Every time Prime Minister Gonzi returns from EU summits he has something nice to tell us, but rarely anything substantial. In whatever is discussed at EU level, the devil is in the detail and for Dr Gonzi is best avoided. This again was the case with his return from Brussels last week, when he told us that there is “wide consensus” among member states over the “financial rescue package to inject liquidity into the banking institutions and guarantee individual deposits in order to stem a financial meltdown”. Dr Gonzi reassured us that “we have strong banking institutions that do not need any recapitalisation at all”, warning that “there are, however, other states with serious problems”. Reassuringly, he also told reporters that “the EU has risen to the occasion” to formulate a strong, united response to current and future challenges. That sounds like a good tranquilliser, but is it that simple?

We will not get much more from Dr Gonzi. This is his current mantra on the financial crisis. I can imagine him at the summit, smugly repeating his one-liners on Malta’s “sound financial situation” with nothing much to contribute and much less to offer in safeguarding our interests.

It is what he is not telling us that is worrying, because if Maltese financial institutions have been diligent – which explains why they are suffering no liquidity shortfalls – the currency in which they transact is not as sound as it seems. But more than it would affect Maltese banks, a weakened euro would directly hit the Maltese taxpayer/consumer, as its purchasing power is devalued and prices rocket. This type of inflation is in fact a hidden tax, for it is induced not by a lack of supply or speculation, but by a devalued currency. This devaluation is caused by an increase in liquidity – in other words, the introduction of new money into the market.

‘There’s no money’

The amount being touted so far in the “rescue package” totals 1.7 trillion euros ($2.3 trillion). That is 1,700 billion euros. This amount was committed by Germany, Britain (in GBP), France, the Netherlands, Spain, Portugal and Austria – each into their own financial institutions, but a coordinated effort nonetheless. Others are expected to follow suit. Essentially, the plan is to purchase shares in banks, thereby partly or wholly nationalising them, while injecting liquidity to jump-start them into lending to each other again. At the same time, governments are guaranteeing bank-to-bank loans, as well as individual deposits, should a run on the banks occur. But not everyone is happy.

Reuters reported that German Chancellor Angela Merkel was jeered in the Bundestag last week as she announced her bailout plan while maintaining that “we have to expect a weakening of growth”. Voicing the concerns of the people, the leader of the increasingly influential Left Party, Oskar Lafontaine, called for measures that would boost domestic demand, rather than bail out the banks’ irresponsible behaviour. “When we asked for more money for Hartz IV (unemployment benefits), the answer was ‘There’s no money’,” Lafontaine told parliament. “When we asked for more money for pensioners, the answer was ‘There’s no money’. People are surprised that, all of a sudden, 500 billion euros are readily available to manage the crisis.”

Most of this money is in the form of guarantees, of course, but in Germany’s case 80 billion euros will be directly injected into the banks. That alone is about 3.2 per cent of the German economy, based on 2008 GDP figures. The rate is higher for most of the other countries. Moreover, these figures are not set in stone. More liquidity would need to be afforded, if required. In the case of the US, the $700 billion bailout bill that was passed through congress was, in fact, an open cheque which, according to Bloomberg, could extend to as much as $5 trillion.

It is to be noted here that the European “rescue plan” is not as bad as the initial US bailout plan, which started with earmarking toxic assets ostensibly related to the mortgage market (which is reportedly just a 100-billion-dollar headache and, according to the US Treasury itself, only seven per cent of mortgages are bad). Clearly, the financial crisis in the US has less to do with “sub prime mortgages” than with the derivative and hedge fund “ponzy schemes” that created much of this shortfall in liquidity. Interestingly enough, eventually the US financial tsar, Henry Paulson, changed strategy and opted for the European way by injecting direct credit into banks in the hope of triggering off bank-to-bank lending.

It is just like oiling a rusty machine that has stopped working. Or is it? Not by thinning the oil down, for that would create friction and cause more problems.

Credit out of thin air

The fundamental question is: where are these billions coming from? Are they lying in vaults or will they be digitally created as the need arises, and eventually printed to ensure paper liquidity? Various financial analysts are now maintaining that the introduction of new money into the market will eventually debase the US dollar, the British pound and the euro. One such critic is Martin Hennecke, senior manager with the Tyche Group (investment and financial advisers), who told CNBC last week that governments are throwing new money at the problem and this can only lead to hyperinflation. He explained that, unlike the case with the “national bankruptcy of Iceland”, which cannot print more of its currency, the US, Britain and the EU can. Iceland is liable to a lot of external debt in relation to its market size, so creating enough Icelandic króna to solve the problem would lead to hyperinflation Zimbabwe-style.

Yet with a larger market, the EU governments seem to believe that dumping new euros is affordable by the many. Besides, diluting our currency is not readily visible to the populace, especially if all the world’s currencies are diluted.

Hennecke quoted the world’s leading rating agency Standard and Poor, which projected in March 2005 that all the major Western governments are heading towards defaulting on their sovereign bonds.

That was predicted well before the crisis started. With these bailouts, Hennecke concluded, cash is the highest risk investment.

No wonder there is panic buying in the gold market, with some US and German dealers running out of gold to sell, essentially proving allegations of price manipulation on the virtual Comex gold index in order to stem such panic buying. As a result, gold is fluctuating heavily these days.

No matter how sound Malta’s financial institutions are, the Maltese taxpayer will have to suffer yet another hidden tax – the “inflation tax”. This tax is measured by how much the purchasing power of our euro will be diminished by our bigger European brothers, currently creating credit out of thin air in order to prop up their ailing banks.

Before even coming to ask where all the money has gone, their citizens will be paying higher taxes to counter their governments’ budget deficits, but we will all share the costs of the inflation tax. It is a sure and hidden way to steal our money, especially for those who still believe in currency savings.

Sharon Ellul-Bonici is a prospective MEP candidate

for the Malta Labour Party and currently

works in the European Parliament.

[email protected]