Author: Alfred Sant
Publisher: SKS Publishers
Malta u l-Ewro (3) - & the euro updates Alfred Sant's take on political and economic developments in the euro area, incorporating events between early 2015 up to the end of the Maltese Presidency of the EU Council in June 2017. Like other commentators on the subject, he notes that whereas during the financial crisis and the ensuing sovereign debt crisis there was a strong focus on reforms meant to bring about a banking and capital markets union, the focus then turned to try to tackle geopolitical issues like migration, the civil war in Ukraine, terrorism and Brexit.
Dr Sant rightly points out that this loss of momentum may have long-term effects. While the financial and sovereign debt crisis appears to have been overcome, and the euro area economy is recovering, the eurozone is becoming ever more heterogeneous. This will make it hard to move forward economic and monetary union. He repeatedly asks whether the proposed changes to make the euro project less vulnerable can be made to suit the interests of smaller member states or whether these necessarily will involve the introduction of a federal system.
Malta u l-Ewro (3) - & the euro is meant to serve a pedagogical purpose, and tries to engage readers in topics that are traditionally seen as the preserve of bankers and economists. This explains why the book starts with a detailed chronology of the evolution of the euro from its inception onwards, but with a particular focus on events after the financial crisis of 2008. The benefit of this part of the book is that it looks at both economic and political developments, weaving a narrative that tries to encompass both elements. Typically, there is a tendency for reviews of this period to view these separately.
Dr Sant's book is based around various articles and blogs he has written since 2015, together with his interventions in the European Parliament. The first set relates to the "last" phase of the Greek crisis. In these contributions he gives his interpretation of how the Greek government of Tsipras had to capitulate to the demands of credit nations. He explains the two arguments that were contrasted at the time: on the one hand that unless Greek finances were put in order, no more assistance could be granted and on the other that fiscal consolidation was self-defeating until the private sector could spend and invest again. His main theme is that too much focus was put on fiscal adjustment and interpretation of EU rules on the matter, whereas little effort was expended to understand why the economic performance of EU economies remained stagnant and underpinned by a significant investment gap. He also argues that in the absence of a central treasury to regulate transfers between centre and periphery, a lot of the EU governance mechanisms remained ineffective. In fact, while this section looks in great detail on the Greek crisis, the author is clear that he views this as part of a much larger and more conceptual debate about economic policy-making. Namely the contrast between the strict fiscal prudence, or austerity, advocated by the centre-right political movements in Europe and the focus on economic growth and investment pushed by the centre-left.
Interspersed with this, one finds comments that suggest that another "hidden" determinant of the Greek (and Cypriot) crisis was that rules are applied stringently on small countries, while large countries usually find workarounds and are allowed much more leeway and flexibility. In fact, Dr Sant posits that "partial deepening of the existing arrangements could actually serve to further widen the divergences" that exist within the euro area. One example he gives is the harmonisation of tax structures, which he believes would reduce further the economic flexibility of the periphery. His contention is that instead of emphasising the coordination of economic policies of member states, the focus should be on the convergence of economic performance and outcomes. That said, this dichotomy exists only if one believes that strong economic performance is not a reflection of particular economic policies, which is the line of thinking that is held by those who advocate the coordination and eventual adoption of the same policies by all member states.
Building on the review of the Greek crisis, Dr Sant then presents a number of contributions on plans and proposals meant to push forward the EU agenda between mid-2015 to mid-2016. In this period before Brexit, an attempt was made to kickstart again the discussion of how best to reform the euro area. The focus turned on creating the conditions for enhanced investment, particularly in infrastructure and digital economies. Dr Sant argues that for this to have occurred, policymakers should have looked again at the governance rules of the euro area that created disincentives for public investment. Private investment could not be expected to be the main driver, after such a long period of economic uncertainty.
Dr Sant's contributions indicate that he believes that the EU is suffering from overstretch and over-reach. Increased commitments and aspirations were not backed by a real political will for fundamental changes and the creation of the means to carry them out. For instance he argues that while most resist fiscal transfers across borders, this is actually happening systemically as rules are benefitting certain economies, which happen to be among the stronger countries in the union. When faced with the argument that structural reforms in the weak economies would help redress this, he contends that besides the immediate negative impact of reforms on those economies, it is unclear whether any long-term benefits would eventually flow to these particular countries. He also points out that at a time when parts of the European Commission were pushing for enhanced investment, other parts of the same institution were pushing for regulations to make banks lend more prudently - potentially harming investment. These inconsistencies, in his opinion, are due to the fundamental opposition between two different visions of economic policymaking.
Malta u l-Ewro (3) - & the euro then moves to the second half of 2016, which was dominated by the UK's decision to leave the EU. Dr Sant attributes the victory of the Brexit camp to their unscrupulous manipulation of the immigration crisis, combined with their tapping into the patriotic sentiment of the older part of the electorate. More importantly he feels that the pro-EU campaign was badly led and suffered greatly by being associated with the austerity politics adopted in recent years in the UK. The ambivalence of most of the UK Labour Party was also a major factor.
Dr Sant makes it clear that Brexit will take up most of the resources of the EU over the coming years, and will also lead to a rethinking of the plans that started to appear after the "conclusion" of the Greek crisis. Dr Sant traces the Brexit result to the unresolved dilemma between the concept of ever closer political union with the continued strength of national member states within the EU's set-up. A dilemma made even more difficult by the expansion of the EU which increased the heterogeneity of member states. As for the UK, he argues that the final economic impact will depend crucially on the nature of its future relationship with the EU. However, he emphasises rightly that the decision has created a sharp division within British society which will make it harder for it to develop a post-Brexit political consensus.
Malta u l-Ewro (3) - & the euro ends with a section of developments during the Maltese presidency of the EU Council. During these six months, Dr Sant's contributions continued to focus on the importance of ensuring more convergence between member states' economies, the need to revisit fiscal pacts to give more prominence to public investment and ensuring that the rights of small member states are protected. These three priorities explain why Dr Sant is opposed towards a more federal EU. He sees this as being a bit of a "more of the same" approach, which will create more future Greek crises and Brexit-like situations.
While providing a succinct yet comprehensive discussion of economic and political developments during the period reviewed, Malta u l-Ewro (3) - Malta & the euro presents readers with arguments for and against proposed changes to the EU's and euro area's set-up. While Dr Sant presents his own views in an internally consistent and rational way, he also represents correctly the other side of the argument. This balanced approach is very welcome in todays' post-truth era.
Professor Frank Bezzina is dean of the Faculty of Economics, Management & Accountancy, University of Malta and director of the Central Bank of Malta