Published on the Business Today, issue Wednesday, 30 June 2010
It is not surprising that no clear consensus emerged out of the latest G20 summit which was held in Toronto. The group includes the world’s richest and emerging nations covering two-thirds of the world’s population. It includes Australia, Argentina, Brazil, Indonesia, Japan, Mexico, Russia, South Korea, Saudi Arabia, South Africa and Turkey in addition to the big European economies, the United States and Canada.
The expectation of a breakthrough was high but opinions differed on how to solve the world’s financial woes. For a start, US President Barack Obama came to the summit hoping to persuade other leaders to pump money into government stimulus programs as a way of keeping the fragile recovery going. He has expressed concern about the speed at which European nations, particularly Germany, are withdrawing state spending put in place after global financial crisis and economic downturn.
US officials have argued that unduly rapid and deep budget cuts could endanger global economic recovery and even provoke a so-called double-dip recession. But the Europeans still hurting from the euro collapse and Greece‘s instability thought otherwise. As a compromise the final G20 communique stressed “the importance of sustainable public finances” by halving deficits by 2013. The participants pledged to put in place “plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances”. Many agree that the final communiqué marks an insignificant triumph for European leaders.
Understandably, Chancellor Angela Merkel consoled the Americans, that the deal, which also includes a plan for nations to stabilise or reduce government debt-to-GDP ratios by 2016, would only apply to the most developed industrialised nations. The draft purports to launch an ambitious plan to cut deficits in half by 2013. In turn this has been widely considered as an exit strategy leading to growth. Canadian host Prime Minister Stephen Harper told his G20 counterparts there was a “tightrope that we must walk to sustain recovery”, adding, “It is imperative we follow through on existing stimulus plans.
“But, he added that at the same time, advanced countries must send a clear message that when stimulus plans expire, we will focus on getting our fiscal houses in order,”. But the spirit among Europeans was strong yet the body was weak .Not surprisingly Stephen had ample support from countries like Japan and Brazil, yet others particularly the ailing European economies had different priorities. It is understand that , in Europe instead of spending money on stimulus programs, leaders want to heal what they see as a dangerous and growing mountain of government induced debt. German Chancellor Angela Merkel frankly told President Obama he had got it plain wrong. She seems to echo the European Central Bank President Jean-Claude Trichet who is reported to have exclaimed it was wrong to claim that budget austerity would cause stagnation.
Unmistakably steadfast, the tough German Chancellor Angela Merkel said her country would stick to plans to save 80 billion euros in the next four years. Can anyone blame her if the situation in Greece and others in sick bay waiting for bail-outs. Definitely any new stimulus package have to wait. Mrs Merkel is firm in her resolve to continue in her drive to cut expenditure. Another theme was the desire to tax fat cats and these include banks, financial institutions and hedge funds. France also joined Britain and Germany in saying they will introduce levies on banks to make them help pay for global recovery, a notion that the United States supports but the idea was firmly rejected by Australia, Canada, China, India and Russia. Consider for a while the fragile state of the British economy. It was a tough legacy for the new British finance minister George Osborne. In the spirit of G20 austerity drive he was quoted to say that ,”The truth is that this country was living beyond its means when the recession came and if we don’t tackle pay and pensions, more jobs will be lost,”.
Can there be any respite with countries such as Greece now sporting debts in excess of euro 300billion. Similarly in Spain with one in five unemployed and with rising debt a stimulus is uncalled for. It goes without saying that European leaders emerged at the end of G20 summit in consensus to pursue austerity measures which they consider essential to restore market confidence in the euro dented by the Greek fiscal crisis and wider concerns about high sovereign debt.
One by one European countries have pulled their socks up and invoked welfare cuts, slashed salaries in public sector and raised retirement age. With France being the last in the queue to introduce its austerity package ,it has now announced that strict deficit cutting measures are to be presented to its cabinet next month. So where will be the extra funds to be collected once the European economies are in sick bay or recovering rather slowly from an acute recession. The sentiment in the G20 summit pointed fingers to the possibility of launching a banking tax, stating that the “financial sector should make a fair and substantial contribution toward paying any burdens associated with government intervention, where they occur, to repair the financial system or fund resolution.” Rumours abound that other stealth taxes can be levied on financial transactions and a fund thus created to make good for any eventuality. Leaders were advocating imposing a levy on banks, hedge funds, and other financial institutions which would raise billions to help reduce national debt and pay for efforts to reduce poverty and possibly address welfare shortfalls. So back to Malta how are we faring among the list of 27 E.U members. The answer comes boldly in a recent slap on the wrist by the Commission ordering us to trim our deficits. Recently we have been cautioned to put our house in order particularly in government spending. The Commission warning goes like this …. “The reforms to the pension and healthcare system, which will not adversely affect the recovery of the member states’ economies, should be approached with urgency. In my opinion,this is particularly the case for countries like us where age-related expenditure is a significant source of unsustainability,”.
Malta’s deficit shot up to almost 4.8 per cent of GDP in 2008 and last year was put under an EDP and given until 2011 to rein in its deficit. But party apologists tell us that Malta broke the record in achieving a high first quarter growth this year. GDP grew by an impressive 3.4 percent when compared to the same period of 2009. The balance of payments showed a euro 6 million improvement in the same period with exports increasing at a faster rate than imports. Tourism also picked up in the first quarter with a healthy six per cent increase. So do we need austerity measures or do we stop moaning and thank our stars that the hand on the tiller is strong and diligent. An opposition spokesman says the opposite. He noted that whereas in the 2010 Budget the government projected an increase of the debt by €241 million, in the first five months of this year, the increase had been €59 million more. The other side of the coin is that the extra expenditure is technically leading to a stimulus in the economy. Other capital projects such as the Smart City ICT project, the Massive Financial centre project, MIA airport city block , the Valletta City gate upgrade and now the White Rocks Sports complex add to the string of real estate mega projects.
All these should be functional in the next five years. Granted that most of the projects are leaving a dismal picture of perpetual construction site .This leads to noise ,dust and other problems on the environment and naturally does not bode well for tourists. Yet ,the positive side is that these projects all create sustainable job opportunities. Can we say that we have shunted austerity measures and embraced the USA ‘s style of solving our problems by stimulating the economy. Only history will show us if our approach will work.
George Mangion Partner PKF Malta an audit and business advisory firm gmm@pkfmalta.com