As expected by most, the Prime Minister has asked the President to dissolve Parliament and an election is due on March 9. Around the same time, Italian Prime Minister Mario Monti has also announced his resignation, after one of the parties supporting him – Silvio Berlusconi’s party – withdrew its backing.
Italy does not know yet when its elections will be held, but the odds are that it will be held in February. Cyprus will also be having its presidential elections in the first quarter of next year, with the current President (a Communist) unlikely to stand for re-election given his high level of unpopularity.
The Italian situation brought about an immediate negative reaction from the financial markets, with many starting to express concern as to whether the new government would have the courage and ability to continue with the measures started off by Monti, and if not, whether Italy will default or not. A possible Italian default would be very bad news for the euro, which in turn would be very bad news for Malta.
Germany and France, even if in an oblique manner, have expressed their support for a second Monti Government, as they know full well what an Italian default would represent. Ten-year bond yields in Italy started to rise after Monti declared he was resigning. However, the Italians have to decide whether fiscal austerity is working for them or not.
The vice president of the European Commission, Olli Rehn, published an article in last Tuesday’s Financial Times. He claimed that although the eurozone is passing through difficult times, he is seeing light at end of the tunnel. The short-term economic outlook is described as weak but there are signs that confidence is returning. Rehn mentioned Ireland, which has returned to the debt markets; Spain, which has experienced an inflow of private capital for the first time in 18 months; and Italy, which sold 10-year debt at the lowest yield since 2010, before Monti announced his resignation.
The broad thrust of Rehn’s article is that the austerity measures taken in a number of countries, forced by an unsustainable fiscal deficit, are paying off. He was quite clear that in his opinion, fiscal austerity is working. There is more stability and financial markets are less fearful of a collapse of the euro. Structural reforms are being implemented to restore the competitiveness of certain countries and there is also improvement in a number of indicators. Some claim that these improvements are just a correction that was required after the mistakes of the past. Others point to the figure of rising unemployment to claim there has been no change for the better.
The key issue that has been with us for the last 12 months has returned to the front burner. Should the governments of the EU give priority to tackle the fiscal deficit or to economic growth?
The people criticising the Monti Government in Italy claim that austerity measures have choked the Italian economy and that a new government must do more to generate economic growth. On the other hand, Rehn is claiming that the EU needs to stay the course and continue pursuing decisive reforms. The Chancellor of the Exchequer has also been quite determined in his position. The fiscal deficit needs to be sorted out first.
So far, Malta has generally managed to walk the tight rope, balancing fiscal consolidation on the one hand and economic growth and employment growth on the other. However, in a number of areas relating to the provision of public/merit goods, such as health and education, we have not undertaken any decisions to reduce public expenditure. This has happened because we did not really need to. There may come a time when we will need to bite the bullet, like we have done with respect to the retirement age that has been raised to 65 years.
I believe that time will tell whether fiscal austerity in the EU is working or not.