When REM wrote It’s the End of the World as We Know It in 1987, they certainly did not have the euro’s troubles on his mind.

Meeting the budgetary targets is achievable, even if an external slowdown will make the task more difficult

The single currency was still a dream and the Berlin Wall was still standing. Europe had the Iron Curtain running down its middle and Ronald Reagan was in his last year as US president.

Two decades later that song may very well be the anthem that describes the euro’s predicament in 2012 even if the refrain’s continuation “... and I feel fine” is hardly what people will feel about the matter.

A deal by all EU member states, bar the UK, in December was supposed to have dealt with the eurozone’s lingering problem of bad debts, failing countries and contagion risk.

The fiscal compact, as it was called, will be sealed in March when member states are expected to put ink to paper on an international agreement outside the EU treaties.

The compact seeks greater fiscal discipline and national budgets will have to be balanced or in surplus, allowing only for a negative deviation of 0.5 per cent of GDP. These rules will also have to be enshrined in the respective member states’ constitutions.

Whether this attempt will be enough to ensure the eurozone survives in 2012 still has to be seen but the signs from the financial markets have not been encouraging.

Interest rates on Italian government 10-year bonds remain persistently high at around seven per cent despite a slight drop just before the EU summit.

This means that Italian debt is becoming even more expensive to sustain, raising the spectre of a Greek-style crash and questioning the eurozone’s very survival on its 10th anniversary.

Labour MP Alfred Sant, a sceptic of Malta’s early adoption of the single currency in 2008 and the author of a book (Malta and the Euro) that will hit bookshelves shortly, believes that the most likely scenario is for the euro to continue “staggering” through 2012.

“There is too much human and political capital at stake for the elites who have launched and run the fundamentally unsound euro project,” he says.

But while German discipline, he adds, will spread to control budget laxity, it is doubtful whether this will sufficiently impress the financial markets.

Dr Sant believes that austerity across the eurozone will continue to undermine growth and Germany “might just blink” under market pressure to allow looser European Central Bank policies.

The fiscal compact is a first step towards greater fiscal and economic integration but although European leaders have tried to avoid the word ‘federalisation’ – it is unpalatable to voters since it means loss of sovereignty to Brussels – to describe the changes ahead, technocrats have long arguedthat a United States of Europe is the only lasting credible solution.

For Dr Sant though, the prognosis is not good. “Increasing federalisation in Europe without appropriate transfer mechanisms to pass resources from high to low achieving areas, plus a growing divergence of economic performance, could fuel political crises.”

Germany has until now been reluctant to accept the creation of a money transfer union since it does not want to pay for the excesses of the spendthrift southern eurozone member states unless they are bound by strict enforceable rules.

However, Central Bank of Malta governor Josef Bonnici believes Europe has no choice in the matter and a breakup of the eurozone will only benefit market speculators.

“We have to ensure a return to normal conditions in financial markets, because the alternative would have grave repercussions across the world.”

It is unclear how the matter will be resolved, Prof. Bonnici says, but a solution is “inevitable”.

We have to ensure a return to normal conditions in financial markets… the alternative would have grave repercussions- Josef Bonnici

He acknowledges that 2012 will be characterised by slow economic growth, which is likely to slow down even more as tax rates are increased and public spending is reduced.

“A slower growth rate requires even further consolidation measures in order to achieve the same reduction in the debt ratio,” he says.

If the year that has just ended was characterised by widespread austerity measures in various eurozone countries, the new year will carry the same predicament.

Reversing the excesses of the past will be painful but Prof. Bonnici insists that the post-crisis period will be one where the structural imbalances that spawned the crisis would be corrected, leadingto a greater degree of competitiveness and faster economic growth.

This optimism is also reflected by Martin Bugelli, head of the European Commission’s representative office in Malta.

He believes that the measures taken and others coming up should leave Europeans hopeful that the bloc will be able to turn these difficult times into an opportunity for increased growth andstability.

“The December European Council delivered strong decisions on the creation of a genuine fiscal compact that was needed as a response to the immediate crisis and to open the way to greater integration, discipline and convergence,” Mr Bugelli says, adding that member states rose to the occasion when it was necessary to defend the euro.

The commitment now has to be translated into an agreement by March and it may not be simple to achieve, according to Matthew Mizzi, a law graduate working in the financial services sector.

“While the aims of the agreement seem to be clear – enforce budgetary discipline – the legal method chosen – that of an intergovernmental treaty –creates more questions than answers,” Mr Mizzi says.

It may be a legal issue but one of significance since the fiscal compact will not be part of the EU legal order even though it will deal with something central to the EU: the euro.

“Much will depend on the outcome of negotiations over the coming weeks,” Mr Mizzi says.

He believes that if in typical European deal-making style, the terms of the fiscal compact end up being “watered-down toothless rules”, Malta should consider changing its laws anyway by introducing a debt-brake and a balanced-budget rule in its own constitution.

Apart from having a direct interest in shaping the future of the euro, Malta will also have to contend with a negative economic outlook that is likely to leave its toll in the latter half of 2012.

Fiscal prudence that enables government to achieve its deficit target and the ability to adjust to a decline in exports will provide the country with a best-case scenario according to Prof. Bonnici.

“Meeting the budgetary targets is achievable, even if an external slowdown will make the task more difficult,” he insists.

Malta will continue to pay the price for having joined the euro system prematurely- Alfred Sant

But a tight grip on public finances alone will not do the trick, according to Dr Sant, who believes that a best case scenario will see a steep pick-up in tourism, which would inject cash into the economy that revives the flagging small self-employed sector.

The problem with this, he adds, is that Malta’s tourism competitiveness is still declining. And a worst case scenario, Dr Sant says is the drying up of financial inflows coupled with higher outflows due to pressures on the euro banking system.

In any case, he says, in both circumstances Malta “will continue to pay the price for having joined the euro system prematurely”.

ksansone@timesofmalta.com