Fabian Demicoli

MITIGATING FOR THE ECONOMIC DOWNTURN

Celebrating Malta's fifth anniversary as an EU Member state under the dark clouds of an economic downturn is quite unfortunate. The last five years have served us to bring forward a new generation of young Maltese, qualified in all EU matters and who's tremendous task has been to ensure that our small country makes the most of our EU membership. Only these know how difficult it is and how far we have progressed in such a relatively short period of five years. We are still climbing the stiff learning curve, but I believe that Lawrence Gonzi in Malta and Richard Cachia Caruana in Brussels have reason to feel proud on May 1, 2009. It's a job well done.

 

Brussels has a high opinion of the quality of our people and the seriousness of our endeavors. I honestly feel proud that I am contesting for a seat in the European Parliament. I believe that my experience at both the local and EU level should serve me well in being a very effective MEP. Experience, in an EU context, counts.  The work our people have done in Brussels, to give our country such a good start, now needs to be strengthened. So much work has been done that now we really deserve the right returns to our efforts. It is up to us now to choose people that represent us who can really make the difference. It is up to us to have the right policies and the right people in the right places.

 

It cannot be that as participants in an internal market of 500 million we cannot attract more investments, more orders for our enterprises, more work for our people, more tourists, more financial institutions and, above all, we cannot make Smart City the success story we all wish it to be.

 

Investment promotion, business development, procurement of orders and work, this is all home ground to me. I feel I can turn an experience in the European Parliament into more work for the Maltese. This should be our main task in the five years ahead of us. But first we must all put our heads together to mitigate for the economic downturn that now besets us.

 

The economic statistics at hand at the moment are worrying. The situation could have been much worse, as our professors of doom had predicted, if it were not for two important facts: the much maligned economic restructuring of industry and commerce has after all worked far beyond what was assessed and, at least up to now, the economy has proved that the predictions of our econometricians are not correct. Secondly our economic managers are responding much better to the crisis than Joseph Muscat thinks and believes.

 

Given that our exports over the last months have dropped by 20%, in line with what has been happening in international trade, should the predictions have materialized we should have lost 15,000 jobs already. The truth is however that over a 12 month period we have lost 900 jobs. The job situation is now more or less at a plateau level and we pray that it will hold as things may get worse before they get better.

 

I believe that the top level Task Force lead by Lawrence Gonzi himself, which is working hard to identify the firms and the problems that beset them in an effort to mitigate for the economic downturn with solutions that should, if the recession abroad does not last too long, bridge our little economy from here till the next push forward. What these people want however are solutions that are properly costed and immediately implementable with maximum effect in the shortest time-span possible. Mere talk is for yesterdays men.

 

The problem is we all want to cut public expenditure, but when it comes to it no one wants to say what and where. Who for instance is coming forward to say that government should not give the income tax relief, not spend on a new hospital, not sustain pensions, not build new roads or spend less on saving our environment or spend less on education, on ICT and localities? 

 

Everyone sermonizes about the budget deficit but when it comes to raising new taxes or cutting on expenditures everyone pulls back.

 

Most Euro Area Member States recorded negative growth rates in the last quarter 2008. Over the last quarter 2008 and in the first quarter 2009 world trade has fallen by 20%. In 2009 world trade is expected to decline by another 13%. The most recent economic forecasts indicate an even worse outlook than that at the beginning of the year.

 

The March 2009 OECD forecast shows a deadline of around 4% in GDP for the Euro Area compared to a decrease of around 2% in the European Commission's January 2009 interim forecasts. The outlook for 2010 is also more pessimistic, with the OECD expecting a marginal drop of 0.3% in the Euro Area's GDP. The OECD forecast shows that unemployment will rise to around 10% in 2009 and to increase to 11.7% in 2010. Inflation is expected to slow down significantly to around 0.6%-0.7% in 2009-2010 on the back of declining commodity prices and slower wage growth.

 

Is there anyone out there who believes all this is of no relevance to us? Our rate of economic growth has slowed down to 1.6% in 2008 from around 3.5% in 2005-2007.

 

Luckily for all of us the domestic sector continued to contribute positively to GDP growth, sustained buoyant consumption and this at a time when we are suffering from a contraction. The contribution of the external sector was a minimal 0.1% in 2007, reflecting a situation where both exports and imports have dropped by more than 13%.  Tourism is suffering greatly as the international economic and financial crisis is negatively impinging on the travel trade worldwide.

 

In the first half of 2008 international tourism grew by 5% according to the World Tourism Barometer. However, the Maltese tourism industry has been hard hit by these developments, with tourist departures declining by around 10% and gross tourism earnings falling by 2.7% during 2008. As an economist I know the situation is serious, but I know solutions do exist and serious people are working on them.  

 

The thing is, we really do not have much room to maneuver. We're a small economy. The budget deficit forces us not to spend lightly and to prioritise. That is what the Maltese Government is doing. Our job is to identify the new opportunities, safeguard the jobs that exist and sustain those companies that have the potential for growth once the recession is over. This is not subsidization of lame ducks. This is supporting firms who are well managed and with growth potential but who are temporarily hit hard by falling demand and dumping of prices internationally.

 

Government is right in identifying the right measures to help the tourism industry focus on improving airline accessibility and sustain increased promotional campaign spending. The agreement with the Banks to provide moratorium on repayments of capital on house loans for redundant workers and loans for investments by hotels leads in the right way, but local Banks need to stop fooling around with interest rates and to be selective in supporting enterprise.  With more substantial support from the banks many firms can survive the difficult times, but I still see very little support so far.

 

We still need to further address the many market imperfections which may be contributing to higher inflations. We need to protect our producers without the many market interventions that we have today as these are not really ensuring a better return to our primary producers but simply sustaining high consumer prices.

 

We have also to rethink our port strategy and analyze correctly many commercial practices. We need to study the labour market. We cannot continue to have shortages and resulting wage pressures in the areas we need for our economic growth and continue to sustain so many wages, especially in the public sector where wage increases do not reflect productivity developments.

 

Above all we must however concentrate on our ability to attract more foreign direct investment, more orders for our firms and more tourists. We need to diversify more and seek with urgency the investments necessary to strengthen our potential growth areas. My aim as MEP would be that of concentrating primarily on this mission.

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