Four ways to go wrong
With Labour’s electoral programme now in hand, we can, from today, set about comparing the two main electoral packages on offer.
Both the Nationalists and Labour argue that while their package leads to genuine, sustainable economic growth, their adversary’s risks leading us down the path of the crisis that has hit the European Mediterranean. What is sometimes lost in the heat of the argument, however, is that, even in crisis, Europe has displayed diversity in unity.
The countries teetering on the edge of the precipice – I’ll be skimming over the cases of only Greece, Cyprus, Spain, France and Italy – have gone wrong in one (or more) of four different ways. It’s important to keep in mind the various traps an electoral promise may lead us into. It’s not just about debt and deficits. Each way of getting into a crisis suggests a lesson to be drawn.
First, there is the Greek way, about which a lot has been said, except for one point that has frequently been understated. Yes, the books were cooked, necessary structural reforms were deferred, the banks were imprudent, the politicians incorrigible. But there has always been something unfair about the Aesopian fable some have insisted on retelling: the contrast drawn between the industrious, ant-like Germans, who agreed to a decade-long wage freeze until competitiveness was regained, and the partying, grasshopper-like Greeks.
The fact is that the Greek consumption boom helped fuel German productivity growth. Greek consumption underwrote a lot of German exports and outward investment.
What appears to be a tale of two peoples going different ways is, in fact, a more complex story where the different fortunes and outcomes are part of the same plot.
Lesson 1: consumption-led growth has its place but over-reliance on putting money into people’s pockets, if the money is largely spent on imports, could lead to the country effectively subsidising foreign workers’ salaries. Malta’s open economy is particularly vulnerable to this outcome.
The second path to crisis is that of overexposure. Cyprus is perhaps the handiest example. I don’t have in mind so much its overexposure to the risk posed by storing confiscated Iranian arms close to a power station, although that accident blew away just under 14 per cent of the country’s annual GDP and has been blamed on the President’s personal decisions. Cyprus has also been overexposed, systematically, to the Greek financial sector and to Russian and Ukrainian investment. Exposure to Greek debt was higher than the annual GDP.
Exposure to Russian investments has helped Cyprus secure an important loan from Russia (which wishes to protect national holdings) but it has also made EU member States, notably Germany, reluctant to bail out Cyprus, without considerable concessions, since they consider this aspect of Cyprus’ path to prosperity to have the strong whiff of tax dodges and money laundering (claims that Cyprus vehemently rejects).
Lesson 2: policies that overdevelop a sector to the point that it becomes too big to fail can effectively undermine democratic decision-making, either by making politicians dependent on that sector’s whims or on the creditors one needs to bail oneself out. (Cyprus is already having to enter into negotiations over future likely earnings from its considerable gas reserves.)
The third path to grief is the economic bubble, of which Spain is one example. Again, reams of print have been expended on this crisis. A huge, decade-long housing bubble, which saw property prices shoot up 200 per cent, was fuelled by relaxed banking practices, family indebtedness and an ideal of home ownership. The bursting of the bubble has been disastrous.
But what is mentioned rather less frequently is one reason why the bubble went unchecked for so long. Many of the politicians who could have done something about it had strong investments in the sector; some owned as many as 20 properties. They had a conflict of interest.
Lesson 3: it’s a sign of trouble when a programme of growth is overexposed to a sector where the politicians have a conflict of interest.
The fourth road to the Rome of groan is, unsurprisingly, Italy’s. But also that of France, Greece and, to some extent, Cyprus. It’s the road of perpetually deferred structural reforms.
In Italy (which, in several respects, has strong fundamentals), it has been inflexible labour laws and low investment in infrastructure and research. In France, it has been the high price of labour that has rendered French firms uncompetitive and seen their exports fall dramatically in relation to Germany’s.
The trap is not decent labour rights and workers’ status. One of France’s problems is low union membership, which renders difficult negotiations with someone truly representative. Germany would not have been able to effect its own recovery during the last 10 years without a fully functioning system of consultation and dialogue with workers’ organisations.
Rather, the trap is the political unwillingness to undertake pinching reforms (a never-ending project in an ever-changing economic environment) in the good times.
Lesson 4: no matter how good the economic plan, it requires political muscle and the readiness to flex it well and with good judgement.
It’s against this background that each programme needs to be evaluated. If it treats us only as consumers, something’s wrong. If it’s based on a quick run for easy money, the overexposure may come back to haunt us. If it involves conflicts of interest or smacks of unwillingness to take hard decisions, something’s sorely amiss.