Democracy in times of ‘war’

Recent events in Italy and Greece - where elected governments have been supplanted (albeit legally) by unelected technocrat administrations, on the pretext of the economic crisis - cannot but raise serious questions about the state of Europe's democratic health.

But while the talk in Europe is all about austerity measures, and drastic action to salvage the eurozone and avert a financial cataclysm, here in Malta the flavour of discussion has been... rather different.

Oblivious to all concerns about the EU's dubious political direction, the Maltese media are currently busy dissecting last week's budget, and asking themselves whether it was 'generous enough'. Something, somewhere seems to be amiss. Is it possible that Malta - a part of the EU since 2004 - remains so utterly cut off from European realities and concerns seven years since accession?

Among those who have noted this discrepancy - perhaps unsurprisingly, given both his economics pedigree and the fact that he militates within Labour - is Edward Scicluna, MEP.

Like the others in my immediate circle, I too am affected by this apparent insular malaise. But before turning our attention to Budget 2012, I feel I have to ask Scicluna for his views on the worrying trend that has seen democratic European governments 'sacrificed' on the altar of economic necessity. In this respect, the economic crisis seems to have hammered home the point that international markets are now much stronger than politics, and - as we saw in the case of Italy and Greece - can weaken and ultimately destroy governments altogether. How democratic is this situation, considering it has resulted in two 'appointed' unelected governments?    

Scicluna answers my question with a somewhat disturbing question of his own:  "How democratic was the interim governing council in Libya?"

Fair enough, I counter; but there is a slight difference. Libya's transitional government was the result of a civil war...

Scicluna however disagrees that the two scenarios - war and economic crisis - are all that different, at least for the purpose of analogy. According to him, Europe  considers itself to be 'under siege'.

"As Germany's Finance Minister Schauble told me in the EP the other day: 'We are under attack'," Scicluna explains. "In this context, a transparent transitory 'rule of law' - made up of technocrats, yes, but with the consent of the country's president, and the elected members of parliament - can be justified given the dire circumstances. That they were pushed into doing so by creditors is an unavoidable fact of life..."

Scicluna draws another analogy, this time between the health of an individual and the health of a country's political system. The less healthy the individual, the more restraints are inevitably placed on the 'rights' he would otherwise enjoy when healthy. "Let's face it: my rights as a patient on a bed in the hospital's Intensive Therapy Unit would be expected to be more circumscribed than when I am in the street..."

If I understood correctly, then, Europe is being forced to accept unusual and arguably extreme situations as a direct consequence of its poor economic health. On paper this seems reasonable: but I am uncomfortably reminded of all the Eurosceptic argument against accession prior to 2003. Ironically many of those came from Labour under Alfred Sant, in what now seems like a distant and almost forgotten age. Could it be, however, that the Eurosceptics are slowly being proven right? After all, they now claim that the Monti and Papademos governments have vindicated their traditional arguments that the EU ultimately aims to supplant national sovereign governments with a centralised, unelected Brussels technocracy...

"Yes, Eurosceptics are having a field day," Scicluna freely admits. "And although I disagree with their tenets, I find they do occasionally come up with a lot of sharp observations which other, more democratic groups should heed. Even the Church finds use in appointing devil's advocates..."

Which of these concerns resonates most with Scicluna? In reply, he points towards a functional problem within the structures of the European institutions - structures which are arguably too cumbersome to respond to the lightning pressures of modern economic forces.

"Our major concern in the European Parliament is that the essence of democracy requires adequate time to take its proper course, and cannot compete on equal terms with computer-fast, real-time financial markets. That is why the analogy with democracies in time of war is more apt in this instance..."

Speaking of modern economic pressures, I draw Scicluna's attention to a recent phenomenon that has proven to be something of a bane to Western democracies: international credit agencies, which appear to have somehow assumed a Godlike ability to radically affect (for better or for worse) a country's economic prospects with a simple stroke of a pen. For instance, Moody's recently downgraded Malta's investment rating... just as Standard and Poor's did to the USA. This brings me to a question that has troubled me for some time. Why do we so attach importance to agencies like Moody's? Not just investors and governments... but also the media, which automatically catapult credit agency ratings to the status of front-page news. But are we over-inflating their importance? Who are these people, and how independent are they really? And why is their assessment of an economic scenario - so notoriously subjective at the best of times - now considered the be-all and end-all?

Scicluna acknowledges that the blind trust in such agencies may sometimes be misplaced. "Reports by independent research institutes presented, to our EP committee, show these rating agencies to have the workings of a cartel with common ownership and a series of gross misjudgments," he remarks. However, he quickly adds that now is not the ideal time to investigate them.

"Europeans will not appear credible in taking any drastic actions to muzzle the current agencies, just because they are issuing a number of downgrades during this crisis," he warns. "That time has to be in the future when we would be more clear-headed..."

Turning to the budget, I point out that Scicluna's own public reactions and assessments have to date been noticeably less critical than others within his party. Naturally he has expressed reservations; but Scicluna has been conspicuously more generous than some of his colleagues...

He keeps up this tradition by acknowledging the positive aspects of Budget 2012.

"This Budget has tried to do many good things," he admits. "Definitely, one cannot argue about its various good intentions. It shows that it is convinced that small enterprises need to be helped in specific ways supported by funds; that it is in the economy's interest to increase its EU-wide record low female participation rate, and that giving financial incentives to old people to stay at home eases the burden on the government and therefore makes economic sense...

