Does austerity or greater competitiveness secure a recovery?


George M. Mangion¸ PKF Malta. April 2012




It is well known that Germany has been heavily criticised for its imposition of austerity measures as part of the new fiscal pact and as a precondition for the bail-outs of ailing euro members. Economists argue that austerity noticeably slowed down any potential economic growth in Europe. Indeed¸ the current no-growth rate of southern European countries reinforces the argument against the validity of stifling austerity measures.

The gross domestic product of both Greece and Portugal continues to fall. Since late 2007¸ the Greek GDP has fallen more than 16 per cent and no economic revival has been noticed since the imposition of the latest austerity package. On the contrary¸ the Greek recession a – which is already in its fifth year – has intensified. The lowering of the minimum wage by 22 per cent¸ and the sacking of 15¸000 employees in the bloated public sector – together with a new dose of higher taxes – has led to a further reduction in consumer spending. Sooner or later¸ German Chancellor Angela Merkel must agree to a better remedy to revive confidence¸ and that is the issue of Eurobonds¸ since imposing austerity packages in the short term does not seem to be the right way out of the crisis.

Observers hope that¸ once the European Commission has drafted the fiscal pact reforms¸ changed the Treaties and declared who exactly is liable¸ and to what extent¸ then Chancellor Merkel will have no option but to yield and give her blessing to embrace Eurobonds. Realistically¸ although most members have ratified the Treaty¸ it will still take time to fully implement¸ and time is rapidly running out as Damocles’ sword hovers perilously over EU heads. On a positive note¸ the European Parliament’s first resolution on the feasibility of stability bonds can be seen as a step towards well-designed Eurobonds and hopefully this heralds the beginning of the end of the euro crisis.

Now¸ with oil prices hitting a high of $123 per barrel¸ it comes as no surprise that Europe is struggling under the weight of high production costs¸ which make manufacturing and services uncompetitive. This is reflected by the slower growth in the number of job vacancies last winter¸ with unemployment in the EU at 10.2 per cent¸ compared with 6.8 per cent in Malta. It is true to say that statistics issued by Eurostat are indicative¸ and where employment is concerned one has to be careful to compare like with like. As an example¸ in Malta our low unemployment rate does not take into account the fact that we have one of the lowest labour participation figures¸ particularly where females are concerned .Women are slowly being encouraged to return to work after marriage but the figure does not exceed the 40 per cent mark.

This is notwithstanding the fact that recent budget gave a special one-year tax-free concession for females who return to work and special “3-16 age group“ school facilities are organised at state level to cater for children who can be taken care of after school hours¸ thus enabling parents to stay longer at work.

Officially¸ unemployment levels in Malta are low¸ which is quite an achievement given that our exports are inevitably hit by lower