It is often said that a week is a long time in politics. Following the events of the past days, it is probably appropriate to say the same thing about the international economy.
The end of the year was celebrated by financial markets as an excellent year with good gains. US President Donald Trump had also stated that the US and China were close to striking a trade deal that would keep away any escalation of the trade war between the two countries.
The year has just about started and we had the elimination of a top Iranian general that has made the international political situation potentially explosive and as a consequence has brought about economic uncertainty once again. We have to say that the outlook is again quite precarious.
At the end of last year, it had already become evident that business and consumer confidence had decreased and economic activity was showing signs of slowing down in most leading economies. Manufacturing activity had weakened substantially, to levels not seen since the global financial crisis of 2007 and after. Investment decisions were being postponed.
Both the US Federal Reserve and the European Central Bank had adopted what is being referred to as an accommodating monetary policy, namely keeping interest rates down and further purchasing of financial assets. This did cushion the negative effects of other developments, giving rise to an element of hope.
Our economy is one of the most exposed to international developments because of our strong reliance on foreign investment
At this stage, with the current international situation being so difficult – not to call it chaotic – an accommodating monetary policy may not be of much help. The gains made by the financial markets in 2019 may well disappear in a few months. In such a scenario I believe the key policymakers around the world need to adopt a stance that is probably diametrically opposite to what we saw in 2019.
Economic policies should aim at continuing to defuse trade tensions. The imposition of import tariffs will not create any economic wealth that is sustainable. This means there needs to be more multilateral cooperation and acceptance of the view once more that international trade generates wealth.
Moreover the limitations imposedby fiscal policy rules need to be looked at again.
These were designed when the world was a much different place. More specifically the Stability and Growth Pact of the European Union – which I strongly believe was the correct policy at the time it was designed – may today be hindering growth. There was an element of normalcy when it was first drawn up. Today it is not allowing countries to provide timely support to economic activity where needed. Fiscal policy needs to be allowed to take a more active role.
There is then the impact of climate change. Some may continue to dig their head in the sand but the events in Australia of the past weeks simply cannot be ignored.
The bush fires will have a severe impact on the Australian economy. The impact on the rest of the world may not be so great given the size of the Australian economy when compared to that of the US, China, Japan and the eurozone, even if supply lines for some raw materials produced by Australia may be hampered.
However, we need to keep in mind that the past weeks has been Australia, but no one knows where the impact of climate change will hit next. We may joke about the fact that given this cold weather, why all the clamour about global warming. We should understand that extreme weather conditions are in fact the consequence of climate change and these extreme weather conditions are disruptive to economic activity.
In Malta we have our own issues with which to grapple. True enough, but we also know that our economy is one of the most exposed to international developments because of our strong reliance on foreign investment. We also cannot ignore the political tensions south of Malta, in Libya. In the face of all this, we cannot stand still. We cannot simply be happy with the economic performance of the past years.
The international tensions are a threat to our economy as much as they are to other countries around the world. This is why it is imperative that our country has well defined plans (and not vague ideas) as to how we will grow our economy in a sustainable manner in future years, in spite of the tense international political situation.