It is well known that Germany has been heavily criticised for its imposition of austerity measures as part of the new fiscal pact and as a precondition for the bail-outs of ailing euro members. Economists argue that austerity noticeably slowed down any potential economic growth in Europe. Indeed, the current no-growth rate of southern European countries reinforces the argument against the validity of stifling austerity measures.

The gross domestic product of both Greece and Portugal continues to fall. Since late 2007, the Greek GDP has fallen more than 16 per cent and no economic revival has been noticed since the imposition of the latest austerity package. On the contrary, the Greek recession a – which is already in its fifth year – has intensified. The lowering of the minimum wage by 22 per cent, and the sacking of 15,000 employees in the bloated public sector – together with a new dose of higher taxes – has led to a further reduction in consumer spending. Sooner or later, German Chancellor Angela Merkel must agree to a better remedy to revive confidence, and that is the issue of Eurobonds, since imposing austerity packages in the short term does not seem to be the right way out of the crisis.

Observers hope that, once the European Commission has drafted the fiscal pact reforms, changed the Treaties and declared who exactly is liable, and to what extent, then Chancellor Merkel will have no option but to yield and give her blessing to embrace Eurobonds. Realistically, although most members have ratified the Treaty, it will still take time to fully implement, and time is rapidly running out as Damocles’ sword hovers perilously over EU heads. On a positive note, the European Parliament’s first resolution on the feasibility of stability bonds can be seen as a step towards well-designed Eurobonds and hopefully this heralds the beginning of the end of the euro crisis.

Now, with oil prices hitting a high of $123 per barrel, it comes as no surprise that Europe is struggling under the weight of high production costs, which make manufacturing and services uncompetitive. This is reflected by the slower growth in the number of job vacancies last winter, with unemployment in the EU at 10.2 per cent, compared with 6.8 per cent in Malta. It is true to say that statistics issued by Eurostat are indicative, and where employment is concerned one has to be careful to compare like with like. As an example, in Malta our low unemployment rate does not take into account the fact that we have one of the lowest labour participation figures, particularly where females are concerned .Women are slowly being encouraged to return to work after marriage but the figure does not exceed the 40 per cent mark.

This is notwithstanding the fact that recent budget gave a special one-year tax-free concession for females who return to work and special “3-16 age group“ school facilities are organised at state level to cater for children who can be taken care of after school hours, thus enabling parents to stay longer at work.

Officially, unemployment levels in Malta are low, which is quite an achievement given that our exports are inevitably hit by lower demand due to a pan-European recession. This achievement encourages us to strive for higher productivity and to explore ways of improving competitiveness and cutting down on unnecessary bureaucracy. Party apologists regularly spin on Net TV that we are faced with a situation where we have started to feel the negative impact of the recession in other countries but not to the extent that is wreaking havoc on our economy, and no unpopular austerity measures have had to be put in place, not even a meagre attempt to reassess the three-month-long half-day working hours concession that prevails in the public sector in the summer.

However, nobody owes us a living and while our pension costs continue to escalate, we still retire at 61 compared to richer countries such as Germany, whose industrious workers continue to keep their noses to the grind-stone until the age of 67 (for both sexes). So can we remain complacent and think that we are Teflon-coated and, unlike other islands such as Cyprus, continue to bask in providential times. The prognosis for the near future is not so heart-warming, and this summer our tourist season will naturally see a dip in numbers as forecasts contained in the half-yearly Global Economic Prospects report reflect a slowdown in the global economy last seen in the second half of 2011. Then there is a glut of bank loans to the top end of property development, which is experiencing a fall in sales (an example is the €42m lent by Bowag to Montebello Bros).

It is true that a similar scenario is evident in European countries, particularly those in the Mediterranean, which this year are witnessing weakening trade flows, declining capital flows and higher energy prices. Many argue that the ECB could be forced to take fresh rescue measures in the next few weeks to prevent strains in Europe’s banking sector from turning into a credit crunch, while in the longer term, several more countries – including Spain and Italy – will eventually be forced to write off a proportion of their debts before the crisis is over.

The World Bank has warned that the crisis in the eurozone will lead to a sharp slowdown in growth in both rich and poor countries this year, and could spiral into a return of the pre-Lehman legacy of the 2008-09 recession. One cannot forget the recent 50 per cent hair cut on Greek loans suffered by banks which has critically hit the heavily indebted Cypriot banking sector. It was only a recent Russian bail-out of $2.5 billion that saved Cyprus from officially announcing the need for a bail-out, following its disastrous tourist season last year and a terrible accident in the summer that immobilised its main power station.

