An informal meeting of the Economic and Finance Ministers of the European Union was held in Dublin last week. A number of interesting points emerged from this meeting. However, they do not necessarily all point to a positive direction. They discussed the lengthening of maturities on loans made to Portugal and Ireland as well as tax evasion, information sharing and bank secrecy. This week Mario Draghi, the president of the European Central Bank (ECB), delivered a speech in Amsterdam, which is also worth commenting about.
The news about Portugal and Ireland is judged to be positive and Ecofin ministers agreed to extend the maturity on loans given to these two countries by seven years on condition that they continue to implement the agreed reform programmes. It needs to be remembered that these programmes also included cuts in salaries for civil servants and other forms of curtailment of public expenditure. Admittedly, the cause of the problem for these two countries was different.
The claim is that around one trillion euros are lost yearly through tax evasion. This is as much as the gross domestic product of Spain
The main problem of Ireland was the crisis in the financial markets and the need to bail out Irish banks. Portugal’s main issue was the size of the structural deficit caused by excessive expenditure. Lengthening the maturities on these loans gives a much-needed breather to these two countries.
However, the tone used by the European Commissioner and the president of the Euro-group when giving this news was exceedingly condescending and therefore not acceptable.
This provides food for thought for Malta. We have to accept that we do not have much space for manoeuvre in terms of fiscal policy.
An unsustainable deficit will force us to ask for help and help will be given only if we adopt painful reforms. This does not worry me as I am vey much in favour of the zero deficit policy adopted by the EU. This means, however, that it is better to adopt a prudent approach today and avoid great pain in the future than throw caution to the wind, increase public expenditure and pay a heavy price in the future.
Draghi’s speech in Amsterdam needs to be placed within this context. He claimed that it is not correct that banks in certain eurozone countries are asking for high interest rates when it comes to lending to small- and medium-sized enterprises. He said that the efforts of the ECB to increase liquidity in the financial market were not meant to shore up banks’ balance sheets but rather to facilitate liquidity in the real economy. He emphasised that countries need to improve the competiveness of their businesses if they wish to move out of the recession.
He underlined the fact that excessive public deficits lead to excessive borrowing and excessive borrowing leads to a weakening of the economy and the loss of competiveness. So to maintain business competitiveness, countries need to adopt a prudent approach to public finances, and banks need to play their part in support of this. In the countries that required a bailout and even in others (such as Slovenia), banks absorbed a great amount of capital sourced from taxpayers’ money to resolve the issue. The banks’ lack of prudence ended up creating a loss for everyone else.
The other item that was discussed at the Ecofin meeting in Dublin was the fight against tax evasion. It is very easy to be populist in this regard and label everything as tax evasion.
Not all countries with a lower rate of taxation are tax havens and so the concept of tax evasion needs to be placed in its proper perspective. The issue is gathering momentum and is expected to form part of the agenda of the May EU summit.
The claim is that around one trillion euros are lost yearly through tax evasion. This is as much as the gross domestic product of Spain.
On this point, one needs to appreciate that there is a vicious circle, the cause of which is once more excessive public spending.
Such excessive spending causes deficits which then need to be financed through taxation. Raising taxes is bound to force persons and businesses to seek tax-efficient solutions and, at times, evade tax. Tax evasion needs to be rooted out; but one also needs to address the causes. Once more, prudence is public finances seems to be the right approach.
The headline of this week’s contribution represents nothing new. It has been said time and time again that prudence is a virtue.
However, it seems that ever so often, this fact of life is forgotten. It is now appearing to become evident that prudence is required if a country is to prevent economic problems from arising and to stay out of the recession.