The European Commission announced last week that it was reversing its Excessive Deficit Procedures (EDP) initiated against Malta after declaring that the country had taken ‘effective measures’ to curb the Budget deficit in the previous six months. CHARLOT ZAHRA spoke to four economic analysts – Labour MEP Edward Scicluna. John Cassar White, Karm Farrugia and John A Consiglio for their reactions to the EC’s decision
“They were also effective even if naturally they have not resolved the deficit problem in full” John Cassar White
What is your reaction to the recommendation for the removal of the Excessive Deficit Procedure (EDP) against Malta by the European Commission, despite the fact that the estimated annual improvement in Malta’s GDP was only 0.75 per cent as against 1.25 per cent estimated in the Spring Economic Forecasts? The Commission takes a pragmatic approach when considering whether a particular country has done enough to rectify the weaknesses in public finances.
In our case the Commission decided that in view of the very difficult world economy circumstances, the Maltese Government has acted well enough to address the outstanding public finance weaknesses
Do you agree with the European Commission’s decision? Yes I agree. Any further action by the government to tighten further on fiscal policy will only delay a recovery.
In its assessment, the Commission concluded that Malta had taken “effective action” as required by the EC Council decision of 7 July 2009 after “taking into account economic developments compared to the outlook in the Commission services’ spring 2009 forecast”. Do you agree with this assessment ? Yes – in the present world economic situation, it would have been inappropriate to try and address the fiscal weaknesses fully by tightening policy.
In your view, what would have constituted “effective action” by the Maltese Government to curb the budget deficit? The action taken by the Government to address the deficit issues were appropriate in the present circumstances.
They were also effective even if naturally they have not resolved the deficit problem in full.
This however leaves us with substantial ‘unfinished business’ in the area of fiscal consolidation that has to be addressed in the coming few years.
What effective measures should the Maltese Government have taken to curb more effectively the budget deficit? I believe that the government rightly limited its fiscal tightening action to avoid throwing the economy in an even deeper recession.
In its assessment, the EC insisted that “bringing the deficit below the reference value by 2011 in a credible and sustainable manner would require the Maltese authorities to achieve the 2010 deficit target of 3.9 per cent of GDP set in the budget.” In view of the current fiscal and economic situation in Malta, is this target possible or not? I still think that the 2010 Government budget projections are optimistic. I hope that they will be reached to avoid painful remedial action in 2011.
It is interesting that the Commission is predicting a worse deficit for 2010 than the Government.
So what would be a more realistic target? I believe the Commission’s estimate of 4.4 per cent deficit is more realistic.
What is your reaction to the recommendation for the correction of the budget deficit period by one year? One year is a minimum extension that we need to put things right. Anything shorter than that would have been unrealistic.
In its recommendation, the EC said that “since the authorities are considered to have taken effective action in compliance with the Council recommendation of July 2009 and unexpected adverse economic events with major unfavourable consequences for government finances can be considered to have occurred in Malta, an extension of the deadline for the correction of the excessive deficit by one year, from 2010 to 2011, is warranted”. What is your opinion on this recommendation? I cannot but agree with this recommendation. In fact we may need an even longer period to put fiscal rectitude back in place.
Do you agree with those who claim that the Maltese Government has been let off the hook by the European Commission for a second time in the space of two years? Not really. Few people realise how much still needs to be done to put things right and the Commission has hinted to some of these things.
You need time to correct structural weaknesses in our finances. The Commission seemed prepared to give us time as long as we show that there is the political will to act when action is needed.
“It is anybody’s guess whether the deficit were to come down to 3.9 per cent by the end of this year” Edward Scicluna
In order to understand the EC’s decision vis-à-vis Malta you have to appreciate that this decision has been taken during the most uncertain moments in the Eurozone’s entire history.
Never as today has the Eurozone been stress tested in this manner. The strengths and the weaknesses which the countries had long been known to have prior to the financial and economic crises have been amplified bringing serious cracks to the fore.
So far the EC has managed the Eurozone with showing the carrot and warning but never using the stick.
Now that it is challenged by the number of countries defaulting on their SGP objectives with some like Greece seriously in trouble, the EC is facing a big dilemma.
Should it use the stick and risk further problems today or lend a helping hand and risk further abusive behavior in the future?
Compared to Greece and to some extent Ireland and Spain, Malta’s tiny GDP pales into the background.
The EC knows that the problems are structural and not brought about as a result of the international recession.
It said so in reply to my parliamentary question which put across to the Commissioner Almunia. Of course the adverse economic events did not help and a one year reprieve was given.
I do believe that the government is using all the one stop measures to brake the ballooning deficit.
Like a failed student who gets a prize for trying, one could say the Government is resorting to a bag of tricks to increase the tax burden unobtrusively.
