Recession is not a word that our politicians have associated with our economy these years as the last time Malta was in recession was three years ago. Therefore it came as a total surprise when it showed up on the front pages of last Saturday’s media. Yes – in the first quarter of this year we have registered a successive two quarter negative dip in our GDP growth. This is the bold verdict given by our National Office of Statistics.

Now, to make matters worse, the Governor of the Central Bank is warning us of “fuzziness” in the statistical records. He was particularly concerned that Malta’s statistics may not be representing the true state of affairs due to the impact of inventory changes on the calculation of GDP. Others suggest that this so-called fuzziness be eliminated as it is clearly distorting the figures, especially if it is true that these fluctuations contributed to a negative factor of a six per cent fall in real GDP in the first quarter of 2012. It goes without saying that statistics are not infallible and no effort should be spared to analyse more deeply to determine whether economic activity actually slowed down during the first quarter, or whether this is due to some minor adjustment due to statistical discrepancies.

We must ensure as quickly as possible that our weather vane is giving us correct readings. It may be recalled how, in 1996, the then Finance Minister John Dalli cautioned the cabinet about serious shortcomings in economic growth plus signs of serious over-heating. This confidential report was not published but, contrary to expectations, PN Prime Minister Eddie Fenech Adami must have taken good cognisance of these predictions, because he declared a snap election which his party lost.

With hindsight, we know that the high feel-good factor prior to the election was not real and when the bubble burst the incoming Labour party made a big fuss about the “ћofra” or a huge deficit they inherited. Surely, what happened in 1996 bears no resemblance to the recession now facing us, since it is a temporary fall in productivity that is mild compared with the real deficit that hit us in 1996. one can never be too careful – and it could be an eye opener.

From the government side, the onset of a recession triggered the use of spin and mirrors and has inevitably put in motion a number of damage-control mechanisms. We hear party apologists and other official PN gatekeepers stress that this could only be a temporary blip. Business leaders have called for the situation to be carefully monitored. They hope that the situation is not alarming, that it is the result of external factors and not a sustained fall in competitiveness. Some blame the fragile eurozone economies for the negative growth figures registered by the NSO in the past two consecutive quarters. The Employers’ Union, on the other hand, caution that the road to sustainable growth is through more structural reforms, greater competitiveness and a planned reduction in public expenditure, especially where waste is created as a result of an overlap in the use of resources.

Excessive red tape has to be eliminated in public administration but this is easier said than done and with an election around the corner, the PN has no appetite for belt-tightening. But one cannot pontificate about doom and gloom locally, since – due to the judicious handling of the economy – our workers have been spared the cruel austerity measures suffered by Greeks, Irish, Italians and more so by the Spanish. In these countries we know that pensions have been reduced, excess manpower in the public sector dismissed and unemployment is high.

All this started after the collapse of Lehman Bros in 2008 when the euro currency started facing one problem after another – typically the discovery of a massive €360 billion sovereign debt mountain accumulated by the Greeks. Sovereign debt is the money a government borrows from its own citizens or from investors around the world, and the price Greeks have to pay for their past profligacy is tough, so some may be tempted to resist austerity and elect politicians who wish to leave the EU. But if Greece leaves the eurozone, setting a precedent that such a thing can happen, then investors will become very nervous about lending to other struggling eurozone countries.

This could leave the governments of Spain and Italy short of money and in need of a bailout. These two huge countries together account for 28 per cent of the eurozone’s total economy, but the EU’s bailout fund currently does not have enough money to bail out both of them. To start with, Greece requested two successive bailouts – with other countries such as Portugal and Ireland then following suit. All this created much nervousness in international markets and has seen the euro fall in value. Some voters are contemplating an exit and whether or not Greece avoids such a fate will depend on the result of today’s election. Europe seems ready to reward a responsible Greek government, giving it more time to meet fiscal targets and offering some extra infrastructure financing while insisting more strongly on deregulation and other structural reforms. Europe may not formally renegotiate the “troika” memorandum but use a clause that allows fiscal slippage if an unexpectedly deep recession worsens the fiscal situation. But, if Greece does not elect a responsible government today, then Europe will probably take a hard line and not offer such concessions.

If the ultra-left Syriza party, led by Tsipras – a fiery leader – pockets the 50-seat bonus and forms an anti-bailout coalition with some smaller leftist groups, then Brussels will probably offer no serious concession but demand that Tsipras either scraps his campaign promises and signs up to the Troika memorandum or is cut off from EU and central bank support. With Greece lacking the money to import oil and other essentials, and amid a bank run, the threat of utter chaos could give birth to a devalued drachma currency.

The election is too close to call, while the Greek economy goes from bad to worse, the unemployment rate has hit a new record of 22.6 per cent in the first quarter and it has had the highest quarterly jobless rate since 1998.

Turning our attention to Spain, it is worrying to read that its fourth-largest bank, Bankia, needed €19 billion from the government – the biggest bailout ever – as it and fellow regional banks struggle under a mountain of bad property debt. Bankia was created in 2010 from the merger of seven struggling regional savings banks and it holds €32 billion in distressed property assets. It has also restated its results and is now saying it made a €2.98 billion loss in 2011 rather than the €309 million profit it announced in February. As a precautionary measure, trading in Bankia shares was suspended on the Madrid Stock Exchange while its management put together a restructuring plan. The bank said that the “recapitalisation measures strengthen the group’s solvency, liquidity and stability”. Last week it had to reassure its savers that their money was safe after a Spanish newspaper reported a run on the bank. With hindsight, we see that there have been four previous attempts by Spanish governments to shore up the banking system since the global banking crisis of 2008. This seems a forlorn hope, as all the recent evidence is that any respite in the financial markets for “good news” can be measured not in weeks, or even days, but in hours.

Most important of all, action in the bond markets reflects concerns about the Spanish banking system. The weakness of the Spanish economy cannot be denied: it is rooted in hard facts. Spain’s 10-year bond yield hit a euro lifetime high of seven per cent – a staging post above which Greece, Ireland and Portugal were driven to seek international rescue – despite last weekend’s eurozone agreement to lend Madrid up to €100 billion to recapitalise ailing banks.

One may well ask what was the root problem that caused the Spanish banking collapse. The answer can be found in the speculative property sector. Spain has had a spectacular boom-bust in its housing market, financed by its commercial banks. Like Ireland, Spain borrowed growth from the future and is now gripped by a brutal recession that has sent youth unemployment soaring above 50 per cent. The banks that lent so imprudently are now in riddled with toxic assets worth nothing in a distressed market. They are only kept alive by courtesy of the European Central Bank, which lent them a bumper bailout sum of €320 billion. The Spanish banks have been buying up Spanish government debt, which is falling in value day by day. This, clearly, is a recipe for crisis and because Spain is the eurozone’s fourth biggest economy, it is a crisis of a different order of magnitude to that witnessed in Greece, Portugal or Ireland.

To conclude, there is no magic cure in our dispensary. Perhaps it is wise to heed the words of German Chancellor Angela Merkel. This week she said that Europe must press ahead with closer political integration even though is a “Herculean task”. She warned: “...I know that it’s arduous, that it’s painful, that it’s drawn out. It’s a Herculean task but it is unavoidable.” There is no miracle cure to rid us of the sins of greed and wanton profligacy.

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The writer is a partner in audit and business advisory firm PKF