"But the Minister cannot afford to miss the elephant in the room. Malta has been handed a Warning Letter from a newly un-muzzled and fierce Northern EU Commissioner, underlining specifically the words 'convincing', 'sufficient' and 'permanent' in connection with this Budget's fiscal measures..."

He is of course referring to Commissioner Olli Rehn, who recently clashed with Finance Minister Tonio Fenech over the latter's 'optimistic' predictions for economic growth and deficit reduction. Specifically, Rehn warned Malta (among five countries) to take "convincing evidence over sufficient, permanent fiscal measures" to reduce deficit and debt.

Scicluna argues that Fenech's response was untoward. "Now, to come up with a Budget presenting a number of 'one-off' fiscal measures, built on top of an obviously unrealistic growth scenario, you have to be either arrogant or foolish," he asserts. "While the markets all over want eurozone countries to eat humble pie this Budget's economic language effectively is out of synch with that of the rest of the eurozone..."

Sticking to this difference of opinion between Commission and Maltese government - or as Scicluna describes it, the elephant in the room - and it arguably boils down to how one calculates such things as revenue and debt. Rehn predicts that Malta's deficit will be around 3.5%; Fenech insists he can reduce it to 2.8%. Which is the more realistic proposition? And what concrete measures does Scicluna see in this budget (if any) that support the finance minister's prediction?

"Let me put it this way: a tiny drop in the growth figures will contribute to a larger deficit and debt figures, because the latter indicators are ratios with a common denominator - the Gross Domestic Product, apart from the fact that revenue outturns will be lower. In this situation it is Malta which should present prudent - and, why not, conservative - growth estimates, and not the EU. In the eye of a storm it is better to be over-reefed than not, since there are no risks in being over-cautious, but enormous dangers if you are caught with full sails..."

Seeing the blank look on my face, Scicluna volunteers a slightly less arcane reply: "The GDP forecast is the most crucial. Its growth or otherwise can be a determining factor for all the expected revenues: income tax, national insurance, VAT, etc. Projected new revenues will not materialise without growth. Furthermore, since both the deficit and debt indicators are ratios, if the GDP grows faster that the government's financial shortfall (i.e., the deficit), or faster that the absolute value of the debt, then both indicators would fall. For instance: the absolute value of the debt in Greece has stopped rising, but since their GDP actually fell by a sizeable amount their debt to GDP ratio has gone up..."

Even without this crucial factor, Sciculna points out that Fenech seems to have forgotten a certain reality underpinning all present and future administrations of government.

"The Minister should be aware that the so-called 'six-pack' legislation we passed through Parliament has ensured that from now onwards there is only one 'hymn book' or economic model which over-rules those of the eurozone member States. That economic model belongs to the Commission..."

And yet, it is a moot point which of the two - government and opposition - is the more detached from reality. Reacting to opposition statements, government accused Labour of being unaware of the economic crisis, and that it doesn't know how the budget works. As both an economist and an MEP, how does Scicluna respond to this criticism of the party he now represents?

He smiles. "The government reminds me of Warner Brothers' Sylvester the cat, triumphant over some harebrained trick to catch Tweety-bird... while completely oblivious to the enormous Butch the bulldog watching over it. The government must stop this farcical situation. It is the government, and not the opposition, which is being asked by the Commission and the world at large for credible plans. It cannot hide this fact by blaming the opposition for not supplying it with enough good ideas..."

Having said that, he acknowledges that it is the responsibility of the opposition to explain to the electorate how it intends to govern and what are its broad visions for the future.

"But to be asked for this program by the governing party, which is having its own problems about viable solutions, let alone its own electoral programme, is indeed very rich..."

Perhaps inevitably, exercises like the Budget tend to have two dimensions: one fiscal and economic, and the other political. At moments, the borderline between the two seems to blur... for instance, the exchange of blows between government and opposition over the 'responsibility' or otherwise of such pre-electoral promises as the tax-band revision of 2008.

Government now argues that should this revision have been implemented as promised in 2008, it would have cost €40 million. Instead, Budget 2012 introduced an innovative 'parental tax-band' that (Fenech claims) will cost €10 million. How does Scicluna rate this initiative himself: intelligent, or cosmetic?

"Politically intelligent but grossly inequitable," he replies. "Let me explain. The new tax band effectively reduces taxation for working married couples with children. If one wanted to reduce the burden of taxation, then all taxpayers should be affected. If one wanted to ease the family burden due to child rearing, then all families irrespective of status or income class should get the children allowance; and if one truly wanted to encourage women to join the labour market then all working women would get, say, a tax cut on their newly acquired incomes. This tax, however, is very partial in that it eases the tax burden on some taxpayers, on some families with children and on some working women. Definitely one cannot justify this measure merely on economic grounds."

And let me guess: that leaves us with political grounds, right? Scicluna's expression makes it clear that no answer is necessary.

Returning briefly to the global economic situation, I close the interview with an admittedly speculative question: Italy is among Malta's top trading partners, and (as we can all see for ourselves) is currently facing internal turmoil. Should the spread on its bond yields continue to become unsustainable... what would be the possible fallout of contagion for Malta?

"Malta's government bond yields and spreads depend essentially on the local market sentiment. But in Malta there are no grey areas: either everything is black or white. If white, we snap up any bond - public or private, irrespective of its risk, and with few questions asked... if black, our tendency is to panic about something which, to an outsider, could have been foreseen. And then an unstoppable stampede takes place. A responsible government should ensure that it steers clear of the dangerous zones. It is definitely not the time to play games..."