As the euro crisis heightens, economist and MEP Edward Scicluna speaks to Christian Peregin about the need for unity, Labour’s plans for the future and the prospects of being the next Finance Minister.
Last week you announced your intention to contest the general election on the Labour ticket. Are you the new moderate pro-European face of Labour?
I am myself. But I always thought every party should be modelled around experienced and qualified people. Since it was in the opposition for such a long time, the Labour Party made a series of mistakes.
Several… Even the way it defended itself.
Do you think opposing EU membership was a mistake?
Since it was not elected, the party must have committed more mistakes than the other party. So there are several…
But what about EU membership, specifically?
Yes, as well.
As a 65-year-old technocrat, how do you view the prospects of door-to-door campaigning, only to end up in the Maltese parliament where you are paid less and end up under higher scrutiny?
I think a campaign is a strong dose for anybody to take. That’s why you find very few people offering their services to a party, because you have to go through a campaign which can turn dirty. You end up asking yourself why you are doing it. In other countries, some people are just appointed ministers without having to go through such a campaign.
Is that a good idea or is it important to go through the democratic process?
It’s preferable that you are elected by the people. It gives you a lot of strength and comfort. What you say carries more weight.
When Labour leader Joseph Muscat asked you to stand for the next general election, did you discuss some deal to be appointed in the Cabinet, for instance as Finance Minister?
That’s the prerogative of a Prime Minister.
But did you discuss it with Dr Muscat?
He knows my specialities. I could fit in various positions. I already have a position in the (European) Parliament as vice-president of the Economic and Monetary Affairs Committee. I’m doing very well. This year I was involved in 18 reports: three as rapporteur and the rest as shadow rapporteur.
So it’s fair to say you are being earmarked for Finance Minister. But there are also other candidates…
… I repeat. That is the prerogative – the last-minute prerogative – of a Prime Minister.
Let’s say you do get elected and you are asked to be Finance Minister as many are presuming will happen. Are you worried about the overwhelming task at hand?
I consider it to be a challenge. But the bigger the challenge the more it can get the best out of you.
Does it excite you?
Yes. For years I’ve been rubbing shoulders with politicians from both sides, where you live a subject but you are never in the spotlight like a politician. Now I know the difference. When you’re a politician, it’s your head that’s at stake.
What will your priority be?
Good management. Good governance.
Cutting out waste, for instance?
It’s a big agenda. It’s not a question of cutting waste. I think that we just… the economy could have been managed much better.
Is that what drew you to the Labour Party?
I’ve always sided with the underdog….
So are you with Labour because it is the underdog?
I think it goes back to my Oxford years. Since then, I’ve been centre, to the left.
So it was a natural process for you…
Yes and now it expresses itself in my acceptance to contest with Labour.
The Labour Party came up with 51 proposals in response to the Budget. Were you involved in drawing them up?
No. I was involved in certain evaluation of the economic situation as outlined in the minister’s speech. I submitted my evaluation and it was up to the Leader of the Opposition to digest, cut and paste.
If you had to offer a critique of his 51 pledges and proposals after you heard some of the criticism that followed, how would you evaluate them? Is this the direction the country needs to take or are the points vague?
I think it was partly economic, partly political. Ten questions were asked, 51 answers were given. Obviously I think policy goes further than that. For me there are priorities like education, health, pensions, taxation… So many reforms are required to improve the economy.
Many leading economists as well as the former Governor of the Central Bank have said the money we spend on things like pensions and stipends is unsustainable. Politically we know it is dangerous to touch them.
The worst aspect is that we’re not getting value for money… For the money we are spending, as EU studies have indicated, we are getting much, much less than other countries. Surely we have to ask why and then we have to reform. We reform to ensure we are no worse than other countries.
The Labour Party has still not provided concrete plans to reduce the electricity rates as promised. In light of what’s happening in Europe and the reforms you mentioned, where are we going to get the money from?
