The Prime Minister has consciously chosen a tough cookie by accepting to join ERM II as of this week. Even if adopting the Euro need not happen on 1 January 2008 it would be a very grave mistake to prolong ERM II membership since investors can perceive the postponement as a sign of weakness.
To put things in perspective, adopting the Euro is necessary for Malta to enjoy a stable currency and fully participate within the European single market. It is the next logical step after membership and it would be a mistake to postpone adoption indefinitely.
Whatever the circumstances Gonzi has indirectly bound himself and the country to adopting the Euro in 2008 and that means the country’s finances have to be in ship shape condition by 2007, less than two years from now.
This very tight timeframe for bringing down the deficit below three per cent, controlling runaway public debt and bringing inflation back down to within acceptable parameters is not without its consequences.
More sacrifices have to be made. Increasing taxation is a no-go area. Another tax hike or new tax, in whatever form it may come will only contribute to stifling the economy and putting businesses and families in dire straits.
Deficit control has to come in two forms. The first and probably hardest to achieve is expenditure cuts. Government says it has done a lot to trim public expenditure but for economists it is not enough. The civil service remains an over bloated body which lacks value for money. There is no visible exercise to identify those extra employees Government could very well do without. This leader will not advocate indiscriminate job cuts; that is socially and possibly economically undesirable. But enforcing greater discipline on civil servants to the extent of throwing out those who abuse is the least tax payers expect. Much more needs to be done to extract value for money from Government departments and authorities.
The various agencies, foundations and authorities are also a source of financial haemorrhage. A concerted effort to merge different authorities and put them under the financial scrutiny of the auditor general is required. At a total cost of Lm80 million these authorities have almost become a government functioning within a government.
There is still too much waste at all levels of government.
The second aspect of deficit control is economic growth. The country lacks behind its competitors in eastern Europe. Things here seem to happen at too slow a pace, often with a watered down impact, which is conducive to entrepreneurs losing heart.
The leading story today is a case in point. After launching a venture capital fund with so much fanfare in the last budget, the idea has barely taken off. Six months after the budget Government is still contemplating the setting up of yet another entity to eventually administer the funds.
Bureaucracy remains a multi-headed monster that bites and bruises businessmen seeking investment opportunities. To move ahead the country requires a long term vision accompanied by a list of actions to help achieve the final goal.
Adopting the Euro has its advantages. If Malta is to fully participate in the single market and benefit from the positive spin offs emanating from it, adopting the Euro as early as possible is a must. We cannot be left out from the race which sees our competitors adopting the Euro before us.
But achieving these advantages has a cost and Government is cautioned to tread with care. Including one-off incomes from privatisation to bring the deficit to within acceptable limits is a gimmick. Income from privatisation will just add to the illusion that we are controlling our deficit while leaving the structural imbalances intact.
Easy solutions do little to evoke trust and at a time when trust is a crucial element for navigating the difficult waters ahead, Gonzi has to be careful. Arrogance must not be confounded with determination and decisiveness must not mean divisiveness.
The road to the Euro is a difficult one indeed.