Prime Minister Lawrence Gonzi is in the unenviable situation where he has left himself no room for manoeuvre to cushion our economy against the ravages of the international situation and save jobs. Instead, he has to start the whole deficit cutting exercise all over again, this time under the direct orders of the European Union through its excessive deficit procedure.
In his recent outburst against opposition criticism and mine in particular, the Prime Minister lectured his audience on the euro peg but failed to mention that our economic history since World War II reports only two Maltese lira devaluations, one in 1967 and the other in 1992. Both were carried out under Nationalist administrations.
The Prime Minister referred to the interview I had on timesofmalta.com wherein I had stated that I considered that the present predicament of the economy and public finances were due to two major wrong economic decisions taken in the past. One was the refusal by the Gonzi government to utilise the +/- 15 per cent band around the then existent parity during the ERMII period. This had been suggested by the European Commission.
At that time, I considered this refusal as "the worst advice the Prime Minister was to be given for many years to come".
I had argued that the float within the band during the two years prior to euro adoption would have given the chance to our lira to find its real value against the euro. This would have allowed our monetary authorities to choose the most suitable permanent euro/lira peg, which would have helped Malta's export competitiveness and the creation of more jobs.
It was the Prime Minister's mistake at that time to ignore this advice and trivialise the issue with the infamous devaluation scare. Four years later, on the eve of the European Parliament elections, Dr Gonzi repeats this mantra to deviate attention from the required policy measures needed to take us out of the present economic quandary.
The second wrong decision was to concentrate solely on deficit cutting to the detriment of economic growth and to carry out this exercise solely by increasing taxation.
The way we should have reduced the deficit I had spelt out in a paper presented at a Chamber of Commerce conference in 2003 entitled Cutting The Deficit: We Can Do It. I had warned that previous attempts by other countries such as Ireland to cut the deficit by raising taxes would not succeed in achieving sustainable public finances. This was also ignored.
When the period of euro examination was nearing, as a euro expert appointed by the European Commission, I was given to understand that Malta was failing the stress tests carried out with regard to the debt/GDP ratio. I had reported this in various interviews.
I had advised that the debt ratio was to be brought down not by the one-off proceeds from privatisation but by more diligent control of public expenditure programmes through appropriate reforms. This would have succeeded in putting our public finances on a sustainable path.
The real cost of ignoring this economic advice showed itself in our very first year of euro membership. In one single year (2008) we managed to reverse a seven-year stint of sacrifices of deficit reduction through higher taxation. Our deficit shot up to 4.7 per cent, the inflation went up to over five per cent at a time when the whole world was facing deflation, and the debt accelerated its upward climb. This has brought the wrath of the European Union, which has initiated the excess deficit procedure against Malta. The Gonzi government cannot tell us it was not forewarned.
Finally, as an economist, I have consistently been in favour of euro membership once the much-awaited structural reforms would have been in place. It is sad to note that these much-awaited reforms, notably in health, education and pensions, have failed to materialise in the period prior to EU membership as well as in the period prior to Malta joining the euro. Today, the Prime Minister is still talking about these reforms.
It is up to the electorate to judge who has indeed weakened the economy and its public finances and put Maltese workers' jobs at risk.
Prof. Scicluna will be contesting the MEP elections on a Labour Party ticket.