Mitigating for the economic downturn – Vince Farrugia

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Vince FarrugiaIt is really unfortunate that we are celebrating Malta’s fifth anniversary as an EU Member state under the dark clouds of an economic downturn.

The last five years have served us to bring forward a new generation of young Maltese, qualified in all EU matters and who’s prime task has been to ensure that our small country really makes the best of our European Union membership.

This task was tremendous, not only because we are so small compared to all other EU member states and our manpower is so limited, but the work is so extensive.

Only those who are well versed in EU matters and deal regularly with EU Institutions know how difficult it is and how far we have progressed in such a relatively short period of five years.

We have above all learned how best to operate and prioritise our strategies, how to focus on what is achievable and concentrate on doing what is right within our very limited resources. 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.

In most EU countries we are respected and admired and 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 that our people have done here and in Brussels, to give our country such a good start now needs to be strengthened.

The next five years should see us enhance our position in the EU even further, in spite of the negative economic phase Europe, the world and little Malta are facing at the moment. I am confident that the next five years will see the real leap forward for our economy. So much work has been done to restructure and reform our systems and our ways of doing things 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, and 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. Indeed the situation could have been as 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 the economists had assessed and, at least up to now, had proved that the predictions of our econometricians are not correct, and secondly, our economic managers are responding much better to the crisis than Joseph Muscat thinks and believes.

Labour Party candidate Prof Edward Scicluna had predicted only last December he 16th, 2008, that for every 2% drop in exports the Maltese economy should shed 1000 jobs directly and another 500 jobs indirectly, an incredible 1500 jobs for every 2%. If the restructuring did not work and Government was as asleep as the Labour Opposition and the GWU media keep saying, then today according to the econometric model of Prof Scicluna we might by now be in an extremely serious situation.

Given that our exports over the last months have dropped by 20%, in line with what has been happening in international trade, should the Professor’s predictions have materialized then we could have lost already 15,000 jobs. The truth is however that over a 12 month period, and not over the six months since the European economies on which we highly depend started to fall in economic recession, 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. I believe that it is our responsibility as constituted bodies, economists and leaders of business to help and co-ordinate with the Task Force to ensure that within the limits of our national financial resources we get the Task Force to implement what we prioritise as achievable. There is so much that is being said and written.

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 major problem that besets us is the budget deficit. At 4.5% of GDP the budge deficit is like an albatross around our neck. 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, that sector for which I have fought to relieve from excessive bureaucratic burdens and to obtain for it more space to grow has, in spite of all the hurdles, 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, but this growth. 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. I could go on giving figures for the financial institutions and for the Freeport. As an economist I know the situation is serious, but I know solutions do exist and serious people are working on them. I wish them success.

I was in their shoes years back when recession hit us and I know how difficult it is to steer our small, extremely open economy, through difficult and adverse economic situations dominating the international scene.

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 doing well to provide limited and focused assistance to sustainable manufacturing enterprises who have been very adversely effected by the current international trade downfall. Government is right also 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 so very 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.

It cannot be emphasized enough that Government policy action to mitigate the crisis should be within the context of the need to ensure a sustainable fiscal position. In the short term Government does well when it concentrates on measures which have the largest multiplier effects, particularly if geared towards capital expenditure that lead to targeted measures to safeguard jobs. In the second instant government does well to concentrate on what sustains economic growth. This is really an issue of competitiveness.

We need to further address the many market imperfections which may be contributing to higher inflations. For so long I have identified our fish and vegetable markets and our policies towards agriculture and fishing. 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 dot 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.

Vince Farrugia is Director General of GRTU Malta Chamber of SME’s He is a European Parliament Candidate for the PN/EPP-ED

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