It is difficult to know where to start from as the economic news from around the world remains very gloomy. The barometer is still not pointing towards fair even if by and large most economies have moved out of the recession.
This continues to make economic management very difficult even for the stronger economies, let alone for the weaker and more vulnerable ones. The excesses that led to the crisis in the international financial markets are still having an impact today and there is no doubt that the ground is very fertile for a new bout of speculation. And what is worse, the options available for either fiscal or monetary policy are becoming increasingly restricted.
Many governments are probably disappointed that they have not been prudent enough in the past, and are thus too weak to handle the difficult economic situation effectively.
Prudence is not always considered to be a virtue when the going is good.
However, it is those countries with prudent fiscal and monetary policies that have emerged strongest from the international economic recession.
The highlight of the week is most certainly the crisis in the finances of the Irish government. The Irish government has sought very hard to manage the fiscal deficit on its own but it really could not, and had to plead for a quick decision from the EU finance ministers.
The bailout (as this is what it is) will cost some €80 billion over three years to various taxpayers around Europe, and the austerity package being put forward by the Irish government will hit the Irish by some €15 billion over four years. All in the name of safeguarding financial stability in the European Union and in the eurozone.
It will be very easy for anyone to blame the current government for this mess. However, the crisis is all due to the excessive lending that was resorted to by Irish banks. This indeed did fuel economic growth (hence the growth rates experienced by Ireland in the last 20 years), but left the whole economy exceedingly vulnerable should there have been (as in fact there was) a difficult economic period. The Irish figures speak quite clearly for themselves. Domestic credit is 280 per cent of the gross domestic product. The fiscal deficit was at 14.4 per cent of the gross domestic product in 2009, compared to a surplus of 2.2 per cent in 2006.
Total government debt rose to 65.5 per cent of the GDP in 2009 from 24.8 per cent in 1996. Government expenditure was 48.9 per cent of the GDP compared to 37.4 per cent in 2006. The gross domestic product expressed at market prices (that is not taking account of inflation) fell by 10 per cent in 2009 when compared to 2006. Half the Irish banks have had to be nationalised in the wake of the financial crisis. One will still need to see if the fundamentals of the Irish economy are strong enough to enable the country to move out of the crisis or whether there is need for extensive fundamental reforms.
This is the Irish news so far and the situation keeps unfolding. Then there was also the statement by Pascal Lamy, head of the World Trade Organisation, who warned countries against keeping their currencies overvalued to create jobs, saying such policies could trigger a return to protectionism. He was making reference to the currency war between China and the US, where the US is accusing China that it is purposely keeping its currency undervalued to stimulate its exports and maintain its economic boom.
This issue can be seen as a closely linked to the issue of loose fiscal and monetary policies, as they all help economic growth in the short term but do not necessarily strengthen the economic fundamentals of a country. Undervalued currencies are in themselves a sign of a lack of prudence as they fuel inflation, which will eventually undermine competitiveness. Moreover, undervalued currencies are fertile ground for speculators, thereby creating a risk to the fragile economic recovery.
What is the lesson for Malta? Clearly the need for prudence applies also to our country. We are so small that bottlenecks can easily arise in our economy, causing an unnecessary increase in prices. Our smallness and our openness also make us exceedingly vulnerable to what happens beyond our shores.
The old adage “Waste not, want not”, needs to be applied across the board. Our country does not generate economic growth by the level of consumption and government expenditure but through the level of investment in job creation. We should always see prudence as a virtue.