Do you remember the slogan on the front cover of one of the issues of the respectable The Economist of some years ago declaring “Inflation is Dead”? How times change and how silly it is for any analyst to write a premature obituary of one of the greatest enemies of economic stability: inflation.

After many years of relatively low inflationary pressure and respectable economic growth in most countries throughout the world, the spectre of low growth and high inflation is again haunting us. One cannot but sympathise with bankers in the Federal Reserve, the ECB, and the Bank of England who need to prescribe different but incompatible medicines for two distinct economic maladies: low growth and high inflation.

So far the credit crunch and the likely effect this is likely to have on general economic growth on the western economies has been considered the top priority for central bankers. Central Banks took measures to avert a monumental collapse of confidence in the financial system and bailed out very respectable banks that found themselves squeezed in a liquidity crisis. This has so far averted a probable slide into recession of the US and the euro zone economy.

But there is general agreement that inflation may now become the No. 1 enemy in the short and medium term. Joaquin Almunia, economic and monetary affairs commissioner in the EU, put it clearly and succinctly – “inflation is the major problem facing Europe at the moment”. In fact Brussels has just revised its inflation rate forecasts from 3.2 per cent to 3.7 per cent, the highest it has been since the launch of the euro in 1999.

Now that we are full members of the euro zone economic area, we cannot escape the consequences of inflationary forces that gain momentum far from our shores but which reach us rapidly. We need to be more determined in fighting the local cause of inflation.

We also need to learn from the mistakes of others to save us from having to learn the hard way. Ireland, for instance, has often been admired as one of the smaller but more successful economies in the euro zone area. They achieved enormous success in the past decade by attracting direct foreign investment mainly from the USA. They built their success on the development of three different industries: financial services, high skills manufacturing, and property development.

Unfortunately, their initial success made them complacent and now they have to pay the price for this complacency. Job cuts in all these industries have become the order of the day. The computer company Dell, for instance, recently announced that they were cutting 250 jobs. Much bigger layoffs are affecting the over-extended property development business.

Dr Ed Walsh, founding president of the University of Limerick, identified the problem very clearly: “We have been paying ourselves too much for the last six to eight years and we have not attended to the needs of the multinationals in Ireland.” And now it is official: in 2008 Ireland is expected to experience its first recession in 25 years.

We will face the same problems unless the Nationalist government becomes more sensitive to the needs of industrialists who are already operating in Malta and to those who may be considering doing so. Government-induced costs need to be brought down to more sustainable levels because this is one of the most serious threats to the viability of many small and medium businesses in Malta. The public sector needs to be rationalised and more resources directed to the private sector, which is the main creator of wealth in our country. It is tough enough coping

with imported inflation to tolerate locally induced price rises.

The least the government can do is to promote strict conservative fiscal discipline to ensure that waste is eliminated and not financed by increases in taxation. Maltese families are taxed highly enough at present, and need to see better results for the money they put in the public coffers. No wonder that in the last 10 years the highest increase in taxation in the EU was experienced in Malta. This is not why the Maltese people chose to join the EU.

www.mangioncharles.com

[email protected]