What the Government cannot say in the same breath is that it has had an effective stimulus package.
In economics one cannot have the cake and eat it. Either our fiscal stance is contracting or expanding. It cannot be both.
What is your reaction to the recommendation for the removal of the Excessive Deficit Procedure (EDP) against Malta by the European Commission, despite the fact that the estimated annual improvement in Malta’s GDP was only 0.75 per cent as against 1.25 per cent estimated in the Spring Economic Forecasts?
The Commission is clearly saying that the Government has no exit plan, no fiscal strategy as to how to correct the structural fiscal imbalance. I cannot agree more.
Politically the government wants to continue to play the game that it is in charge, while in effect it is using a strategy of one-offs each year without a sustainable long term plan.
It is anybody’s guess whether the deficit were to come down to 3.9 per cent by the end of this year. Even if it did, we have not assurances that it will not blow over the following year. Without a convincing laid out plan anything can happen.
“The proof of the effectiveness of the Government’s measures will come out as we study the quarterly statistics during the year.” Karm Farrugia
Taken as a whole, 2009 did post an improvement in the economy’s performance, albeit less than had been anticipated by the Commission itself and, worse, than what had been forecast in the Minister’s 2009 budget, which nearly everyone, not least myself, had described categorically as being too optimistic, a stance not apparently repeated for this year’s budget.
The recession hit us later than it hit other EU members, but no less harsh. Thankfully, the Government pushed down the fiscal deficit issue in its agenda and concentrated, as it should, on saving threatened jobs.
The Commission, in my view, should have extended its EDP by 2 years, not one, that is, to 2012, considering chiefly that our deficit “sins” have not been as grave as others in the EU.
Once the Commission itself is happy with the effectiveness of the Government’s measures to rein in the widening deficit, how can any economist here complain? The proof will come out as we study the quarterly statistics during the year.
Everything hinges on whether the Government keeps to its budget forecasts or not. At the risk of repeating myself, I would strongly advise that each Ministry appoints a very small group of professionals to report on “waste of resources” and, concurrently, on whether the citizen is in fact getting “value for its taxes”.
While in its recommendation, the EC said that “since the authorities are considered to have taken effective action in compliance with the Council recommendation of July 2009 and unexpected adverse economic events with major unfavourable consequences for government finances can be considered to have occurred in Malta, an extension of the deadline for the correction of the excessive deficit by one year, from 2010 to 2011, is warranted”
The target is possible, but surely not easy. The Finance Minister can possibly control, even reduce, the expenditure, but almost impotent to stem the reduction in revenues in a scenario of a recession which is likely to take another 6 to 9 months before veering to an upward direction.
That is why the Commission’s extension should have been by 2 years, not just one.
However, anyone suggesting that Malta has been “let off the hook” is a shallow/superficial thinker who needs a good grounding on how an economy works over a cycle of years.
Why would the Commission have hooked tiny Malta with venial sins whilst not even considering “hooking” stronger ones?
Rather than saying “thank you” we should cry out “unfair treatment” and protest, even if not publicly.
“The EU might chide us later when the general economic situation improves” John A Consiglio
The Stability and Growth Pact rules clearly state that if – always within the sole discretion of the Commission – a Government’s actions to return an economy to budgetary operational levels that conform to the SGP’s inspirations (again as solely interpreted by the Commission) are deemed by that same Commission to justify removal of the Excessive Deficit Procedure (EDP), then the Commission can, as a normal matter of functioning, put a stop to the EDP’s operational sequence.
So in essence it’s not really a matter of comparing the actual 0.75 per cent improvement in GDP as against an estimated 1.25 per cent, but much more a question of the actual measures that brought about the change being viewed by the Commission in a certain positive way.
Seen in this light of course I can understand the Commission’s decision. It is only doing what it is in fact fully empowered to do.
My only worry is whether, given certain still worrying signs in the economy – unemployment, order books, and the populace’s spending patterns, among other things – at the time when the next Commission Review comes up, the total operative scenario (both domestic and international) will have shown enough of factual positive shifts and elements that will not push the Commission to again “chide” us.
It is not the first time that the local reality would be one which is totally at variance with the Commission’s perception, and I would be the last to kow-tow to any views of the EU Commission’s economists about the realities of Malta’s economy at any point in time.
This is – everyone in the country needs to understand – the now to be expected reality where our country has all the “xinxilli” of economic independence (an Economics and Finance Ministry, a Central Bank, regulatory bodies, and other things) but the really important ultimate economic decisions (for instance, on monetary policy, budgetary planning for which read also aspects of fiscal policy, social spending, among other things) are effectively made elsewhere than here in Malta, such as for instance, for what level of deficit to target to bring the economy back into its proper shape.