What if We Fail the Euro Test

18^th August 2006

The Malta Independent - Friday Wisdom

In an ideal world, the euro issue should not be a dividing line separating our political camps. However, this is not an ideal world, and like it or not, there are observable trends which indicate that the government is planning to use euro accession as a key platform in its bid for re-election.

Having tried and tested the effectiveness of making the EU issue a key test for the 2003 election, it is almost natural for the PN to resort to a “tried and tested” formula in their quest to secure a refreshed mandate within the next 15 to 20 months. Given the high level of dissatisfaction with the government’s performance on the economic front, as evidenced by ongoing pollsters and by the consistent negative results in local and EU elections, the temptation to make euro accession a key issue for next elections becomes almost irresistible.

For doing so, the government is ably assisted by the misguided policies of the opposition, or at least of the Opposition Leader.

In 2003, against all advice, external and internal, he attached the EU accession issue to the result of the general election when Labour’s interest was in doing the exact opposite, i.e., to separate the general election from the EU membership issue and argue in favour of holding a binding EU referendum soon after the general election.

As if the 2003 bitter experience has not rubbed any wisdom on the Opposition Leader, he is positioning the party as practically the lone voice of doubt on the timing and the rate of conversion. He has in fact in the past expressed his preference for a gradual depreciation of the value of the Maltese lira against the euro before we fuse into the monetary union, and for the implementation of such fusion to be postponed until we achieve more stability and better growth in our macro-economic performance.

There are solid economic arguments that can be made in favour of such policies, although it escapes me how gradual depreciation could be implemented without causing a severe destabilisation of our financial markets, which is not in anybody’s interest, not even that of a prospective alternate government.

From a political view, however, these arguments are misguided. Devaluation of a currency in one single shot, or its depreciation in graduated steps, is not something a party in opposition should talk about. If the opposition is convinced that this is the right policy for engineering an economic turnaround, it is something they should hold under wraps and then execute in the very early stages of the mandate given by the majority at general elections.

After all, the advantage of being in opposition is the facility to focus policies on the objectives to be achieved during the whole term of the upcoming legislature without having to spell out in detail the actual measures being contemplated to get to such objectives. This is not unlike the medical surgeon who explains to the patient the long-term benefit of the surgical intervention without emphasising the discomfort and pain of convalescence in the period immediately after surgery.

By unwisely exposing preference to a delayed euro accession at a rate lower than the current level of just under 43 cents per euro, to which the government and the monetary authorities are committed, Labour is giving the PN the facility to present themselves for re-election in the autumn of 2007, just before the planned euro accession date on 1 January 2008 and present the electorate with a stark choice. Vote for PN, warts and all, and get one euro for every 43 cents of your Maltese liri financial assets or elect Labour on record that they will delay the euro accession project and engineering – a gradual depreciation which will erode the real value of your financial savings.

The PN are obviously hoping that by presenting this stark choice at the front end of their electoral offerings, it would be possible to push into the blurred background the issues which could fail them the electoral test, particularly the bread and butter issues which are eroding standards of living by the very process of shaping up for the euro.

If a week is too long in politics, then the 15 months to an election in the autumn of 2007 is an eternity. There could be developments which could remove the euro platform from under the PN’s feet.

The most obvious development would be for the opposition to define its financial policies to take back the free advantage that their policies so far have given to the PN. Change of policies need however to have a strong wrapper of credibility and it is difficult for this to happen by a mere shift in policies unless such shift is pedalled by new faces uncommitted to the old policies. Otherwise it would be like inviting someone not to think of a white horse.

If change of leadership is too late to contemplate, then at least, the deputy in charge of finance should show that he has the final say in key policy areas under his portfolio, and issue fresh policies related to the euro which will remove the unfair advantage his leader has freely given to the PN.

Yet, there is something else which could do the same without any intervention by the opposition. What if we fail the euro test and like Lithuania this year we will be constrained to postpone the euro accession project by a few years? Our 12-month moving average HCIP inflation index as at June 2006 was 2.9 per cent well above the average of EU 25. Will we come within 1.5 per cent of the average of the best three low-inflation countries by next spring? Don’t bet your pants on it.