It is simply not enough for government spokesmen and ministers to act optimistic and keep smiling in the face of the global economic crisis and to keep repeating the mantra that Malta may well escape the direst impacts of the recession.
On the other hand, it is nauseating to see how some people – opinion leaders, politicians, etc – almost gloat as they announce yet another blow or mishap.
There is simply no way that Malta can escape the impacts of the world recession. Now that we are officially in a recession, much like the rest of the world, if only at a rather later stage, as a small economy and as a totally open one, we will get wave after wave of recession coming our way.
The fact that the banks in Malta did not follow their counterparts in the US and UK, and gaily lend where no one could ever expect a repayment is bully for them and for Malta. But, although the current crisis was sparked off by the collapse of the banking system, it was only the beginning: the banking crisis sparked off a huge world financial crisis, which in turn led to a deep global recession. Avoiding the first wave of the crisis was good, but the second wave, and the third (and who knows how many more?) will still hit us.
We need now to stop this silly bickering and political rhetoric and analyse far better what has led to this crisis, how it may develop in the coming months and come to an agreement on what this country needs to be done to stave off the worst of the impacts.
Slowly, studies are already being published on what has led to the current crisis, as the path to disaster becomes all the more clearer and clearer, even though one would have hoped that such analyses were made when it was still time to avoid what then inevitably happened.
It is rather more difficult to see where the crisis will lead. Ideology comes into this part. Those who were still unreconstituted Marxists, even among us, have claimed this is a systemic failure of capitalism, proving Marx was right when he said capitalism was doomed to collapse. Others have claimed, with more right, that the past three decades or the post-communist world, built on the open market ideology, the government in a regulatory and laid-back mode, the free-wheeling finance system is now over when governments are ploughing huge sums into banks and businesses and re-nationalising banks and other enterprises.
The depressing thing is that this time last year the world thought it knew there was a crisis, at that time the credit crunch, and thought it was containing it. Then, in a ghastly domino game, mainly in the US and in Europe, banks started to fail, other banks found they had lots and lots of toxic areas, and so we are now where we are.
Is it still possible that further negative developments are still to come? With the hindsight gained over the past year, one has to say they will. This is where things get absolutely serious. This is the deepest, broadest and most dangerous financial crisis since the 1930s. As Professors Reinhart and Rogoff have argued in a paper, “banking crises are associated with profound declines in output and employment” partly because of overstretched balance sheets.
“Amid the possible outcomes of this shock are: massive and prolonged fiscal deficits in countries with large external deficits, as they try to sustain demand; a prolonged world recession; a brutal adjustment of the global balance of payments; a collapse of the dollar, soaring inflation, and a resort to protectionism” (from a very good FT series over the past week ‘Future of Capitalism’)
As policymakers the world over discuss what needs to be done in preparation for the coming summits of the world and suggest structural remedies, regulation will be tightened, possibly even where it may nip off the buds of economies coming out of the recession. There will most likely be changes in the ways and rules of the world financial system. Changes will also come in monetary policy with central banks being given more authority beyond monetary policy and regulatory instruments.
The comparison of today with the 1930s is chilling, for we all know what came after that: protectionism begat nationalism which begat Nazism which led to WWII. We are seeing huge evidence of a resurgence of protectionism all over the world. Will this lead to a new nationalism in those countries most at risk of today’s crisis?
As to what will happen to this country, let us for a moment reduce the crisis to a crisis within a family unit. This family unit has been living, for many years, beyond its means. Its debt increased and increased but it always survived because it kept working and paying off one debt after another. Then a day came when a key member fell ill, the family unit could not muster the salary that member used to get, and the debt load soared higher and higher.
It’s not a good enough example, but a pointer still. The way our economy has been structured, and since no government has been courageous enough to tackle the issues at root level, despite being urged to do so both by the IMF and by the European Commission, it slid down on the competitiveness scales and allowed the public deficits to mount for one reason or another. It now finds itself open to the coming waves with not even a fig leaf to cover itself up. Apart from saying the Lenten mantra “Our fault, our own grievous fault” we must try, all together, to agree how to help one another in such a time of need. It is good that the government helps those industries that were thinking of closing down or relocating, but what will the government do to the other sectors? What will the government, with its decreased revenue, do to help the socially weak? What will the government do to correct what’s wrong in the economy? And by government, we don’t mean this government but any government, for whoever governs Malta will face the same problems for many coming decades.