This week Mario Draghi, the president of the European Central Bank, delivered his report to the Economic and Monetary Affairs Commission of the European Parliament. It came at a time when the index of most stock exchanges around the world lost value. It is also important to note that new banking regulation has come into force and banks in a number of countries are still under pressure in terms of their capital requirements.
In the meantime the price of oil has continued coming down and is now at levels last seen in 2003. The prices of raw materials are also coming down. The implication of these two events is that demand is likely to be weak in future and the compounded effect could be that inflation will still remain well below the two per cent target set by the ECB. The economic sentiment has deteriorated since the beginning of December and markets have become more volatile.
The wider scenario includes other facets. In spite of the heavy monetary stimulus in the eurozone, investment has not taken off. Because of the increased capital requirements, banks have not been too willing to lend money, especially to small and medium-sized enterprises. The structural reforms that several governments have been asked to implement are still on paper on a shelf gathering dust.
We seem to be entering another phase in tackling the current situation in the eurozone, where the word austerity will no longer take pride of place
Thus, although economic growth has been moderate it is still quite fragile. Draghi claimed that some economic sectors have still registered growth. He said that in the beginning of March the ECB would review the situation and may adopt a more aggressive stance in its quantitative easing policy.
Then came the bombshell by Draghi. He said that although the rules of the Stability Pact need to be respected, governments should reduce taxes and allocate more resources for investment. In other words, he is suggesting that governments adopt an expansionary fiscal policy within the rules of the Stability Pact.
This is the first time that the president of the ECB has in effect spoken against austerity measures. It opens once more the debate on how to best address the economic situation in a number of countries that are still reeling from the effects of the recession. The problem with the eurozone is the lack of homogeneity.
The economic performance of the Maltese economy does not reflect the average performance in the eurozone. Even if we were to take our country out of the equation, one would still have Germany performing better than other economies.
In this way, the challenges faced by various governments are different. This does not in any way mean that we should have some form of fiscal harmonisation. What it does mean, however, is that governments in the eurozone need to engage in a political debate on how best to address the current economic situation.
I believe that the economic situation in most countries of the eurozone has been stabilised, even if growth may have remained weak.
I also believe that the situation in the financial sector has also been stabilised. However, this only means that we are no longer in a spiral trend downwards. Governments now need to deliver steady growth, even if we may have to accept that growth rates will be lower than we had been accustomed to before the crisis first hit in 2008.
The Italian Prime Minister, Matteo Renzi, has been quite vociferous in demanding more flexibility in the way fiscal rules in the EU are applied. His claim was that strict economic austerity has not worked.
The reality is that in most countries, political parties that expressed themselves against economic austerity have gained in popularity. The recent election in Spain is one example of this.
So we seem to be entering another phase in the eurozone, where the word ‘austerity’ will no longer take pride of place. The statement made by Mario Draghi must have left its effect, although it may not yet have been noticed.
I believe Malta should play a role in all this. We do not have the economic problems that other countries are facing.
Our size is such that an initiative on our part will not be looked at suspiciously. We should seek to broker a deal within the Euro group as a strong eurozone will serve us better than a weak eurozone.