Fiscal slippage and the Euro after Cyprus

This article was published in The Malta Independent  on Sunday - 7th April 2013

The new Labour government’s commitment to adopt the Budget as presented by the previous administration on 28 November is strong and unshakeable.

However, when the actual deficit figures for 2012 were published by the NSO on Maundy Thursday – as everyone was focused on church visits, Good Friday processions and Easter figolli – it was a shock even to the most untrusting economic observers and must have prompted the new Finance Minister to engage in some head scratching.

The 2012 deficit that the former administration had estimated just 33 days before the year end at €180 million has, in fact, come in at more than twice that, at €362 million. From 2.7 per cent of GDP, it exploded to 5.4 per cent. Years of the patient nursing down of our debt-to-GDP ratio below three per cent in terms of the euro rules were blown away, as normally happens in an election year.

When the Budget is debated in parliament, I hope the former Minister of Finance will provide some sort of explanation as to why his estimates went so wildly wrong when he was merely projecting forward 33 days. The suspicion that the budget figures was ab initio unrealistic grows stronger, as one does not genuinely make such gross errors. The Minister was strongly motivated politically to present a rosy picture when reading the Budget for 2013 in Parliament on 28 November, not only because he knew this would be the last Budget before the election but also because, in that same week, he was contesting (unsuccessfully, as it turned out) for the post of PN Deputy Leader.

Yours truly had signalled that the projected 2012 figures appeared overly optimistic, taking into consideration the last published figures for the nine months to September 2012 and the normal income flows in the last quarter of the fiscal year (see my opinion of 2 December entitled A budget for the others). But ending up so widely out went beyond my worst expectations.

The new Minister has to choose between honouring the political commitment to adopt the Budget presented by his predecessor – even though the starting point has changed adversely in a very material way – or taking a responsible but unpopular decision to re-model the budget based on the realities as now known. He has a choice between showing the consistency of changing one’s mind in the face of changing circumstances or carrying on regardless because political commitment must be honoured, even if circumstances change.

Whatever is decided, when he re-presents the budget tomorrow, the Minister must come up with a credible plan to explain how the budget deficit is to be reined in again below three per cent of GDP so that at least our public debt will grow at a slower rate than nominal economic growth in order to break the upward spiral of debt to GDP ratio. We cannot afford to give foreign observers the impression that we have lost control of our budgetary discipline, as this may ignite self-fulfilling unsavoury prophecies.

Meanwhile, Cyprus has been bailed-out – joining the ranks of Greece, Ireland, Portugal and Spain in the bailout sick ward of the euro hospital.

The Cyprus bailout established a new precedent in that, for the first time, substantial losses were forced on uninsured but ordinary deposits, thus sending a message that uninsured bank deposits in Europe were no longer to be considered safe.

But the question remains: ‘and now what?’ Of the 17 euro countries, five have been bailed out and are in the sick bay. Two others are in a serious condition, as Slovenia and Italy may be heading in the bailout direction.

Are we solving any problem by forcing extreme austerity on countries seeking bailout as the EU tries to force harsh internal devaluation to Germanise them and make them export competitive again? Can we do so by wasting idle resources in the form of lost growth and high youth unemployment, which risks becoming chronic and irreversible?

What nobody seems to be asking are these simple questions:

· Is it logical to expect that such disparate countries as Greece and Germany be locked in the same monetary union?

· Can external competitiveness for countries in distress be regained merely through never-ending rounds of austerity?

· Should not surplus countries also be taking corrective measures to bring back macro-economic equilibrium among euro member states?

The present bailout pattern is unsustainable. As more members join the sick bay, the members outside will become fewer and less able – or willing – to carry the load.

We are adopting a Versailles method when we really need a Marshall Plan method. Anyone who thinks that the German taxpayer is being short-changed by having to finance the bailouts of countries in distress should take a cold shower and look reality in the face.

Germans have not just paid for the crisis, they have profited from it. The savings in interest payments that Germany has enjoyed since the beginning of the crisis amounted to €10 billion last year alone. In addition, there are the interest payments from debtor nations.

The reality of the euro crisis is this: the poor of Athens are paying the rich in Germany.
And, above all, Germany is benefiting from export-led economic growth as the euro crisis is keeping the currency’s value on the foreign exchange market much softer than would have been the case if, under similar conditions, Germany’s currency was still the Deutschemark.

The euro crisis has so far been a party for the Germans. But it will not last. They have been warned. Italian elections have given the biggest share of the popular vote to comedian BeppeGrillo who is speaking much the same language as Mussolini used to speak to erode trust in politicians and pave the way for the scrapping of democracy.

Such experiments failed in the past, and they will fail in the future. Europeans will not allow it. As Germans keep cheering on their Chancellor, they should mark the words of former Euro Group chief Jean Claude Juncker:

"Anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven’t been banished, they are merely sleeping.”

Regardless of who is the next German Chancellor, he or she must switch from Versailles to Marshall Plan mode, or what has been gained in six decades since the beginnings of the EU will be washed down the drain.