That’s the wrong question to ask an economist. When you have a liberalised market, the market comes up with the correct pricing. The problem is when you have a monopoly. In these cases, the EU puts emphasis on setting up a regulator… Not to sit there and rubberstamp anything the government decides, but to determine what ought to be done as if it were a liberalised market. We know how the current tariffs came about… In 2008, there was so much red ink on the government books that Cabinet pulled at the first lever in front of them: the utilities.
Is that why Cabinet raised prices?
To increase revenue and stop the haemorrhage in the deficit.
Not because of rising oil prices?
Not really, but it was justified with that…. In a market, first you have to price the resource as it should be. Industry needs the right prices to compete with other industry in Europe. The consumer also needs the right signals to know how much to use and conserve.
Ultimately, how do you get cheaper prices?
It’s not a question of getting cheaper prices. I consider that to be a naughty question because what I can say is that if the regulator, just like in the UK, were to carry out a proper study, it would come up with a lower tariff than ours.
Labour is saying electricity bills will be reduced sustainably and…
…because they are higher than what the market would bear in a liberalised market. The regulator has to carry out studies and publish them. Then you work backwards. The corporation must meet the set tariffs.
You’re saying we should start with the regulator setting a fair price and then work backwards?
That would put the [Enemalta] corporation under scrutiny. We would have found out quite early, instead of quite late, that it is inefficient and its accounts are not audited. That’s not acceptable. If it were a private company, we wouldn’t have accepted it. Why should we accept it just because it is public?
But ultimately if the corporation runs into a lot of debt we would be paying for it anyway.
But the point is the taxpayer would then make demands from government and say it is not acceptable. If you give the tariff that the current inefficiencies demand, there is no pressure on that corporation to find the best investment, the right technology, at the right time.
The Labour Party recently upped its criticism of the government, but there still seems to be a general consensus in the country that compared with the rest of the region, we seem to be doing relatively well. Prime Minister Lawrence Gonzi seems to be the last man standing…
I don’t fully agree, but I have reasons why.
…are the Maltese not being critical enough when it comes to the government or is the Labour Party being too harsh on the government’s economic performance in comparison to the EU region?
When you scrutinise all the high grades the Prime Minister boasts about, they are not supported. I’m not saying we’re the worst in Europe. Definitely not. But we’re definitely not the best. Let’s take our credit rating. When we were rated downwards with a negative outlook, our response was that this is obviously a result of the entire eurozone being downgraded. But out of the 17 countries, there are only three with lower grades than Malta. Italy is with us. So there are 13 countries which have a better rating than we have.
One of the reasons is our debt…
The dynamics of our debt…. The debt is what it is, but the problem is where it is pointing. If it is pointing downwards, even by one per cent a year, it’s fine. But if it’s pointing one per cent upwards, each year, it’s pointing in the wrong direction.
But our debt is mostly local. That’s a positive thing for us.
The rating agencies can be criticised for making 1,001 mistakes in the past but when it comes to relative measurements – us compared with other countries – there’s no reason for them to be unfair. Their reading of our debt is not your reading. Otherwise they would put us on a better grade, at least with those other 13 countries.
In economics we have an equation, whereby the interest rates on debt have to be lower than the rate of economic growth. If there is a difference (interest rates are higher) you have to make up for it by a surplus, which we are not making. This is what we call debt dynamics. In other words, the prospects are not good if we don’t have five per cent of economic growth, which we can’t see on the horizon.
And we’ve never seen our debt ratio to GDP falling through the government’s own efforts at creating a surplus. It was only due to various bouts of privatisation.
You said Europe needs technocrats not bureaucrats. But do you worry that in the eurozone technocrats might be beginning to override democracy, in a sense. We’re being given very tight deadlines to make tough decisions about fundamental changes. Does this worry you? Should it worry us?
What worries me is that [technocratic governments] are being imposed by the creditor countries. The creditor countries want to see some unity in countries like Italy and Greece. Whoever from those [debtor] countries is saying “yes we’re going to correct things” can only mean it if the country is behind him. But since there was no such unity, things were imposed. That is not democratic. But let’s not exaggerate. The parliaments are there, they still function. Even in Italy, they still have to vote and so on. So it’s not as worrying as one would think, that democracy is going to finish.
