp its authority should fresh crises develop. As they already seem to be doing under fresh threats from the rating agencies, who have acquired powder seemingly without end to sway events.

Malta is part of the bigger picture but, because of its size, can do little to influence it – though its single vote is as important as other countries when a qualified majority is not the rule. It can and must do a lot, however, domestically. We cannot fool ourselves with statistics, saying that the Budget is coming down in relative terms. That can happen even if the deficit stays the same in value, or even grows, but the nominal GDP grows faster, partly because of inflation. Meanwhile every euro’s worth of deficit will further increase the public debt.

The aim has to be to start shrinking the public debt, and thereby (other things remaining equal on the interest rate front) the cost of servicing it. That is a huge task, requiring sustained budget surpluses, since the bulk of state assets have already been sold, and few one-offs can be realised from that area. The government – this one and far beyond it – will have to focus on reining in public expenditure, while cutting tax evasion and doing everything possible to stimulate economic growth and thus, public revenue. Tough decisions will be required regarding spending. The 0.5 per cent structural deficit limit agreed in Brussels a week ago is not even nearly enough. Honest political decisions too are required, specifically not to make electoral promises that reduce revenue and/or increase expenditure.