Nine weeks ago, I wrote an article entitled Thinking the Unthinkable: The Break-up of the EU, in which I highlighted the way the euro, meant to unite Europe, seemed to be tearing it apart. “There is a deep vulnerability in the European economy” I said, “both in its damaged banking system and huge debt hang-over and in the structure of the eurozone itself. There is a general consensus among world economists that this can only be tackled with the kind of far-reaching reforms, including a fully-fledged fiscal union, that Europe’s leaders seem unprepared to introduce”.
The Greek government’s turmoil in its handling of the eurozone rescue deal, so painfully negotiated at the end of October in Brussels, has thrown the whole future of the project into the air and could undermine the already febrile state of the EU itself. If the Greeks were to turn down the rescue package for any reason, it is unlikely that the euro would survive such a catastrophe. The possible break-up of the eurozone would cause incalculable losses that, in all likelihood, would be beyond the global financial authorities’ ability to control.
Yet, as my colleague Noel Grima has pointed out, both the Maltese government and the Opposition seem incapable of articulating to the country not only the seriousness of the situation, but also what contingency plans they are putting in hand to ensure that Malta comes through this if not unscathed, at least in some economically viable shape.
When the Greek Prime Minister let loose his thunder-bolt about the referendum he was, of course, like every other leader in the EU, looking after what he perceived as his nation’s self-interest and – above all – his own political survival. That it seems to have had the opposite effect is, apparently, something that had not occurred to him. Civil unrest in Greece is growing. There is economic stasis and contraction and the prospects for the future are bleak.
Any Greek government needs to ensure the people are still behind it and it is therefore right – from a Greek perspective – that it should seek a democratic mandate for what has been agreed with the EU. While the rescue deal last week – albeit less than what was really needed, but more than had been expected – would enable Greece to stay in the euro, the pain for Greek voters would continue unabated for several years. Greece would still be left with a 120 per cent debt-to-GDP ratio in 2020.
The question which Greek legislators are being asked to answer therefore is: should Greece accept the rescue package in order to remain in the euro (and the EU) and to save the bacon of all those banks, principally in France and Germany, which have incurred its sovereign debt; or should it simply default and leave the eurozone? Like Argentina in 2001, they might prefer to default.
While the rest of Europe, Malta included, might be left reeling from such a development, it is a course which most economic analysts have seen as inevitable from the start of this crisis two years ago. From a narrow Greek standpoint, it might actually make sense. While the Argentine default was far simpler than a Greek exit from the euro, it is a fact that a return to a (heavily devalued) drachma would encourage Greek exports, make its tourism much cheaper and its economy much more competitive. Since 2003, the Argentine economy has grown by more than eight per cent a year and tourism has boomed. Unemployment and the proportion of people in poverty, though still high, have fallen. Nonetheless, the default casts a long shadow over Argentina 10 years after reneging on its debts and it is still shunned by many lenders in the market. Unless Greece regains its own currency, it cannot begin to expand its now imploding economy.
European leaders have quietly begun to prepare for the possibility of Greece leaving the eurozone, undoubtedly difficult and painful though it will be, for both Greece and the eurozone. The essential thrust of any such preparations will be to try to make it as orderly as possible. The fear of contagion to other eurozone countries, however, with bank collapses rippling through other countries, is all too real. Above all, the vulnerability of Italy – a major economy holding €1.5 trillion in debt and led by a government that appears to grow increasingly ineffective by the day – casts a deep shadow over all these calculations.
A scheme to shore up bank finances through re-capitalisation above the €106 billion currently provided would need to be introduced. The whole eurozone could be de-stabilised, with Portugal and possibly Ireland following Greece through the exit door. Crucially, the eurozone’s capacity to stand behind Italy and Spain, or any other major vulnerable countries including France, in the markets through the European Financial Stability Facility (EFSF) will need to be considerably increased beyond the €1.2 trillion currently allocated. Going cap in hand to China, and possibly also to the IMF, to boost the size and might of the EFSF has become a real priority and indicates the global ramifications of what is at stake.
The crisis is real and inescapable for Malta, as well as the rest of the eurozone. For Prime Minister Gonzi, this will be a great test of leadership that could directly affect his chances of re-election in 18 months’ time. Malta has already put up guarantees of about €700 million and lent money to Greece. GO plc is heavily exposed to losses in a Greek telecom company and Bank of Valletta will take a loss from any Greek sovereign default. Malta has been a spectator at the G20 meeting in Cannes, but we must hope that our Minister of Finance is drawing up his own contingency plans in the light of what is emerging from Cannes, and Greece. The government’s duty is to ensure that Malta’s interests come first.
The euro was a political project meant to bind Europe closer together in a region of collective prosperity that would lead to greater federalism. Instead, it seems to be pulling it apart. Fixing the crisis will require fundamental changes in the functioning of the EU, with more interference in the workings of sovereign states. Europe is at a crossroads where it will ultimately move either to closer fiscal union, or a break-up of some kind. Is Malta ready for either?
Most analysts seem agreed that there would need to be a fiscal union, with a treasury and a finance minister capable of interfering in national budgets, and more unified tax and pension policies. The fundamental changes needed to cope with the euro crisis – particularly the historic step of creating a common European Ministry of Finance – would require a re-drawing of the basic treaties. Is Malta prepared for that?
“The ticking euro bomb,” as the German magazine Der Spiegel called it some weeks ago, is threatening to blow up the entire European economy and no European leader appears to have the courage to act as the bomb disposal officer. Gonzi cannot be expected to do the job, but he can at least ensure he takes the necessary steps to get us to the shelters before the bomb goes off.