This article was published in The Malta Independent on Sunday on 3rd June 2012
The European Commission, commonly referred to as Brussels, has just given Malta several warnings about the vulnerability of our economy and made the following six recommendations:
• Reinforce the budgetary strategy in 2012 with additional permanent measures to ensure adequate progress towards the medium-term budgetary objective and keep the deficit below three per cent of GDP without recourse to one-offs. Implement, by end of 2012 at the latest, a binding, rule-based multi-annual fiscal framework.
• Take action, without further delay, to ensure the long-term sustainability of the pension system, comprising of: a significant acceleration of the progressive increase in the retirement age compared to current legislation; a clear link between the statutory retirement age and life expectancy; and measures to encourage private pension savings.
• Take steps to reduce the high rate of early school-leaving. Pursue policy efforts in the education system to match the skills required by the labour market. Enhance the provision and affordability of more childcare and out-of-school centres, with the aim of reducing the gender employment gap, and at the same time, reducing the effects of parenthood on female employment.
• Take the necessary further steps to reform, in consultation with social partners and in accordance with national practices, the system of wage bargaining and wage indexation to better reflect developments in labour productivity and reduce the impact of prices of imports on the index.
• Reduce Malta’s dependence on imported oil, step up efforts to promote energy efficiency and increase the share of energy produced from renewable sources by carefully monitoring the existing incentivising mechanisms and by prioritising the further development of infrastructure, including by completing the electricity link with Sicily.
• Strengthen the banking sector, take measures to mitigate potential risks arising from the large exposure to the real estate market. Take measures to further strengthen the provisions for loan impairment losses.
Not everything Brussels says is solid gold. There is a tendency for Brussels to overlook our peculiarities and to recommend standard book solution that are not necessarily appropriate for our circumstances. Still, what Brussels say should be given due weight and government should maintain open dialogue with its citizens to inform how much of the Brussels prescription can be taken on board.
I dedicate this article to what I think we should make of Brussels admonishments.
Budgetary Strategy – The EU is basing its criticism on the basis of the 2012 Budget submissions as originally proposed. But that Budget is dead in the water. The published figures for the first 4 months of 2012 show that rather than fiscal consolidation, we are experiencing serious fiscal slippage. You can’t expect better in a pre-election year, of course. The primary deficit (all revenues less all expenditure before payment of interest) has exploded from EUR 70 million in the first four months of 2011 to EUR 162 million in same period of 2012. That’s more than 130% increase. Some consolidation!!
Government debt has increased by more than 9% over the 12 months to April 2012 whereas the economic growth in nominal terms around 5%. So rather than taming our debt growth the trajectory is still for a higher ratio of GDP. Government budget has gone off track and that could have very serious consequences.
Pensions – I take it as a given that government will have to cap the maximum benefits under Pillar 1 at the present real values and to do this it would have to continue reducing the eligibility for Pillar 1 pensions by linking retirement age and contribution period to the changes in longevity. It is also a given that for anyone earning more than twenty thousand Euro annually before retirement, they will on retirement suffer a drop in standard of living if they depend only on pillar one pensions.
The Maltese are among some of the best savers by world standards and many of them have not been waiting for government to launch pension initiatives. They have been saving for retirement even in the absence of fiscal incentives. So I don’t think the problem is as acute as Brussels make it. So much so that I would completely skip pillar two pensions, which risks raising our productive cost base and eroding our competitiveness. I would move directly to Pillar 3 with fiscal incentives for personal savings for retirement for those still in time to do it (basically those born after 1972).
Elimination of early school leaving, and achieving higher female participation in the employment market are a must. We are doing a lot but not enough. Youth must be studying or working, never idle. Mothers must have access to a good social infrastructure that permits them to further their professional career whilst knowing that their children are being taken care of through family arrangements or reliable childcare and after school arrangements.
Wage bargaining – COLA across the board increases have long outlived their purpose. They should be rendered applicable only to the minimum wage. Where collective agreements are in place wage setting should be the entire preserve of unions and employers. In case on non-unionised sectors wage order regulations should be used to adjust wages.
Dependence on foreign oil – incentives for installation of domestic and industrial renewal energy sources must be rolled out wider and longer.
On the banking sector exposure to the real estate market these are unnecessarily false alarms. We have enough problems; Brussels should not create additional ones unnecessarily. Banking is based on trust and confidence and misplaced comments could create problems even where none exists. It is true that property values are falling and that banks are nursing higher levels of non-performing loans. But thankfully our banks are highly liquid, have more deposits than they can lend out and are not dependant on any wholesale funding from foreign sources. On the contrary our banks have to invest a good portion of their surplus liquidity in foreign securities.
Furthermore what is heartening is that our households, unlike the situation in Spain or Ireland, have a strong balance sheet with little debt and have a strong culture to ensure that they honour their debt commitments come hell or high water. Obviously this depends on support from the wider family when needed, and on unemployment remaining stable. People out of job will be hard put to repay their debts, whatever their nationality.
So the health of our banking sector is not so much dependent on property values, but is more exposed to our ability to preserve the health of household balance sheets and maintaining unemployment at stable levels. This of course does not remove the need for our banks to adopt dynamic debt provisioning and to adopt more prudent dividend policies to preserve as much capital as possible for future challenges.
In summary we have substantial problems with our public sector deficits and debts, and some frank and serious re-orientation and approach is necessary. Certainly off-balance securitisation funding is no reliable solution. But for as long as government deficits remain internally financed and for as long as our households sustain their savings culture, then our problems are not as acute, at a national dimension including the private sector, as Brussels tend to make them.
The major challenges of vulnerability for our economy are exogenous. What the Greeks will decide on 17th June concerns us. The pain in Spain will not be anybody’s gain. If their banking system collapses, nothing and nobody is safe.