During his recent parliamentary speech, Finance Minister Edward Scicluna was quick to complain that Malta will be making an €11 million loss on Greek loans. Incidentally, this amount is simply the difference between the interest rate paid on government borrowings and the interest rate that is charged on the Greek loans multiplied by 30 (the duration of the loan).
The overall benefits of the common currency far outweigh this small premium
Rendering such an important political decision into a mere ‘calculator exercise’ is superficial and presents a naïve interpretation of facts. Economic and historical analysis should go deeper than this. There needs to be a proper interpretation of the events which led to the decisions by European leaders to offer assistance to Greece.
The euro project’s success rests on the belief of financial investors that countries which join the euro area are committed to maintain sound economic policies in order to withstand the challenges that membership in this ‘exclusive club’ entails. Such a belief would quickly disappear if a country were to abandon the euro. Naturally, the question would then be, “if country X has left, will country Y also leave?” And so on.
The bottom line is that serious doubts on the sustainability of the euro would have emerged had any country reverted back to its national currency.
We had a recent concrete example of how financial market sentiment can be quick to react when, in the aftermath of the problems that were faced by Cyprus, the Labour Opposition back then was quick to erroneously suspect and raise the alarm that Malta had similar problems and would follow suit. This was based on irresponsible and superficial impressions.
It is natural that European leaders, Malta’s included, took the bold initiative to save Greece from complete meltdown. They were not willing to make their people face the risk of disintegration of the euro area.
The alternative to a Greek bailout was (and still is!) worse by far. Hence, the bold words of Mario Draghi, President of the European Central Bank, stating he was “ready to do whatever it takes to preserve the euro”.
Naturally, as most of us learn at a very early age, there is no free lunch. Credibility has its own price. In order to assist Greece, funds had to be lent. During the first wave of assistance, interest rates were set at a level to strike a balance, sufficiently low to be affordable by the country but sufficiently penalising to act as disincentive for other countries to avoid going down the Greek path.
What followed was something which at that time experts had underestimated. Economic projections are always dependent on assumptions, which at times may not hold. The Greek economy embarked on a downward spiral, with shrinking output and falling tax revenues. This freefall situation necessitated a reassessment of the costs and benefits attached to the Greek financial assistance.
Compared to the spectre of a full collapse of the Greek economy, with uncontrollable negative shocks felt by the rest of the European economies, naturally including Malta, political leaders opted for softer conditions.
The benefits of Malta’s membership of the euro area are there for all to see. The phenomenal expansion of the financial sector as a result of that, which, coincidentally, the Labour government boasts about as if it were its own, is just one example.
Incidentally, the infamous partnership agreement, campaigned for by the now Prime Minister Joseph Muscat, would not have made this possible. In this respect, Malta is enjoying a fair share of the benefits of euro area membership, similar to when someone pays annual insurance to have peace of mind. The overall benefits of the common currency far outweigh this small premium.
Policymaking is all about having a vision, something that Labour’s recent history has evidently lacked, opting, as it has for a more naïve and short-term calculator mentality.
Kristy Debono is the PN’s spokeswoman for competitiveness and economic growth.