Primary objective, challenge
The unfolding drama in the eurozone has ramifications far beyond the geographical boundaries of Greece and its islands. World leaders are apprehensive a eurozone bust-up will let loose economic contraction from which not even fast-growing economies like China, or other huge ones like the US will escape. Observers are pinning the next move on what happens in the elections to be held in Greece on June 17th.
If the new left wins, they say, it will confirm Greece’s exit from the eurozone, which will immediately affect the weak southern axis of Spain, Italy, Portugal and Ireland, whose 10-year sovereign borrowing costs have already risen sharply and are again approaching crisis levels and signalling the contingency need for bailouts.
Except that in such a scenario all the king’s horses and all the king’s men will not be able to put the eurozone together again. Even if political willingness is assumed – a tall order – the combined forces of the European Central Bank, the International Monetary Fund and the comparatively healthy eurozone economies will not be enough to stave a eurozone collapse. Various efforts are being made about what that would mean. Nobody has as yet come up with a conclusive action plan.
My belief is that if the Greek electors rethink the implications and do not vote in the new socialist coalition, which would tear up the existing bailout agreements and probably lead Germany to press harder for Greece’s exit, that would still not offer a solution.
Whether the Greeks as a people deserve it or not, and the IMF’s French head Christine Lagarde thinks that they do, the continued social cost of continued, perhaps increased, austerity measures will break civil society, and maybe also sting the army into action. A combination of the extreme left and extreme right will find sensitive chords in the middle class, which is being rapidly decimated.
The situation will continue to call for additional measures targeting the whole of the eurozone. As of now, though Germany is still fiercely insisting on steadfast austerity measures, it too has come round to the belief that policies to trigger and sustain economic growth must be found.
The EU leaders will be discussing that agenda at the end of the month. The trouble is that even should they manage to conjure up a set of effective policies, these will take years to be implemented and bear fruit.
And they will have to be financed, alongside the need to finance the massive existing debt burdens. To understand just how massive they are take a look at the article on the following link to The Guardian newspaper:
The neat interactive debt table, which lights up the debt-to-GDP ratio of each EU country if you move the cursor to it, shows just how huge the problem is. Even the Germans and the French, for all their coveted AAA sovereign rating, have a ratio in excess of 80 per cent. The article also shows the main proposal to move out of the damning euro situation through some form of eurobond, which combines the burden to average it into one more manageable, though quite expensive for the Germans even if it relates to the portion of public debt above the elusive 60 per cent ratio.
So far, for reasons which I for one understand, the government has not made any public comment about whether Malta is making any contingency plans.
The public line, shared by commentators like myself, is that our public debt though substantial is not inherently dangerous. It is not liable to a sell-off by international investors – it is mostly held by Maltese institutions, companies and individuals.
Hopefully that will remain the case. But, there is no certainty. In Greece too, much of the public debt was held by Greek banks. That did not prevent the crisis from breaking out.
To be very clear I am not saying that I expect a crisis to break out in Malta. But nobody can be complacent, least of all the government. It does not have to take the IMF and other critical international analysts to warn us that the public debt must be reined in and start being reduced. That must happen, I persistently hold, not merely in terms of ratios – public debt relative to GDP at current market prices. That would be no more than a statistical illusion, helped along by inflation.
The real test is the real burden – the chunk of public financial resources that has to go on servicing the public debt. The principal of the debt can be rolled over on maturity, to be bought by existing holders and new investors so long as there are liquidity and confidence in the economy. Interest costs, however, are definite outgoings. In making them the government has less to use on high priority issues, such as to reduce absolute and relative poverty.
Expenditure has to be reined in a judicious, well thought manner, so that the impact on effective demand, and on real growth, will be as minimal as possible.
It will have to be properly planned, unlike the hash of the current €40 million cut in outlays.
Hopefully, its nature will be such that the political parties can agree to treat it realistically, with adequate expertise, rather than in pure partisan terms. These raise much huff and fury, but contribute zilch to the common requirements of the country, which affect all the people, whichever partisan side they take.
That is the primary objective and challenge.