There’s this feeling that France and Germany are calling the shots and although Malta is participating in the discussions, does it have the clout to make sure it gets what it wants?
This is worrying for Malta. That’s why I have been speaking about the challenges ahead. We have enormous challenges and Dr Muscat has already spoken about them and shown he is prepared to cooperate with the government because we have to take a common stand.
The worrying thing is that while in the EU we have several countries which can be considered allies because they have the same mentality and we talk the same language, when you look at the eurozone we find ourselves almost alone.
Ireland and Luxembourg have similarities with Malta’s financial services industry, for instance. But because of his position as president of the Euro Group, Luxembourg’s Prime Minister Jean-Claude Juncker has his lips sealed. Ireland can’t speak either because of its problems. So we are on our own. Our competitiveness could be under attack. That’s where the red line should be drawn.
If the government doesn’t play hard at the negotiation table, does Labour have the confidence to speak out? Considering the party’s past anti-EU membership stance, do you worry that if this sort of political discussion comes to the fore, Labour will not win the local propaganda war?
I think we shouldn’t play politics in this area. When it came to the financial services industry, from its very initial stages there was a common front from both sides. They’ve kept it and let’s hope they continue because even if we are fully united we will still have a big, big battle ahead of us.
But being united at the expense of keeping the government in check?
We are referring to unity when it comes to treaty changes… In the EU, faced with a crisis, there are lots of good MEPs from several countries coming up with solutions which do not include treaty changes.
But there are others who are federalists for their own sake who have an axe to grind against the UK and against tax havens… And don’t be shocked, for the French, the way they speak, still consider Malta as a tax haven… They are even very jealous of countries like Ireland which have been successful at attracting a lot of investment with their moderate to low corporation tax. They would want a common corporation tax. That is something we will be united to resist. It’s not in our interest.
Economists agree this is not the time for a treaty change. Our house is on fire. First we must put out the fire, then see how to prevent it next time.
So if the government’s position softens, will Labour be able to stand up and say so, without being accused of being Eurosceptic.
I think we have to appear to be united. And both sides should show discretion.
Should we use the power of veto if it comes to that?
I don’t think we will gain anything by mentioning that. There are many other means. There are other countries like Luxembourg which wouldn’t want a tax to ruin their industry. So I don’t think we should jump the gun. I don’t think treaty change is coming tomorrow. But we definitely need to be aware and prepared for these challenges.
All these discussions are fundamentally to save the euro. To what extent is the euro worth saving, in the eyes of the general public?
The global economic costs of the eurozone breaking up are enormous. We had enormous fallout with Lehman Brothers, can you imagine the eurozone breaking up and the catastrophic effects it would have? I cannot see that happening or any country letting that happen. But obviously there would be a lot of brinkmanship – pushing it to the end and then saying we have to do this and that….
Will we have to cut some countries loose?
Not today. But in the future, yes. When this passes and there will be treaty changes they would allow for countries to leave in an orderly manner. But not today, we can’t afford to let any country leave.
In light of all this, with the benefit of hindsight, was the euro project a good idea? Should we have joined the eurozone?
For Europe, the eurozone project was a good idea but there were certain essential ingredients which were not all satisfied when we set it up. Our response was the Stability and Growth Pact. But when the big countries broke the rules they were not sanctioned….
So it was a good idea gone wrong.
The political execution was weak. It was not executed as was intended by the forefathers. Now we have to correct that.
Regarding Malta, whether better inside or outside, I always say it’s a question of a different type of economic engine. Outside the eurozone you have the devaluation handle and the monetary policy of the Central Bank. But you won’t be in a block. We wouldn’t have gained anything from 10 years of successful performance by the euro. Now we are facing the other side of the coin for a while. Hopefully it will be corrected.
Sunday, December 11, 2011
by Christian Peregin