The government’s decision to ask for collateral when guaranteeing Greek debt is “commendable” but symptomatic of the difficulty of managing a single currency used by 17 different countries, economists agree.
Are we losing the plot? Have the financial markets become more important than the real economy?
Economists Joe Vella Bonnici and Lawrence Zammit said the government did the right thing to ask for collateral given that other eurozone countries have started asking for it.
“It is commendable that the government took this path to safeguard the national interest,” Mr Vella Bonnici said.
During a meeting of eurozone finance ministers last week Malta asked to be treated on an equal footing with Finland, which was the first member state to ask for collateral in exchange for loans to Greece.
Finland has said it would pull out of the second eurozone bailout agreement reached in July to finance the ailing Greek economy unless it was offered collateral. The decision shook the notion of solidarity that eurozone leaders have been trying to portray.
But Mr Vella Bonnici was not entirely surprised by the Finnish decision given the eurozone reality made up of 17 sovereign states each with their own fiscal policy and particular circumstances.
“It is evident that the Finnish government did so to placate internal discontent as the normally frugal Finns did not want to finance the spendthrift Greek lifestyle,” he said.
This puts a finger on the heart of the problem facing a monetary union not accompanied by a common tax regime.
“Every economist knows that monetary and fiscal policy have to work hand in hand,” Mr Zammit said, insisting this did not mean Malta should not have joined the single currency.
The Maastricht criteria establishing the level of debt and deficit tried to create convergence between the eurozone member states, he added, but the rules were not strict enough.
“This is why I advocate that all eurozone countries should have etched in their respective constitutions the principle of a balanced budget,” Mr Zammit said.
Spain has approved constitutional changes making it mandatory on future governments to balance their annual budgets and Italy is expected to go down the same road. Such a move would in theory prevent countries from notching up annual deficits that contribute to ever increasing debt — the source of the woes facing the eurozone.
For Mr Vella Bonnici the solution may lie elsewhere though, as the current crisis makes a compelling case for greater European centralisation.
“Europe might have to move towards a federal model because a strong single currency has to be accompanied by fiscal harmonisation but this has tremendous consequences not least for Malta,” Mr Vella Bonnici said. The consequences are a loss of sovereignty over taxation that has been a red line for EU member states, he added. “Malta would stand to lose in financial services, online gaming and other sectors where taxation is used as a tool to attract business.”
The debate is expected to gain ground as the International Monetary Fund yesterday gave the eurozone six weeks to find a solution to the Greek problem that has sparked fears of contagion.
It is being proposed that the European Financial Stability Facility be increased to €3 trillion from the current €400 billion and that Greece may have to default on half of its debt.
The twin decisions may be a sign that eurozone leaders are ready to defend the euro even if it means compromising certain principles.
Germany and France have always opposed a Greek default because their banks are heavily exposed to Greek government bonds.
“Germany and France have no choice but to accept the fact that they have to shoulder some of the Greek losses,” Mr Vella Bonnici said.
Increasing the financial stability facility to €3 trillion, he added, would deliver a strong message that the eurozone would defend even larger economies like Spain and Italy.
But Mr Zammit is wary of the €3 trillion package that was floated yesterday, which will most likely be used to recapitalise European banks to avoid them going bust because of the debt crisis. He questions how wise it is to use all that money to placate jittery markets when it could be used to create jobs.
“Are we losing the plot? Have the financial markets become more important than the real economy where jobs and wealth are created? If we have €3 trillion available they should be invested to create jobs not to cover up the holes created by wrong investment decisions taken by bankers.”
Economist Joseph Falzon, who heads the University of Malta’s banking and finance department, believes that an orderly partial Greek default is much better than a sudden one and it may be necessary for banks to strengthen their capital reserves.
“A partial default means that the Greeks will pay back less of the money they owe but it also means that the German and French banks will lose out. This is why the banking sector has to beef up capital reserves to avoid a Lehman Brothers style crash if the Greeks default.”
He insisted that cutting Greece loose from the eurozone would send a very negative message and hardly solve the problem for the Greeks.
“Greece has been finding it hard to finance the interest accrued on its debt and a partial default has long been on the cards. The Economist has been advocating it for at least six months.”
But Prof. Falzon believes that the biggest decision has to be taken by Germany, Europe’s powerhouse.
“It has to decide whether it wants to save the euro or not and a long term solution posited by many is the introduction of eurobonds guaranteed by all the eurozone countries. However, this means Germany will have to pay more to service its debt because eurobonds are unlikely to have a triple A rating.”
Eurobonds are still not on the agenda but they may very well be in a couple of months’ time if the current twin package of a partial default and a bigger stability mechanism fail to put a lid on the debt crisis.