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Lack of strong political leadership in the past years has meant that the euro was not well supported by good fiscal and economic policies. We had 17 countries all behaving differently without any real central fiscal control to ensure that no country was spending more than it was earning. This was a recipe for disaster.
Malta’s exposure to Greek debt is not significant. The Maltese banks that hold Greek bonds can take the knock. The real problem is the doubtful future of the euro zone as a result of the Greek debt problem that has now already spread to Italy.
France and Germany have the biggest economies in the euro zone. They very much dictate what happens in the euro zone. Germany is the richest euro zone country and so far it has paid the most to avoid an even bigger crisis by rescuing Greece, Portugal and Ireland. They are now proposing a treaty change which should ensure that the mistakes of the past are not repeated. We will have to wait and see whether this solution will actually work.
France would like to see the introduction of eurobonds that would be secured by the guarantees of all the euro zone states. They would also like to see the European Central Bank buying debt of troubled euro zone states in order to calm the financial markets whenever there is a run on the debt of a particular country.
Germany does not like these measures and prefers more fiscal controls by Brussels that could eventually lead to a fiscal and economic union of all Member States of the euro zone. They also fear inflation if the ECB starts printing money to buy dodgy euro zone states’ bonds. Finally, they believe that by guaranteeing Eurobonds, Germany would be agreeing to transfer its taxpayers’ money to wasteful or profligate states in the euro zone.
A fiscal union could be bad news for Malta as some of our financial services operators and our electronic gaming companies are attracted to Malta by the tax advantages that we offer. This may eventually be eliminated. Moreover, a fiscal union will also mean that our government would have to submit its spending and taxing plans for approval to a central fiscal supremo in Brussels before it goes ahead with its financial plans. In a few words, we would lose our fiscal sovereignty.
On Friday we expect some details on the treaty changes being proposed by Sarkozy and Merkel. There is a lot of speculation at the moment, so we have to wait until Friday To know what really is going to happen.
Few people believe that this Friday will see the end of the euro crisis. There are formidable challenges ahead. Will all the euro zone states agree to a treaty change? Even if they agree can they be trusted that they will abide by the new rules? How will the non eurozone states like Britain react to proposed treaty changes? The markets will have the final say on the credibility of this fourth rescue plan announced in 2011.
I think that the euro zone economies will remain sluggish both as a result of the euro crisis and the weak political leadership that is affecting the eurozone. So it is still very likely that come next year we will hear of yet another rescue plan.
As Merkel said, the euro zone crisis will not be resolved in the short term. One just hopes that the euro itself would survive. If it does not, then we will all suffer because a messy breaking up of the euro will mean a deep recession for Europe with some banks failing and exchange controls reinstated. There will also undoubtedly be social unrest if this happens.
The best case scenario for all euro zone citizens, including the Maltese, is for a speedy resolution of the euro crisis. This is unlikely to happen anytime soon, so the next best thing is some tough action to ensure that governments in the euro zone do not resort to populist measures simply to please the electorate while they bankrupt their country. So a more central fiscal discipline and eventually a possible fiscal union is the price that we may have to pay to avoid further deepening of the crisis that is affecting the real economy and jobs. We operate in an open economy which means that when our trading partners in Europe are in trouble, we too will be in trouble.