A gloomy picture is currently painted by the International Monetary Fund (IMF), which commented on Malta’s fragile economic recovery, stressing the immediate need for our politicians to strap up better growth in order to start repaying the national debt and a growing pension deficit (anything less than 5 per cent growth will be risky). Regarding the eurozone, the IMF also expressed its fear that it is already in recession and was likely to contract by 0.3 per cent this year. On a positive note, it predicted that high-income countries would grow by a modest 1.4 per cent as a result of a recovery in Japan from the effects of the 2011 tsunami and a slight rise in activity in the US.

Even so, this year rich countries are expected to grow at only half the 2.7 per cent expected when the IMF last published forecasts in June 2011. Can this be attributed to a double dip recession or a lack of consumer confidence? In the past, the stalwarts used to be the emerging countries commonly referred to as BRICS (Brazil, Russia, India, China and South Africa). We see that India and China are both growing at exemplary rates, compared to recession-hit Europe, but even here there has been a small correction in growth rates predicted for this year.

In China, the stellar growth of the past decade has seen the new affluence enjoyed by the middle classes. To cite an example, in the 1990s China’s wealthiest 20 per cent spent five times as much as the poorest 20 per cent. By the 2000s, that gap had almost doubled, with the richest 20 per cent spending 9.6 times as much as the poorest, which indicates the beginning of more equitable wealth distribution.

So how is Asia being hit by the recession in Europe? Will there be more investment in Europe by the emerging countries to help reduce its misery due to current austerity measures and record unemployment? The answer is not easy to predict, but it is a fact that the greatest risk to Asia is the uncertainty surrounding the resolution of sovereign debt problems in the eurozone.

It goes without saying that emerging markets warn the Commission that it needs to pull its socks up and avoid taking half measures in tackling its ingrained sovereign debt problems. It needs to act quickly and avoid prescribing palliatives. Reports show that there has also been a slackening in the pace of activity in Turkey – another contender as a leading developing country. This can be attributed to Turkey’s main dependence on cheap credit from foreign countries which are now becoming more risk-averse, especially when they witness its creeping inflation. It comes as no surprise that economists agree about the incidence of a risk that the crisis in the eurozone and weaker growth in BRICS countries reinforcing each other at a time when the ability of policymakers to respond to a downturn, has been greatly diminished compared with three years ago. This is reaffirmed by the World Bank which recently commented: “While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remain”.

Going back to the subject of Turkey, the willingness of markets to finance its deficits and the maturing debt of high-income countries cannot be assured. Should Turkey and South Africa find themselves being denied such financing, it may create contagion and engulf top banks and other financial institutions on both sides of the Atlantic. Nobody wants to be reminded of the severe recession that gripped the world following the credit crunch and the sub-prime debacle that blossomed in 2008-09. As stated in my article entitled Italy sink or swim in another part of the media, the revival of the euro depends heavily on the sustainability of Italy as a country straddled with €1.4 trillion in accumulated debts. If Italy plays its cards well, and manages to avoid a bail-out, then the markets will sleep soundly until another crisis looms. Italy and Spain, the eurozone’s third and fourth-largest economies, were at the centre of the market turmoil, with investors demanding an increasingly high premium for holding their bonds.

Spain is labouring under one of the most severe unemployment crises in its post-war history. A lack of market confidence in its recovery has seen interest rates on 10-year Spanish bonds reach 16 per cent, which is a terrifyingly high rate and shares listed on Madrid’s stock market fell by almost three per cent to hit their lowest level since March 2009.

Back to the spaghetti lovers, and in Italy the government is facing growing hostility to reforms of its labour market, while the sheer size of the country’s public debt made it an obvious target for nervous traders.

To conclude, while many resent the imposition of austerity measures, it is not easy to see any gain in the competitiveness arena if there is no pain. The risk of social unrest in Mediterranean countries is real and it is a daunting prospect that, in their forthcoming election, Greek voters might vote in a new cabinet that rejects austerity. And as if this is not enough to scare the wits out of the markets, we will shortly be seeing the choice of the French electorate, who may possibly elect Mr Hollande who, among other things, is proposing the renegotiation of the fiscal pact apart from taxing the rich at a draconian high rate of 75 per cent.

Let’s hope that, in the short term, rationality prevails and sanity returns to the international markets, since there will no option other than hitting EU citizens with severe bouts of austerity to redeem the profligacy of their politicians.

George Mangion is a

partner in audit and business advisory firm PKF

[email protected]