On July 26, 2012, the then president of the European Central Bank, Mario Draghi, made a remark that changed the course of history: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This came as a shock to the financial markets, especially since these remarks came from a fairly unknown Italian who ended up in the most important position in Europe against all odds and thanks only to the crossed veto of the most influential European countries.
These three words, “whatever it takes”, did the trick. The euro was safe. So powerful was the impact that the ECB never had to implement the announced plan to buy bonds of distressed European countries.
Why were these words so influential? Because they changed the expectations of all the players in the world financial markets. All of a sudden, governments, central banks, hedge funds and speculators realised that the ECB was serious and determined and that the euro was not going to implode.
Words can have a huge impact, especially if pronounced by leaders who have the means to deliver what they say.
Economic decisions are made every day by entrepreneurs, investors and financial intermediaries on the basis of expectations. If their expectations are positive, they will recruit more people, invest more, provide more credit; if they are negative, everything stops and they enter defensive mode.
The exceptional measures introduced by the government were certainly needed and are no doubt helpful in the short term. The intention to maintain a war chest is also understandable since we do not know how long the pandemic, and ensuing crisis, will last.
The government should forget the war chest and start using the bazooka
However, thankfully, we are not at war. Our homes have not been destroyed, and food is easily available in our supermarkets.
The Ministry of Health has done a fantastic job in preparation for a pandemic hitting Malta. Intensive care facilities were prepared, doctors and nurses were trained, materials and machinery were purchased. Not just for today’s needs but in expectation of the worst-case scenario. The government should now take the same approach with economic issues.
It is fine to take care of immediate problems, but measures must also be taken in preparation for a major economic crisis which may hit the country.
That is why the government should forget the war chest and start using the bazooka.
Maltese entrepreneurs are planning now what to do with their employees and their investments. There are strategies based on the expectations of what will happen when the lockdown is over.
The safer they feel, the less likely they are to lay off employees and the more likely they are to hold on to future investments.
The government can provide such safety by offering a guarantee to companies in distress. To any company and for whatever amount. This is the bazooka.
An announcement of this kind by the government would have the same effect as Draghi’s historic “whatever it takes” speech. Companies would be able to resume their business, taking their usual commercial risks, certainly, but knowing that, in this exceptional situation, they can count on the government if anything goes wrong.
Maltese entrepreneurs are proud people. Their success was created thanks to government support but not because of government assistance.
They would not ask for help if they did not want to continue paying their employees’ salaries and keep their business alive.
Now that the European Union has suspended the Fiscal Compact and the ECB has announced massive interventions in the markets, the government has a unique opportunity to shape the conditions for the country, not only to navigate this crisis but also to continue to attract business and investments after it is over.
‘Think big, start small, act fast’. This is what entrepreneurs in Malta have been doing.
Let’s all continue to do it and let’s make sure that not a single Maltese company will go bankrupt because of the coronavirus.
Paolo Catalfamo, chairman, Global Capital plc