Fiscal compact to ensure greater discipline

Will the latest round of frantic efforts being made in Brussels to put Europe’s financial house in order lead to a degree of financial stability that could help bring about the kind of confidence and optimism needed to generate higher economic growth? It is hard to say but the objective is worth every effort.

The latest move takes the shape of what is being called a fiscal compact or, to give it its proper name, Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

It is essentially a pact under which national budgets are required to be balanced or in surplus .This balanced budget rule has to be incorporated, within one year, into the member states’ national legal systems.

The treaty will also empower the European Court of Justice to monitor compliance and impose fines on rule-breakers.

Malta and the rest of the European Union, except the United Kingdom and the Czech Republic, have agreed to sign the treaty.

On his return from the Brussels summit last week, Prime Minister Lawrence Gonzi lost no time in moving, in Parliament, the first reading of a Bill to amend the Constitution in order to incorporate a provision making it obligatory on administrations to have a balanced budget, as required by the fiscal compact.

To its credit, the Labour opposition has kept to its word and will be cooperating with the government in the move to incorporate the provision in the Constitution even though it is strongly against the government for holding on to power following the abstention of Franco Debono from a Labour vote of no confidence in the government.

The compact will hopefully usher in a new fiscal discipline in Europe and prevent the kind of excesses that a number of EU countries resorted to when the going was good, ignoring altogether the rules establishing a deficit threshold. Malta is now managing to control the deficit after having had to face procedures against it when the deficit exceeded the three per cent threshold. In fact, Malta is now expected to close 2011 with a deficit of 2.8 per cent.

However, even though the government planned to keep to the right track when drawing up the budgetary allocations for this year, the European Commission was not entirely satisfied with the government’s programme and demanded further expenditure cuts. These would amount in all to €40 million, quite a hefty sum for Malta. This means that, despite the government’s good intentions, it was not sharp enough to escape the keen eyes of the budgetary experts in Brussels. According to the government, the bulk of the new savings is expected to come from plans to restrict employment in the public service. The idea is to replace only one of any two who retire in areas where this is feasible. This is exactly one of the seven measures that the Finance Minister had announced in the Budget for last year in order to trim the government’s expenditure. In view of this, it is quite pertinent to ask whether the government had been successful in implementing this measure and, if so, to what extent.

Both the Prime Minister and the Finance Ministers have given stern warnings to heads of government departments and entities about the need to resort to the cost-cutting plans, clearly indicating that this time they mean business. Even so, this is not enough. Cabinet ministers ought to take direct responsibility and ensure that the orders are followed.