Sustaining the euro

Last week the meeting of the Governing Council of the European Central Bank was held. Mario Draghi, the ECB president, announced that the Council decided to keep the key ECB interest rates unchanged. He also announced that these rates are expected to remain at their current levels for an extended period of time and well beyond the expected end date of the quantitative easing programme.

Yes, we had forgotten that term, probably because it no longer makes news. However, it is evident that the ECB is seeking to do all it can within its remit of monetary policy to sustain the economic recovery within the eurozone. The quantitative easing programme will run until its expected deadline of end December with net asset purchases of €60 billion a month.

Draghi also left the door open to extend it beyond 2017, until such time as the ECB ascertains itself that inflation is moving on a path that will eventually reach the two per cent target.

The signs of economic growth are there, even though the diversity of the eurozone is such that some national economies do well, while others not so much. However, this is the same as with all large economies. When it is reported that the US economy is performing well, it does not necessarily mean that all the regions in the US would be doing well.

Keeping interest rates low will ensure that the cost of financing for investment will remain low and that consumer demand is encouraged. It is therefore to be assumed that the current interest rate scenario shall remain in place until there is robust economic growth across the eurozone.

Consumers and businesses have got accustomed to a low interest rate environment

Two considerations need to be made. There have been, and continue to be, many who believe that the euro is a project which is doomed to fail. It has been written off on a number of occasions. Yet it continues to survive. A look at the evolution of interest rates over the last month, one notes that the US dollar has got weaker against the euro. Is it really a project that is doomed to fail?

The second consideration is about interest rates. A decision to increase interest rates cannot be a clinical one. Consumers and businesses have got accustomed to a low interest rate environment. An increase is likely to have a very profound economic and even a social impact.

Are current salaries sustainable?

Salaries in Malta continue to increase. I do not believe that this is something that would annoy too many people. There are a number of reasons why salaries have evolved the way they have. Shortages in the labour market are one such reason. In some areas, we have had employers who deliberately pushed up salaries in the hope of attracting the best people. However, this has forced other employers to respond in order not to lose their staff.

In other occupations, salaries increased as employees asked for more not to fall behind in the relativity scale. Even in such cases employers obliged. Exorbitant increases in the price of property has also contributed to demands in increases in salaries. We have also had situations where private sector employers have lost persons to the public sector, where taxpayers could be paying for salaries with little to no productivity.

In such a scenario the issue of sustainability of such salary increases is bound to crop up. Can employers continue to sustain the current level of salaries for much longer? On the other hand can employees sustain their current quality of life with lower salaries?

The reality is that in a lot of these cases, we have not had a wage evolution because the value add has improved. We have simply had wage inflation. And wage inflation is very bad news indeed.

Wage inflation leads to a consumption bubble that one day will burst. We are already experiencing employers in what are regarded as the highest paying sectors complaining that their salaries are becoming unsustainable.

The concluding thought in all this is that we may have become too blinded by the here and now. In spite of the claim of John Keynes that in the long run we are all dead, long-term sustainability is a very important concept in economics.