Concerns over the sovereign debt crisis in countries such as Greece, Latvia, Spain and Ireland, and growing deficits in Europe, have prompted decisions to cut social spending together with measures to raise taxes and the pursuit of
significant austerity measures.
In the UK, manufacturing growth slowed to the weakest point in nine months. It also fell in Italy and Spain but expanded in France. In Germany, the figure slowed but still remained relatively high. Last month saw France, Germany and Austria stay well ahead of a subdued duo of Spain and Italy, while Greece remained firmly in the grips of a deep downturn.
Checking the Eurostat figures, one finds that the economy of the 27-nation EU, which includes non-euro members such as Britain and Poland, only grew by 1.0 per cent in the second quarter. This contrasts with the exemplary growth in Malta of 3.9 per cent in the second
quarter of this year, compared to the corresponding period in 2009.
The other fast track achiever is Poland. Its second quarter revealed headline growth which, at 3.5 per cent, was slightly lower than ours . In sheer contrast to other ex-Communist countries, Poland is faring well and aims to achieve a lower deficit to GDP ratio of 1.5 per cent and its debt/GDP should be around 40 per cent, rather than the previous level of 54 per cent (compared to circa 70 per cent in Malta).
Poland stands out because it is in pretty good shape with very limited fat, if any (it never entered recession), and is more insulated from any euro area slowdown. Unlike Malta, Poland has been vigilant; it introduced serious reforms to its pension regime and boasts a well funded first and second pillar scheme (both mandatory). Thus new entrants to its pension system contribute to a first pillar in a state-controlled fund together with a second pillar, which is made up of private pension funds. So far, in Malta, the voluntary third pillar is still under discussion; likewise no decision has been taken to introduce a mandatory second pillar. Delays in the reform of pensions will only exacerbate the overall country debt levels.
Turning to Greece, it was the only nation stuck in recession with an economic contraction of 1.5 per cent, as it battles with national protests to overcome a public deficit and debt crisis laden with severe spending cuts.
Some economists claim that taking such drastic austerity measures will lead to killing the stimulus needed for a speedy recovery.
Others, like the British prime minister, reiterate that there is no gain with no pain and his coalition government is about to start implementing an emergency budget slashing costs and personnel in the public sector. Yet history invariably shows that turning the screws on jobs at a time of a recession can jeopardise the very recovery it is trying to achieve. Opinions differ, but most agree that such measures will certainly slow down job recovery in the short term.
Despite a fragile economic recovery, according to the ILO global unemployment is at its highest level ever, at more than 210 million, and nations will need to create 470 million new jobs in the next 10 years to absorb new entrants into the labour markets. This is no mean feat. Youth unemployment has reached unacceptable levels. Perceptions of social injustice – once seen as mainly a problem of the developing world – are spreading fast in many developed countries.
Tensions and social unrest are increasing in the form of riotous public protests in Greece, France and Ireland against austerity measures, the raising of pension age and the cutting of jobs in the public service. It came as no surprise that, only last week, President Obama recommended to Congress another hasty fiscal stimulus to invest more in infrastructural projects with the aim of creating new jobs.
He stressed that a better infrastructure and transport system will benefit America in the short term by way of job creation and removing uncertainty in small and medium-sized companies that may be encouraged to hire new staff. Again, tax credits will be introduced for SMEs to help them invest more in research and development. Tax credits for the top two per cent rich will be curtailed.
The jobless army in US has reached an unpalatable 10 per cent mark and as a sign of urgency this new stimulus is expected to be in place before the November mid-term elections. While it is hoped that global growth reaches around four per cent this year, what does that matter to a worker who cannot get a job nor has any re-training facilities in times of such a crisis?
The fragile SMEs that tend to work harder and be more resilient to changes in their markets are also suffering from a risk averse policy adopted by banks. They experience difficult access to new credit and cannot benefit from the mild economic recovery that is underway.
As stated earlier, re-training of workers has to be intensified while governments can help by guaranteeing a low inflation, sound fiscal policies and other macroeconomic objectives. Back to the euro: governments ought to strengthen the deficit levels of the euro region as the currency has suffered a considerable fall against the dollar.
More is expected to be done to round up laggards who continue to run high deficits and burgeoning national debts. EU finance ministers toyed with ideas to impose sanctions on Maastricht rule-breakers. At the same time, the patient can only address the plague of fiscal deficits and uncontrolled sovereign debt by taking painful measures, ie – cutting waste, more taxes and regenerating new sustainable solutions. The nature of the penalties also have to be agreed on.
Typically, Spain, a leading recipient of EU infrastructure subsidies said countries that fall foul of the rules shouldn’t have that money taken away. The message on the wall is that such laggards must start to crack their whips to stop citizens living beyond their means (like the drastic reforms put in place by British Chancellor of the Exchequer George Osborne).
Waste can only be trimmed by painstakingly introducing a balanced, gradual yet credible exit strategy from the stimulus measures that rescued the global economy from an even deeper recession in the Thirties. Such policies have saved or created tens of millions of jobs since the great depression.
But all is not doom and gloom. Grass shoots are appearing and the euro-area economy expanded one per cent in the second quarter, the fastest pace in four years. It reported a healthy 4.4 per cent jump in exports, the biggest in the euro’s history, while investment rose 1.8 per cent, ending two years of contraction.
The positive mark was reached in consumer spending, which increased 0.5 per cent, the highest since 2007. It is true that Germany is leading the export drive although this fell in July for the first time in three months, while manufacturing growth eased in August.
But Germany, and to a lesser extent Poland, have led the way in a brazen attempt to shake the pessimists. We saw its business confidence rise to a three-year high. Consequently, it is a good sign to notice that crude oil fell as the euro tumbled against the dollar on speculation that Europe’s debt crisis may not be over. Oil dropped as much as 2.6 per cent after German factory orders unexpectedly declined in July, causing the euro to weaken most since August.
Pessimists point out that share prices declined following news that the European situation will delay the global recovery. Typically, Sweden, a non-euro member that weathered its own debt shock in the early 1990s, is disappointed with progress so far to enact tougher sanctions on deficit offenders including Malta, which has been warned in the past to regularise its fiscal position and rein in its mounting debt that now reaches 70 per cent of GDP (the allowed threshold is 60 per cent). It is expected that the Commission will pre-screen our 2011 budget to make sure it conforms to the norms of deficit reduction.
To conclude, we can safely say that Malta, without implementing any austerity measures (or painful pension reforms), is performing well. That is what the National Statistics office (NSO) is projecting.
It is even beating Poland, which is itself on a quick trot to recovery.
Let us pray that the NSO will report a high third quarter GDP growth. Then we can rejoice that the island is on the golden path to recovery.
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The writer is a partner in PKF Malta, an audit and business
advisory firm