Is Malta the new Med Tiger?

Concerns over the sovereign debt crisis in countries such as Greece, Cyprus , Spain and Ireland and growing deficits in Europe have prompted decisions for governments to cut social spending, alongside measures to raise taxes and the pursuit of significant austerity measures.  For example we see how, in the UK, manufacturing growth slowed to the weakest point in nine months.  It also fell in Italy and Spain but waned in France.  In Germany, the figure slowed but still remained relatively high.  Last July saw France and Germany stay well ahead of a subdued duo of Spain and Italy, while Greece remained firmly in the grips of a deep downturn.  When checking the Eurostat figures, one finds that the economy of the 27-nation EU, which includes non-euro members such as Britain and Poland, only grew by 1.0 percent in the second quarter last year.  This is in contrast to the exemplary growth in Malta of 3.9 per cent in the second quarter of last year when compared to the corresponding period in 2009.  Another fast track achiever which has bucked the trend of a contracting economy is Poland.  In its second quarter Poland revealed headline growth at 3.5% which as stated above was slightly lower than Malta.  By sheer contrast to other ex-Communist countries, Poland is faring well and aims to achieve a lower deficit to GDP ratio of 1.5% and its debt/GDP should be around 40%, rather than a previous level of 54% (compared to 68 % in Malta).  By comparison ,Poland stands out to be in pretty good shape, with very limited fat, if any (it never entered recession), and appears to be insulated from any euro area slowdown. This advantage has come about because Poland has been vigilant in controlling expenditure and in particular introduced serious reforms to its pension regime and boasts of a well funded first and second pillar scheme (both mandatory).  Thus new entrants into its pension system contribute into a first pillar in a state controlled fund together with a second pillar which is made up of private pension funds.  In Malta we have started studying a much needed reform more than a decade ago but so far the voluntary third pillar is still in discussion, likewise no decision has been taken to introduce a mandatory second pillar.  By sheer comparison one regrets that any further delay in the implementation of a mandatory second pillar in Malta. More delays in reforming the pension deficit will only exacerbate future country debt levels.

Turning back to Greece, it was the classic small nation which stuck in recession with an economic contraction of 1.5 percent, as it battles to overcome a public deficit and debt crisis. The cure is bitter and includes severe spending cuts and some layoffs of public sector worker .  Some economists argue that taking such drastic austerity measures is counterproductive as it will lead to killing the stimulus needed for a speedy recovery.  Others like the British prime minister disagree. Mr Cameron reiterates that there is no gain with no pain and his coalition government is about to start implementing an emergency budget, slashing costs and personnel in the public service.  Yet, invariably history shows that turning the screws on jobs at a time of recession can seriously jeopardise the very recovery we are trying to achieve.  Opinions differ but most agree that such measures will certainly slow down economic recovery in the short run.  On a global level we witness  a fragile economic recovery, which according to the ILO global unemployment is now at its highest level ever, at more than 210 million, and nations will need to create 470 million new jobs in the next 10 years to absorb new entrants into the labour markets.  This is no mean feat. Youth unemployment has reached unacceptable levels creating perceptions of social injustice .Tensions and social unrest are increasing in the form of riotous public protests in Greece, Britain, France and Ireland protesting against austerity measures, unemployment levels, the raising of pension age and for cutting jobs in the public service. This malady of long queues of unemployed is also hitting the US. In contrast the unemployment levels in US are staying persistently high at 9 % . It came as no surprise that President Obama recommended to Congress another hasty fiscal stimulus to invest more in infrastructural projects (building bridges and repairing public infrastructure) with the aim to creating new jobs.

Obama stressed that a better infrastructure and transport system will benefit America in the short term by way of jobs creation and removing uncertainty in small and medium sized companies who may be encouraged to hire new staff.  Again tax credits have been introduced to SME’s to help them invest more in research and development.  Tax credits to the top 2% rich will be curtailed.  The jobless army in US has reached an unpalatable high mark and as a sign of urgency this new stimulus is expected to be put in place before the November 2012 final term elections.  While economists placate us with predictions of improved global growth this cannot be a consolation for a worker who cannot get a job nor has any re-training facilities in times of such a crisis. In particular one reads how the fragile SME’s who tend to work harder and be more resilient to changes in their markets are also suffering from reduced demand and a risk adverse policy adopted by banks.  They experience difficult access to new credit and cannot benefit from any mild economic recovery that is underway.  

Back to Europe and governments ought to strengthen the deficit levels of the euro region as the currency has suffered a considerable drop against the dollar.  More is expected to be done to round up laggards who continue to run high deficits and indulge in burgeoning national debts.  EU finance ministers toyed with ideas to impose sanctions on Maastricht rule-breakers. At the same time the patient can only address the plague of fiscal deficits and uncontrolled sovereign debt by taking painful measures ie- cutting waste, more taxes and regenerating new sustainable solutions.  The nature of the penalties also remains to be agreed upon.  Typically Spain, a leading recipient of EU infrastructure subsidies, said countries that fall afoul of the rules shouldn’t have that money taken away.  The message on the wall is that such laggards must compel their finance ministers to crack their whips urging governments to living beyond their means.  Waste can only be trimmed by painstakingly introducing a balanced, gradual yet credible exit strategy from the stimulus measures that rescued the global economy from an even deeper recession in the Thirties.  Such policies have saved or created tens of millions of jobs since the great depression.

But not all is doom and gloom.  Grass shoots are appearing and the euro-area economy expanded 1pc in the second quarter, the fastest pace in four years. It reported a healthy 3.4pc jump in exports, the biggest in the euro’s history, while investment rose 1.8pc, ending 2 years of contraction.   Consequently it is a good sign to notice that crude oil fell as the euro tumbled against the dollar on speculation that Europe's debt crisis may not be over.  Oil dropped as much as 4.6pc after German factory orders unexpectedly declined in July, causing the euro to weaken its most since August and the fact that the Libyan civil war seems to be approaching its end.  Pessimists point out that share prices declined on the news that the European situation will delay the global recovery.  To conclude can we agree with the NSO statistics that show how Malta without undergoing any austerity measures (or painful pension reforms) is performing well and more than 6,000 jobs are being created.  It is even beating Poland which is itself galloping in a quick trot to recovery. Having seen the travails of our countries we may be boastful to brand Malta as a maverick state which seems to have broken the trend of economic failures and if it continues in its trajectory for growth may qualify as the new Tiger in the Med.

George Mangion is a senior partner of an audit and consultancy firm, and has over thirty years experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF Malta has been instrumental in establishing many companies in Malta and placed PKF Malta in the forefront as professional financial service providers on the Island. George is a regular contributor to both local and foreign publications on business, financial services, taxation, mergers and acquisitions, company structure and insurance. He has also lectured and delivered presentations at numerous seminars and conferences worldwide, namely in Europe, South Africa, North and South America, Canada, Australia and the Caribbean.

George can be contacted at gmm@pkfmalta.com or on +356 21493041.