Shadow still long over public finances

We take a look at the plight of Greece and Portugal and say, there, but for the grace of God, go we. The two countries are among those in the eurozone who have run into a brick wall, but only more so. Their cases shout out a loud lesson that those who believe that, by adopting the euro, one has bought insurance against all odds, are very gravely mistaken.

Switching to a common currency does do away with the danger of a run on one's currency. Single currencies tend to be the first victim of a loss of confidence in the financial and economic stability of a country. Such instability, however, leads to other pitfalls, as the current strains within the eurozone show.

Greece, after years of creative accounting and profligacy in its public expenditure, came up against the brutal reality that lenders shy away from risk. If they lend at all it will be against a sharp risk premium. Which is why the cost of servicing Greece's public debt has gone up to over double the euro benchmark, the yield on German bunds. Put differently, Germany can borrow at half the cost of Greece. Greece has been doubting whether it can borrow at all in order to roll over the maturing part of its existing debt.

Portugal has different problems. They include a high proportion of debt held outside the country, more so, even, than in the case of Greece, though our Mediterranean neighbour is bedevilled by a massive public deficit.

The size of Malta's problems is nowhere near those of Greece and Portugal. Nor do we have the massive unemployment rate of, say, Spain where it translates into 20 per cent out of a job. Yet allowing for size, we do have problems which continue to cast a long shadow, especially over the next three years.

The government, always trying to look at the bright side of things, does not emphasise these problems. It makes no sense to be fatalistic and to sap the morale of our society. But reality has to be admitted and faced, otherwise one slides very quickly into a state of denial.

As it is, one of the benefits of membership of the European Union is that we are not permitted the foolishness of allowing that to happen. This was confirmed once again in the recent view expressed by the European Commission regarding the state of Malta's finances. Financial indicators are currently the subject of fresh controversy. There is disagreement about the true size of the public deficit.

That arises, among other things, out of the way the government says it will finance the Valletta entrance Piano project, and the reorganisation of the public transport system. Ignoring that controversy and sticking to how the EU measures our financial performance, the latest views are not at all rosy as made out in the Nationalist media. This newspaper carried a detailed report by its Brussels correspondent on Friday. Gutting it for highlights demonstrates that the fiscal skies are still dark with no rainbow in them, let alone any pot of gold at its end.

The highlights are within the Commission's assessment of Malta's financial plans for 2010-12. Brussels calls for "correction" on some fronts, particularly through "more robust" financial planning. It tells Malta to concentrate on "further reform", in order to cut its expenditure, particularly on healthcare and social services. The government is urged "to consolidate" its discipline in the implementation of annual budgets.

Regarding 2010, taking into account the "risks to the deficit targets" the budgetary strategy "may not be consistent" with the recommendations. The consolidation plans for 2011 should be backed up by "concrete measures".

The authorities should stand ready to adopt "further consolidation" measures in case risks from less favourable GDP growth and revenue developments, and from possible slippages on the expenditure, materialise.

Moving on to 2012, the Commission says it is "worried" (because) the programme envisages a move "further away" from the Medium Term Objectives, "rather than" gradual progress towards its achievement. A "more ambitious" pace of "consolidation" than foreseen would also be warranted in view of "the high risks" to the long-term sustainability of the public finances.

Brussels Speak is not easy to decipher. Translated, it means that we do not have a crisis but, without further expenditure retrenching and possibly higher taxation, we could move into one. What else does one call failure to achieve the long-term sustainability of the public finances, should that come about?