But are we sure we are not the piglet on Noah’s Ark? Are not our symptoms very much akin to the “PIGS” family? Are not our exports and tourist services uncompetitive?
Times of Malta – Wednesday 25th February 2009
In spite of the great foreboding 10 years ago, that the eurozone is not exactly the United States with its near optimum currency area characteristics, results have shown that it did pretty well. Its members saw satisfactory rates of economic growth, equally impressive rates of job creation and subdued inflation; really, a model of economic stability. This happened in spite of the lack of independent economic adjustment by the individual eurozone members normally used to independent monetary and exchange-rate policies.
However, it must be recalled that many of its promoters wished it would be much more. The euro was supposed to be an engine driving supply-side reforms across its member states, making them more productive and competitive than any other world economic block. Actually, this did happen with a number of eurozone countries. Germany, Austria, Finland and the Netherlands did indeed bite the bullet and duly implemented reforms to make their economies more flexible and more competitive.
With time, though, the zone was turned into an animal farm, with some animals being more equal than others. At one end a group of like-minded Mediterranean countries, nicknamed “PIGS” in view of the fact that the main protagonists were Portugal, Italy, Greece and Spain, were having a different view of the eurozone. Their view all along has been that the eurozone was itself a safe haven. It would serve them as a Noah’s Ark in times of a global financial deluge.
Fine. So they made supernormal efforts to qualify and join at any cost. They increased taxation significantly and introduced one-off fiscal schemes, kept expenditure temporarily on hold and kept wage increase at bay until the euro test-time. One particular country, Greece, was even subsequently caught cheating and got fined.
As soon the euro test was over, these countries, having felt secure with having boarded what each believed is Noah’s Ark, have gone back to their old practices and economic sinful behavior. The euro saw the end rather than the beginning of their economic reforms. Sounds familiar?
The result now is that the eurozone is no longer seen as a top notch club of first-class economies but a club with two classes of members. The “PIGS” group is showing common symptoms: High effective exchange rate and endemically uncompetitive exports, rising unit labour costs, deteriorating current account balances and similar deterioration of its member’s public finances. With an economy that seems to be and, in fact is, stuck, the feeling is dismal and general frustration is there for all to see. Feeling cosy within the eurozone, their respective peoples, however, have no appetite for painful reforms. In fact, their political masters have ruled this out in no uncertain terms.
In the face of greater global stress, a sharp rise in bond spreads are being observed for Portugal, Italy, Greece, and Spain. You cannot expect, in these testing times, that capital markets will be less forgiving of high public debt or rising budget deficits. To make matters worse, Standard & Poor’s – a credit-rating agency – has recently downgraded Spain, Portugal and Greece.
Which brings us to our own predicament. Like the “PIGS”, we too made strenuous and admittedly heroic efforts to join. We truly believed that we could not stay out in the cold. Even now, we are thankful that we are cosy within, watching the outside world fall apart. Non-eurozone island states like Iceland are pointed out to us like a Titanic film watched from the cosiness of our sitting room.
But are we sure we are not the piglet on Noah’s Ark? Are not our symptoms very much akin to the “PIGS” family? Are not our exports and tourist services uncompetitive? With exports falling record heights when compared to all the other European Union countries, resulting in yawning current-account imbalances. Has not the IMF and, more recently, the EU warned us about the repercussions of unsustainable wage agreements in 2008? And how can we explain that we managed to break all three sacred vows we took when we joined the eurozone, namely not to exceed the three per cent deficit-GDP ratio, to keep inflation low and to maintain a declining debt ratio.
Most economic observers were fooled when they thought they heard the European Commission telling EU members to stimulate their economies through more spending. They thought that the message was meant for all the member countries irrespective of whether they had room to manoeuvre or not. Of course, they were wrong. It was only meant for surplus and not hugely indebted countries like the “PIGS” family and piglet Malta.
It must have come as quite a shock to many last week that Malta was close to be slapped by the EU’s standard “excessive deficit procedure”. Instead, we were given a reprieve. Unlike Latvia and the other wavering countries, we were smart enough to impress on the Commission that this state of economic affairs was a one-time quirk, almost a mirage. And, of course, we are now in for a bigger shock. Because the reprieve was conditioned by the promise that Malta would soon get its public finances in order in two principal ways; One, by cutting public expenditure as a result of a health reform and, two, by increasing the tax burden by nearly a percentage point of the GDP. Yes, you read well. This much is stated to have been promised in the European Commission’s Assessment of Malta’s Stability and Convergence Programme.
How we can promise this plan in the face of increasing pressure from the business and private community for some relief from the scourge of the impending recession boggles the mind of anyone, not least the economist.
Prof. Scicluna is a Labour candidate for the European Parliament elections.