State of Denial

The Malta Independent on Sunday 

 

  I always suspected it but now the proof is concrete solid. We are living in a state of denial.

Just as soon as we have travelled the long road till we achieved political consensus about Malta`s EU membership, public support for the EU as measured by Eurostat amongst the Maltese public is amongst the lowest of the new member states.` Why`

My best bet is that we have joined the EU for the wrong reasons.` We joined the EU for the prestige and for the funds, wrongly assuming that it could be an easy solution to our economic ills which will be magically solved once the EU would owe us a living.

Now we are finding out that it just does not work that way.` And we are disappointed that no one really owes us a living. And for all the opportunities which EU membership presents, nothing changes the simple fact that we have to solve our own problems, and that it is up to us to grasp the opportunities.

I was not enthusiastic about EU membership as I was dismayed by the misrepresentation that was being sold to the electorate. I always argued that should we find the self-discipline to do what we have to do, the sort of discipline which the Swiss seem well endowed with, we could do just as well or even better outside the EU.` On the other hand if we continue to miss this self-discipline, as very clearly we are, then EU membership was plausible not so much for the funds or for the prestige but at least for the discipline it imposes on us to save us from ourselves.

It is time for the great majority of us to abandon the state of denial and accept that we are simply not earning our way in the world, that we are just bumping along the bottom whilst all else around us are overtaking us ` some walking by us whilst others running or sprinting ahead of us.

Government seems bent on cultivating and spearheading this state of denial. All economic data shows a dismal picture. We have had no real growth during the four year period 2001-2004 so that the real GDP of 2004 was at the same level of 2000. Furthermore it is clear that in the composition of our GDP the two productive sectors of manufacturing and tourism have actually contracted and the slack was taken by financial services and real estate. It is questionable for how long real estate can continue to pump the economy forward given the stellar prices that property has reached and the consequential abundance of residential development in the pipeline.

Data for the first quarter GDP for 2005 shows a further real contraction.` Latest data for government budget position up to May 2005 shows deterioration rather than an improvement over last year, in spite of substantial increase of grants revenue from the EU and the Italian protocol.

The revenue side of government finances shows disquieting slowdown in all ordinary fiscal headings with the exception of VAT which in comparison to last year was enjoying better flows from the rise in VAT rate from 15% to 18% effective 1st January 2004 ( the comparative revenue for 2004 has its reporting origin backdated to 2003 with the lower VAT rate).`

Whichever way you look at it we have a chronic economic jam at a time when world economy is experiencing substantial growth.` This is not the mid-seventies or early eighties when the whole world was in a chronic recession.` It is not the early nineties when high interest rates to iron out chronic inflation slumped economic growth in most developed economies.

This is a time when economists are speaking of goldilocks economics.` Where there is good growth rate varying from 9% in China and parts of Asia, 4% in the US and 2% in Europe but without giving rise to undue inflation expectations making low interests rates apparently sustainable for the long term.` It is the best international scenario we could reasonably aspire for.

Yet we seem locked up in a vicious circle of inflation, stagnant economy and fiscal deficits. It is quite a moot point whether one calls this a recession or not. What`s in a name` What matters is that we have deficits and inflation without any growth. If recession is too offensive a term for some of us then they can call it stagflation or slowdown but this will not change the substance ` we are falling behind; we are the last of the pack; we are not operating anywhere near our true potential level.

Quite often economists and columnists like yours truly try to alert the public conscience on the true state of affairs we are in.

The state of denial is so ingrained that our political leaders, rather than acknowledge the problem and work out a consensus-based plan on how to address the problem, as the Irish did so successfully when they were in our same position in the early 90`s, they try to belittle economists who dutifully point out the undue length of our shallow recession.

Our politicians seem happy that our recession has been shallow though long and care little that our global competitors have left their shallow recession behind more` two years ago.

But the state of denial is by no means restricted to our politicians. The President of the Malta Employers Association (MEA) should know more than most the dismal state of our economic performance and that the only reason why we have no double digit unemployment is due to the under-employment we have spread across the whole public sector.`

Yet rather than build on what serious economists, not on government`s payroll, are telling us, the President of` MEA accused such economists of playing political games.

Are our corporate leaders just as much in a state of denial that they have not even learned that before one can solve a problem one at least has to accept its existence`