Central Bank governor warns 'austerity courts negative macroeconomic spiral’

Addressing a national conference organised by Finance Malta, Central Bank Governor Josef Bonnici said that "fiscal consolidation across most of the euro  area carries the risk of downward macroeconomic adjustment," adding that    "in today's circumstances, there is the danger of a negative macroeconomic spiral."

Bonnici warned that "weak economic growth leads to reduced government revenue, which in  turn raises the deficit and debt ratios, and therefore may require  further budgetary tightening and austerity measures."

Higher debt-to-GDP ratios thwart corrective action, he said, in particular when growth is feeble. "And the higher the debt ratio, the greater the risk of a situation where the debt dynamics become unsustainable, such as when the growth rate of the economy falls short  of the interest rate paid on the debt," he added.

Still, it is "inevitable" that fiscally troubled governments should seek to cut their deficits, and with that comes economic weakness, he  said.

Nonetheless, it has to be asked whether the negative impact on incomes and employment can be mitigated, he said.

This could be possible  via "a judicious mix of government spending and revenue options so as to  reduce the depth and duration of the slowdown."

Increased use of EU cohesion and solidarity funds could be the answer here, he said, though he conceded that this would probably imply  an expansion of the EU budget.

Without mentioning countries by name, Josef Bonnici was cautious not to irk Germany, and remarked on how "not all member states are in a stressed environment, and  it may be possible to consider other financing options, especially where  bond interest rates in some member states are rather low, even below the  inflation rate."

"EU level solidarity and cohesion assistance may prove a crucial catalyst to the required structural  changes."

As markets continued to show unease following reports on an EU plan to counter an eventual exit of Greece from the eurozone, Bonnici said that "despite the efforts being made by policy makers across the European Union, the sovereign debt  crisis continues and its ramifications are still uncertain. The recent rise in Spanish yields and the turbulence in Greece are evidence of  this."