The Stability and Growth Pact version 1 has collapsed. On the insistence of France and Germany, with some assistance from Italy, the EU finance ministers have decided to re-vamp the Pact to reflect the realities being faced today by most European economies. In political terms one can say that the big boys of Europe have pushed their way through the established rules of the game, in order to right a fiscal imbalance that previously was considered a wrong and was indeed punishable at law. What has now been agreed on is a Pact to deal with more instable economic conditions, ensuing from new global economic realities, which keep every EU Finance Minister (in our case Parliamentary Secretary) sleepless and guessing.

The Stability and Growth Pact was agreed to in order to establish a fiscal and monetary framework within which EU economies were expected to operate. The purpose of the Pact was to impose fiscal discipline at a time when Europe was working towards monetary integration and the single currency. Indeed it would have been almost impossible for the single currency to come into force if the countries joining euro-land had not entered such a firm commitment to bring their country’s debt and deficit levels to sustainable levels. Besides other measures, the Pact resolved not only that individual country deficits be within three per cent of GDP, but also that over the medium term countries would run budgets in surplus or close to surplus. The three per cent target was presumed to be a “worst case scenario” limit.

The Pact was promising in scope, but inflexible and unreasonable in practice. It had been successfully in force throughout one of history’s longest uninterrupted periods of economic growth covering the mid to late 1990s. However, what was originally designed to be resilient fiscal body armour grew into an unbearable and unshakeable economic straight-jacket. Following the economic implosion in August 2000 and the prolonged (albeit shallow) economic slowdown across the globe, many countries’ fiscal surpluses or balanced budgets soon vanished. Extended periods of budgets deficits run up in many countries including France, Germany, Italy and even the UK, which had registered stellar budget surpluses, during the first Blair administration (1997–2001). However, smaller countries in Europe like Austria and Denmark had managed to contain their budget deficits to more reasonable levels; indeed some of these countries were in principle against letting “the big boy” off the hook.

The first thing, which in my opinion was wrong with the Stability and Growth Pact was the “one-size-fits-all” formula. Specifically the Pact imposed a budgetary discipline of three per cent on all countries irrespective of their national debt levels, which is actually a reflection of a country’s fiscal discipline over generations. In effect, for a country like Luxembourg, with very low levels of national debt, even a prolonged deficit of five-six per cent is sustainable, because in reality the real burden of a country’s fiscal deficit can only be correctly measured and evaluated by considering the interest costs carried by each country not in absolute terms, but as a percentage on Gross Domestic Product.

The second major misgiving about the Pact was that it gave little regard to the respective growth rates and economic cycles of individual countries. It is inevitable that economies which are slowing (or worse still contracting) start to rake in lower revenues from corporate and personal taxation and need to spend more on social security, particularly to support the unemployed. At this point a worsening of the fiscal position is expected unless extraordinary receipts like those from privatisation (that anyway are a one-off) are not brought into the equation. The Stability and Growth Pact version 2 is catering for this eventuality by giving defaulting countries a three-year period in which to rectify their position. Furthermore, Germany’s request, to have the fiscal transfers made to finance the integration of ex-communist East Germany excluded from the deficit computations, is, in my opinion, fair; however this concession must have a clear time limit.

What are the implications for our economy? I expect Prime Minister Gonzi is pleased that the European Union has given us a breather. I think it is only right that the “new” countries, most of which have to face considerable restructuring in a much shorter time-frame than the “old” countries were allowed, are given a more flexible framework in which to work to grow their economies and maintain social protection. It would have been highly unrealistic to expect countries such as ours to sanitise their fiscal and monetary positions as well as grow their economies at above-average rates all at the same time, and in a handful of years. The impossible we perhaps can do; miracles take a trifle longer.

What concerns me however is that this fiscal loosening could tempt our government, which, remember, will face yet another do or die election in a few years, into relaxing on tax collection and public spending. The risk is that in order to secure another election Premier Gonzi will suspend (in secret though) his Cabinet’s commitment to the Stability and Growth Pact, knowing that should his party get re-elected, he will have three years to clean up the mess. This is the political-cum-fiscal reality this country has faced on the eve of each and every election. In the existing two-party, winner-takes-all electoral system, the government and the opposition are forced to promise the world even though they know they simply cannot deliver it. Caution is thrown to the wind, to hell with the Stability and Growth Pact, and the victor is left with a deeper and wider hofra (crater) than the previous government. Both Alfred Sant in 1996 and Eddie Fenech Adami in 1998 were witness to this hideous reality, each of them left to deal with a more monstrous structural deficit after the car-cades were over.

The fiscal discipline our country needs should be safeguarded well beyond the statutory life of a five-year government. A revision in this country’s electoral system is needed. A change that would encourage the building of political alliances and in the process would deny every contesting party the chance (in the run up to the election) to gamble irresponsibly and unilaterally with our country’s coffers.

The Stability and Growth Pact as revised, is a legacy of fiscal stability the European Union bequeaths us, and one the whole political class has an obligation to uphold in order to mould a more stable and prosperous future. The slogan Ghal Uliedna (for our children) was never so relevant.

Edward Fenech is the spokesperson for Finance, Economic Affairs & Tourism of Alternattiva Demokratika - The Green Party