News | Wednesday, 01 July 2009

The ugly face of the EU

Former finance minister George Bonello Dupuis described it as “bullying” from Brussels. Malta has until the end of 2010 to correct its deficit. The European Commission is recommending that Malta comes in line with its financial and economic rules laying down that the member states’ structural deficit should not be higher than three per cent of GDP. At the end of 2008, Malta’s deficit stood at 4.7 per cent of GDP, meaning it will have to be trimmed by at least 1.7 per cent by December 2010. In addition, the slight surge in government debt observed since 2008, will have to be reversed. What do the economists say?

Edward Scicluna: “The EU has finally called our bluff”

The Excessive Deficit Procedure is a normal and agreed procedure taken against any Euro zone member that breaches the Maastricht criteria. I certainly do not believe that it could be otherwise, once the deficit was described as “not resulting from an unusual event or from a severe economic downturn”.
The EU has to it’s own discretion a period of time within which, a correction has to made by the member state to return below the 3 per cent target.
The European Commission has apparently decided on the 2010 deadline for Malta because of the way the economy has been described by the Malta Government in its documentation. Other countries argued and got a longer correction period.
Initially, Malta gave the impression that its deficit was something specific and temporary. The EU believed us then.
Now the Commision seems to have changed its mind, but in principle it still accepts Malta’s thesis that a short period of time is enough to correct this “one time” quirk in our finances. With this, I say that the EU has finally called our bluff.
With the current economic environment I just cannot see the government reaching those goals by the end of 2010, unless it wants to drive the economy further into a deeper recession than we have at present.
The philosophy driving this administration has to change radically if it wants to succeed in undertaking cuts in expenditure without hurting the economy.
It is too politically risky a-task for it to succeed. It does not enjoy the trust let alone the consensus to undertake drastic surgery at this time.
I would say one year from when the economy turns from negative to positive economic growth rates, would be the time when one could say that we could correct our infringement.
But in its assessment, the EC said that Malta’s budget deficit “does not result from an unusual event or from a severe economic downturn in 2008 in the sense of the Treaty and the Stability and Growth Pact.”
I agree to this assessment, and I have expressed this view even when the EU said otherwise earlier this year. I could not understand then, why the EU should be so naive into thinking the deficit was a temporary event.
I do not know of countries who managed fiscal consolidation just by raising taxes and refusing to tackle the expenditure side. Even during the Euro test year the finances were anything but sustainable.
All the good things were promises, while the past deficits were temporarily closed through taxation. Nothing looked sustainable to me.
It will remain so until the Government comes clean and stops dreaming, and stops taking the people and its representatives for a ride.
Government must admit that it has a problem and must seek partnerships to solve the problem.
It may happen. The recent murmurings from the Finance Minister could see the start of such a journey. I would wish him the best of luck. I have been longing for this to take place since the ERM II period prior to Euro membership.

Karm Farrugia: “Such a procedure is inopportune”

What is your assessment of the European Commission’s decision to proceed with the Excessive Deficit Procedure (EDP) against Malta?
Do you agree with the decision to proceed against Malta and ask for a deadline?
“As rules still stand despite the exceptional global economic scenario, the EC had no choice but to proceed with the EDP against Malta, hopefully likewise with most EU members.
“However, I maintain that such a procedure is inopportune and even harmful during a recession of such magnitude and intensity.
“It should have been suspended until at least the growth path of EU nations has again been reached. Only then would a deadline have some meaning and purpose.
“The bureaucrats at the Commission had better read about Keynesianism and its relevance today.”
What is your view about the end of 2010 deadline for Malta’s budget deficit to be reduced to below the 3 per cent Maastricht benchmark?
Do you believe that this deadline is realistic in view of the current economic situation?
The 2010 deadline is cruel and reveals an absence of realism and sensitivity. It assumes that the recessionary effects would vanish by the end of 2009.
And not just for Malta but for the whole of the EU on which we mostly depend for our revival. It shows the “ugly face” of the EU.

So, what would, in your view, would be a more realistic deadline for Malta?
Any deadline must not be decided now but in a year’s time when the situation becomes clearer.

In its assessment, the EC said that Malta’s budget deficit “does not result from an unusual event or from a severe economic downturn in 2008 in the sense of the Treaty and the Stability and Growth Pact.” Do you agree this assessment or not?
I agree with the first part, but disagree with the second part of the statement. The problem was that our Government was not aware of the country’s economic downturn until the first quarter of this year when, in fact, it was happening from the end part of last year’s third quarter when the nation’s budget was being drafted.

Does this mean that the budget deficit in Malta has become structural in its nature or not? Why?
Yes, I think one can call the current budget deficit as “structural”, but one which can be cured through an overhaul of the Recurrent Expenditure part of the budget.

Given the current financial situation, do you think that Malta is in a position to achieve a “minimum annual improvement of at least 0.5 per cent of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures”, as requested by the EDP regulations, to correct is budget deficit by 2010?
Not yet, not this current year. It should, however, endeavour to target it from 2010 unless the global recession will not have bottomed out by then.

In its assessment, the European Commission says that “in order to bring the deficit below the reference value by 2010 in a credible and sustainable manner, it is necessary that “Malta rigorously implements the budgetary measures planned for 2009 and avoids any further deterioration in public finances”. What does this mean for the Maltese Government?
Malta should not be pressured to implement the mentioned budgetary measures before at least next year, especially the water and electricity charges which impact heavily on our cost of living index.
I have always maintained that such subsidies should be reduced gradually over a span of four to five years, during which time Enemalta and WSC would be made to operate efficiently, perhaps possibly managed by incentivised private operators.
There are several other public sector areas on which to draw for cutting down on expenditure.

In view of how public finances performed last year, when the budget deficit rose from 1.9 per cent of GDP as forecast in the 2008 Budget speech to 4.6 per cent as forecast at the end of the year, do you think that the Government will be able to meet its budgetary targets again this year of 1.5 per cent of GDP, particularly in view of the economic recession that has hit the Euro area, or not? Why?
Of course not, and the Government should not be expected to or be pressured by the EC or anybody else. The Minister would claim success even if the deficit is kept at 4 per cent of a declining GDP.



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01 July 2009

Malta Today


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