Joseph Muscat, Prime Minister, Government of Malta
Prospects of the economic, monetary and financial union in the global context
Malta, 5 April 2017
The prospects for European monetary union are fair. I believe the economic indicators are encouraging, and following the double blow of the global financial crisis and the sovereign debt crisis, I believe we can safely say that economic recovery in the euro area is moderate, but underway. Major forecasters project steady but unspectacular growth in the years ahead. Employment is expanding, but unevenly so, and in some countries unemployment is still unacceptably high. Fiscal imbalances are being corrected, but outlook risks are on the downside.
Growing protectionism and the retreat from international organisation pose, in my opinion, the real threats. Brexit is a significant source of uncertainty, even though I am more positive than others that the process will be plainer and less bumpy than many seem to expect. The global situation is unhelpfully complex and riddled by multiple tensions. Geopolitical tensions have intensified. Pressures relating to migration flows are relentless. Terrorism and the emergence of an intolerant, xenophobic populism are contributing to make this a very dangerous world indeed.
These few words should suffice to sketch the global context of the prospects and challenges of European economic, monetary and financial union.
Within the euro area, there are stresses along various fault lines. One of these is that different euro area member states face divergent economic situations, whilst sharing the same nominal interest and exchange rates. Secondly, while monetary policy is determined for the euro area as a whole, fiscal policy remains and should remain largely national. Thirdly, institutionally there is tension between the nation state and the supranational body stemming from the fact that the euro area is a monetary union, not backed by a common treasury. Fourthly, the single currency is embedded in a strong, yet incomplete, single market, and only a partial banking union. There are no easy solutions, as you all know. We need to devise mechanisms to allow for a greater rebalancing of the asymmetries among the euro area countries in terms of income and employment. Partly, this requires greater economic integration, as I said in your magazine; easier flows of labour within the euro area; and greater risk sharing, balanced against measures of risk reduction through financial integration, including the banking and capital market unions. National structural reforms are needed to recover or enhance competitiveness, offering more and better employment opportunities.
On the fiscal front, we clearly need to simplify rules. They have become too complex for ordinary citizens and companies to understand. We need more rather than less flexibility in national budgets, as these are economic shock absorbers. We need to enhance the qualitative dimension in our policies. Growth-enhancing investment, tapping idle labour resources and cheap financing, needs to be executed irrespective of fiscal position. Such investment would enhance rather than complicate long-term fiscal sustainability. Simultaneously, we may also need to increase the EU’s budget size – which is problematic given that the next budget will see 27 rather than 28 member states contributing – and reorientate it in order to allow for more redistribution between member states.
As we work to resolve these very complex issues, it is worth recalling some basic principles we often tend to sideline. The treaty calls for constant improvement of living and working conditions, the reduction of disparities across regions and closer union of peoples across Europe. We must admit that in recent years we may have focused too much on stability, at the expense of growth. Even when we have promoted growth, we may have given too little weight to redistribution of income and wealth. Europe goes beyond a single market. It must have a social dimension. Our decision-making processes need to be more open and transparent. We need to seriously listen to our citizens, understand their concerns, and communicate in ways that everyone understands.
I believe that this is crucial, also, for the financial services industry. Success is, I believe, possible. Take Malta: the smallest EU and eurozone member state. We are enjoying rapid economic growth, virtually full employment, an exterior surplus and contained inflation. This reflects welfare reforms that this government carried out to encourage more people to work, increased public investment, a boost in foreign direct investment, and a major energy sector overhaul. This has taken place against a backdrop of steady improvement in public finances, which are now in surplus for the first time in a generation.
As we move forward, we must not forget Europe’s advances over the last 60 years. By and large, this continent has enjoyed unprecedented peace, prosperity and growth. Democracy has taken root in those countries that did not have it. We have established economic freedoms to trade, to invest, to work, and many of our citizens enjoy and value these freedoms. We have a single currency that has gained popular acceptance, in Europe and in the world. It is time for us to declare that we will do whatever it takes to protect the EMU, while unifying economic policies, bringing prosperity and social justice to all our people.
Thank you very much, and I wish you all the best for this conference.
EU – European Union
EMU – Economic and Monetary Union