Title

The Euro, Greece and Important Policy Lessons for Malta

Authors

Bernard Mallia

Abstract

The Euro, Greece and Important Policy Lessons for Malta, viewable here, was a research study conducted over May and June of 2010 to look at what was happening in Greece and how things were likely to unfold, setting out the implications for Malta’s policy environment in the process.

The main findings and salient points of this study were that the situation in Greece needed to get worse, before it got any better, and that Greece would still need to go through a Spartan period, even if it quit the Eurozone. The policy lessons drawn were that:[list type=”icon-check-empty”]

  • Reforms to buttress and sustain price competitiveness, boost productivity, and keep inflation and labour costs (both intimately linked in Malta through the COLA mechanism) in check needed to be pushed through;
  • Given that the single interest rate and exchange rate characterising the Euro encourages less-disciplined parties to a single currency area to run excessive fiscal deficits as market feedback (say through exchange rates) was non-existent, fiscal consolidation remained a top priority;
  • Devaluation could no longer serve as a politically-palatable option in the context of monetary union;
  • Resisting the temptation of policies that inflate public debts, especially in view of the fact that countries remain sovereign in fiscal matters within the EU, was going to be imperative;
  • Real estate bubbles were going to have to be contended with, one way or another, given that nothing kept the inflation of the bubble in check when it was building up. Whatever the policy response to this problem, it was going to have consequences either through dents in competitiveness or through a debilitation in the financial sector.