The Ukraine war has inevitably disrupted the economic planning processes of all countries directly or indirectly hit by Russia’s military hostility and its massive economic repercussions.
A few months ago, the EU was confident it had a solid plan to stimulate growth through huge public investment in decarbonisation, digitalisation and resilience investment following the disruption caused by COVID-19. Now, security, both economic and defence, has to be added to this plan.
The cold headwinds of the Russian invasion are blowing with increasing intensity. No one can claim to know how long these conditions will last and the damage they will cause to the EU’s economies in the short and medium term.
Finance Minister Clyde Caruana says the cost of cushioning consumers from the inflation shock in energy prices is estimated to reach €200 million this year. While he admits to having great economic concerns about the war, and claiming to have a better ability to manage the economy than any PN candidate, he repeated the mantra that no new taxes will be introduced. He further claims that “Labour’s electoral pledges are costed and programmed in accordance with the developing conflict”.
Meanwhile, most other political and institutional leaders in Europe too are fretting about the economic uncertainty. The heads of the Portuguese and Greek central banks have warned that the crisis risks plunging the eurozone into a period of stagflation – a toxic mix of stagnating growth and inflationary supply pressures.
The Maltese government may be adopting the tactic of kicking the can down the road, hoping that, if elected, it will address the collateral damage of the Ukraine war after the election.
The government’s subsidies on fuel and electricity supplies have kept the inflation rate in Malta at much lower levels than in the rest of the EU. This was a necessary move to deal with the short-term risk of creating unbearable burdens for a large section of the community. Most other EU governments have introduced a raft of measures to contain the rise in energy and food prices and to support vulnerable households.
But no government can absorb inflationary pressure forever. Promising not to increase taxation may be a pragmatic tactic during an election campaign, even in deteriorating economic conditions. But the credibility of political parties depends on their ability to withstand the scrutiny of economic experts who cannot be hoodwinked into believing that a fiscal policy based on increased spending, without countermeasures to boost income, is sustainable in the medium and long term.
Both parties made electoral commitments financed by massive increases in public expenditure. Little has so far been revealed about where the income will come from.
The PL and PN would do well to at least make some back-of-an-envelope assessments of the total cost of their electoral promises and the sources of revenue that will finance these commitments. To these calculations they must now add the cost of mitigating the inflationary and other economic risks resulting from the Ukraine war.
At the EU level, it now seems inevitable that the ECB will shelve its policy of normalisation for 2022 altogether. The fiscal restraints of the Stability and Growth Pact – which prevent member states from spending beyond their means – are also unlikely to be reintroduced in 2023 as planned. The rethinking of fiscal and monetary strategies will give eurozone governments the needed flexibility to address the current economic crisis.
Still, it is wrong to give the impression that fiscal rules do not matter anymore and that fiscal measures to support the economy will come at no cost to present and future generations.