A false economic argument is being made with increasingly annoying frequency since the start of the election campaign. It involves the government claiming glory for achievements registered in spite of rather than because of the government.

The Prime Minister repeatedly seeks credit for the fact that Malta did not suffer the same fate as Greece, Ireland, Portugal and Spain that had to be bailed out by the EU when their fiscal budgets went out of control. Recently he has started adding Cyprus to the list of victims, as it is on the verge of asking for a bailout, given that its banking system has been crushed by its exposure to Greece.

This very argument makes mockery of previous claims that our membership of the euro monetary system saved us from financial crisis. All these countries are in the eurozone and it did not save them, so why should anyone claim that our euro membership has saved us?

Countries in the eurozone were scarred by the financial crisis just as much as countries outside it, whereas countries outside it, such as Norway, Switzerland, Czech Republic and Poland, have sailed through the financial crisis fairly undamaged if not outright strengthened.

The evidence shows that it is not being in or out of the eurozone that matters; it is the macro stability of the overall country that matters. Unfortunately, and with hindsight, it is now accepted that the eurozone rules, even had they been rigidly applied and observed, were meant to place severe restrictions on governments’ fiscal operations but were blind to the much more relevant macro stability factors like balance of payments deficits, competitiveness and employment.

Before the crisis hit, Ireland and Spain were the poster-boys of sound economic management when measured by the euro criteria. Their governments ran surpluses and their debt levels were very low in comparison to their GDP. However, no attention was given to the fact that the countries as a whole were suffering excessive balance of payments deficits, that their banks were lending far more for construction investment than domestic savings could finance, and that the economy was building an undue reliance on construction, real estate and housing financed by excessive credit.

When the crisis hit, the property bubble burst, borrowers could not honour their loan repayments to banks just as the value of their mortgaged property fell below the amount borrowed and banks were rendered illiquid and insolvent as they had to write off or make provisions for the non-recovery of loans that could not be serviced.

To salvage their banking systems, the governments of Spain and Ireland had to intervene in support and take on the public sector’s severe financial strains in a desperate effort to protect the whole economy from the mess created by excessive and irresponsible lending by private banks. The banks’ failure would have ruined the economies of these countries, as depositors and bond-holders would have been forced to suffer severe losses in the absence of government intervention.

The same fate was suffered by non-euro Iceland which, however, has shown greater capacity to restructure and grow through its flexibility to devalue its own currency, an economic tool not available to eurozone members in distress.

In spite of the Gonzi government claiming credit for steering our country away from the misfortunes suffered by countries forced to seek a bailout, the simple truth is that our fiscal deficit and our debt levels before the crisis of 2008 were worse than those of Ireland, Spain and Cyprus and not much better than that of Portugal. Greece was a basket case in its own right.

What has saved us is that the country as a whole, rather than the government, was a creditor to the outside world. Our banks never indulged in excessive lending beyond what could be financed by domestic savings. Our banks did not need to access foreign lines of credit on the international wholesale market to finance their lending. On the contrary, our banks only lent around 70 per cent of their stable domestic deposit base and had sufficient extra liquidity to buy government bonds whenever government needed to finance its deficits on the local capital markets. Consequently, even the government had no need to tap into foreign sources to finance its borrowings and could rely on local savings to finance itself at moderate rates and on a well-structured maturity profile avoiding frequent debt rollovers.

I reiterate that the credit for avoiding the crisis does not belong to the government but to the private sector, whose high propensity to save has financed all our borrowing requirements internally. We have avoided the crisis in spite of the government’s massive borrowing requirement and not because of it.

Now, to add insult to injury, the Gonzi government is resorting to atrocious scaremongering. They are claiming repeatedly that if a PL government is elected on 9 March, then as if by magic the country will be forced to seek a bailout.

Even if there were any truth in such claims it is utterly irresponsible to make them so explicitly. Business and economic management is built on confidence and the PN, as a major political party, which if not in government is in opposition, should be more careful when making any claims that could hurt confidence in the country, prejudice our stability and damage our growth potential.

There is nothing, absolutely nothing, to suggest that Malta, whoever is governing it after 9 March, will be forced to seek a bailout from the EU. Why should we seek any bailout when our economy is over-liquid and the government has no problems in financing its borrowing requirements on the local markets at competitive rates and for stretched maturities? Countries that were forced to seek a bailout only did so reluctantly when they could no longer finance themselves normally on the market except at prohibitively high rates.

On the contrary there is ample scope to continue to make better use of domestic financial resources. Rather than having pseudo banks indulging in deposit-taking to the exclusion of all other banking functions, and ‘abusing’ the local deposit insurance scheme regulations to gain unfair and unintended access to the low-cost discount windows of the ECB, we would do better to pay more attention to the advice emanating from the Central Bank Governor regarding the setting up of a Development Bank to fund major productive infrastructure projects without putting a strain on the government’s fiscal position.

If such a Development Bank initiative were in place, Labour’s proposal for financing the LPG power station and its infrastructure could be financed or co-financed using such funding without undue reliance on international investors, given that the payback period is relatively short and its commercial feasibility has been depicted with an attractive rate of return for prospective investors.

Rather than saving us during the last legislature, the Gonzi government should explain to us why they have continued to operate the Marsa and the first phase of the Delimara power station when they are so inefficient. The cost of operating them was so high that economies thereon over the last legislature would, on their own, have more than financed the full capital cost of what Labour is proposing.

www.alfred-mifsud.blogspot.com