Can the Maltese ignore the possibility of decreased UK tourists as consequences of next month’s referendum?
Will the feel good factor evaporate if tourist arrivals from the UK plummet should Brexit win the hearts of euro sceptic islanders? Tourism brings in jobs, income, growth and economic benefits across the Mediterranean, so can we ignore the consequences of next month’s referendum?
There are schools of thought that say the exit from the EU will slowly shrink the British economy coupled with a sure exit from the Union of Scotland. All this may also affect the supremacy of the financial district in the City of London as a number of banks and agencies will transfer offices elsewhere and possibly the Sterling may also lose value. Jobs will be lost.
Yet, eurosceptics retort that in the medium term, Brexit will render exports cheaper and help British industry access new markets which at present face protective barriers due to the preferences afforded by the Single Market. Extended business deals with Asian countries could be facilitated especially in regions where the UK had ties going back to the glorious days of its empire. Free from the chains of EU rules and the hegemony in Brussels, the City of London can adopt different standards that will render it more attractive than other European jurisdictions.
Britain first joined the then European Economic Community (EEC) in 1973, and in a referendum two years later the public backed membership by 67% of the vote. However, the country has had a strained relationship with Brussels, opting out of key projects including the euro and the Schengen passport-free zone. The late Margaret Thatcher had successfully fought for a reduction in the annual contribution paid to Brussels claiming that the Common Agricultural Policy system was discriminating against the British farmer.
David Cameron, in a pre-election deal, had bravely promised an in-out referendum should the Tories be elected. He gambled his seat at Westminster hoping that if he secures a favourable package with Brussels on four major policy areas the Eurosceptic majority in his party can be swayed to play ball at a referendum planned for 23 June.
His main adversary in the Tory party is former London mayor Boris Johnson. The battle between the two sides is playing out against a backdrop of a possible Conservative leadership contest if Cameron resigns in the event of Brexit or obtains a very narrow “remain” vote.
Johnson, the favourite to succeed Cameron, criticised the prime minister for appearing to change his mind about whether the UK could flourish outside the EU. The flamboyant Johnson wasted no time to remind voters that Brexit would reduce the UK’s contribution to the EU budget – a net €7.1bn in 2014 after rebates – potentially to zero.
Rating agency Fitch said “Brexit would create a precedent for countries leaving the EU. It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits.”
Can this exacerbate economic problems for the fragile recovery of the Eurozone? The answer can be ascertained by reading recent commentary from the European Central Bank (ECB) on the issue of sluggish growth and prevailing negative interest rates. First, it argues that the presence of downward rigidities, delivering an inflation rate persistently below 2% does not support product and labour market functioning.
Ideally prices need to adjust across goods and services in response to shifts in aggregate supply and demand, which improves price signalling and resource allocation. ECB waxes lyrical that at an average inflation rate of 2%, relative prices can realign around that level without producers necessarily needing to cut prices in nominal terms, whereas at lower inflation rates nominal downward rigidities are more likely to bite and hamper the adjustment process.
In the face of declining prices, wage rigidities shift the burden of adjustment onto the scale of employment, as firms attempt to recover mark-ups which are being eroded by high labour costs. Witness how the unrelenting high jobless rate in some Eurozone members is a consequence of labour shedding processes which in turn (unless modified) exacerbate the downward pressure on the general price level and sets the conditions for this process to become self-feeding.
Back on the subject of Brexit, a nil contribution from Britain does not bode well for the remaining Eurozone group. But it is not all doom and gloom since the Mediterranean is again enjoying a boom in tourist arrivals both by traditional routes and on board cruise liners.
As for Malta, NSO statistics show a record arrival of 1.8 million tourists exceeding four times the local population with exemplary results concerning cruise liner vessels entering the Grand Harbour. Edward Zammit Lewis, the tourism minister appeared buoyant exclaiming that the upward trend is continuing and in his words nearly 40,000 cruise liner passengers arrived in Malta in the 1st quarter of this year, an increase of 90% over the same period of 2015.
This all looks hunky dory as more hotels are expected to expand and build more rooms while older ones are pulled down. The long awaited privatization of the extensive White Rocks development is at the final stages of adjudication and when completed it is expected to be the flagship of a booming tourist sector. As European travellers turn away from Turkey, Tunisia, Egypt, and any other destination tinged with a threat of terrorism, four countries such as Spain, Portugal, Malta and Italy are expecting a bonanza. This results in record numbers of cruise ships with airport capacity pushed to the limit and busy roads in summer.
Although summer season is not yet with us the bars, restaurants and roads of Mallorca are thronged with people while famous dance clubs of Ibiza are planning their seasonal launch parties even earlier than last year. As can be expected, the cruise ships are already looming large in the Mediterranean looking like giant floating watering holes and pleasure domes.
We can never overstate the popularity of the Balearics, having just three times our population yet they hosted almost 13 million visitors last year. Palma is already pushing its airport capacity of 66 flights a day to 100 this season.
The fly in the ointment is what happens if Brexit ruins the party and the arrivals from UK will start to drop? The chances of a Brexit appear high as the man in the street has lost faith in the machinations of the Mandarins in Brussels. Yet watch out for scaremongers – the International Monetary Fund and the G20 group of the world’s leading economies have warned of the economic dangers of Britain leaving the EU, while the OECD last month said there was “no upside” to a Brexit.
Even the United States has weighed in, with President Barack Obama saying last month that EU membership magnified Britain’s global influence, during a state visit in the country. He also warned that if Britain did leave and wanted to sign a separate trade deal with the US it would go to the “back of the queue”. Labour and Scottish Nationals are saying inflation will explode and this will make life miserable. Some predict British families have to trim the number of overseas holidays as the pound devaluates. In conclusion, Cameron has taken a risky gamble – will he succeed to pull out of the fight unscathed? Certainly his political career depends on the outcome of the referendum next month. Roll the dice and let the fun begin.
George Mangion is a senior partner of an audit and consultancy firm, and has over twenty five experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF Malta instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.