Tough times ahead

Last week, the former president of the Euroepan Central Bank, Mario Draghi, presented the preliminary findings of the competitiveness report, to the European Parliament. This week, the European Commission convened a press conference, with the president of the EU Commission, Ursula von der Leyen, taking centre stage, along with the author of the competitiveness report.

In my preceding article, I wrote about the importance of monopolies to innovate. This related to the military industry, citing also Schumpeter’s economic doctrine. In part, I have to agree with Mario Draghi, that the European economy is dying. Indeed, we promoted polices for decades that do not make sense in these day and age. We have been doing the same budget lines, and exercises in conciliation for decades, now. On one hand we have the EU Parliament attending conciliation meetings in November to trim budget lines where it is needed and replenish others that are not. The entire conciliation period is a complete circus. There is no scientific analysis, and impact assessments on the reduction or replenishment of certain budget lines, within the MFF.

The problem emanates with frugal countries asking for cuts, while other member states requesting additional spending for Cohesion Policy. Meanwhile, the European Parliament groups join the chorus for more spending. I am glad that Mario Draghi did not mince his words. Yes, the European economy cannot compete with that of the USA and China. However, being entangled, indirectly, in a war with Russia, is going to make it even worse or tougher to achieve the results that were inked on paper. To be able to manage the pandemic crisis, the EU Commission came up with the recovery plan, which money, is required to start being paid by the respective member states in a few years’ time. Whereas the EU needs additional funds to invest in military production, and technology, as well as additional funds to use as budget guarantees to transit to greener practices, in tandem, the EU needs to preserve the governance of the Euro.

Certainly, member states need to repay the money disseminated, as part of the 2020-2027 MFF. This means that each member state, that benefitted from the recovery funds, is required to start paying the debt in 2027/2028. To finance the NextGenerationEU, the EU Commission was required to borrow funds on the market, which subsequently disbursed to member states. Obviously, to finance the Next GenerationEu, the EU Commission was required to come up with a plan of new sources of revenue beyond the traditional own resources, of VAT, customs and GNI. Let’s for a while leave aside the new own resources relating to national contributions based on non-recycled plastic packaging waste, which required us to introduce the BCRS, and recycling concepts in Malta.

The new sources of revenue that were proposed by the EU Commission, entail three new sources for the coverage of the grants’ repayments under the NextGenerationEU, which includes an Emissions Trading System own resource, a Carbon Adjustment Mechanism own resource, as well as a temporary statistical based ow resource on company profits. Frankly, the entire system requires a total overhaul. If we need to redirect investments that require energy intensive productions at a cheaper cost, the only way to do it is either moving productions north, where renewable energy is better, or south due to the abundance of solar. Also, France might be able to take a piece too with nuclear energy, and ditto Italy if it keeps on investing in it. However, Germany would be badly hit, because they have been dependent on LNG for years.

Crucially important is to note that the economic stability of some leading member states would be jeopardised unless they invest in other sources of energy. I think Germany’s economic and security stability, would be put at test. In essence, we require a treaty change, which would cover more revenue. Hitherto, revenue was always within the member states’ competence. Opening it up to other institutions would further endanger member states’ autonomy. Certainly, the EU Commission is more interested in the areas of CFSP, where unanimity is required. In part, when it comes to revenue, the EU Commission already managed to weaken member states’ autonomy by involving the OECD for a minimum global tax rate.

However, Malta must take note of these changes, and the report’s narrative. As a small open economy, we must be careful to make sure that we attract new industries. Let’s forget, though, about attracting some of the energy intensive investments, unless we do not expediate the upgrade of the electricity grid distribution, and tap into more renewable energy sources, including offshore windfarms. If we do not invest in offshore renewable energy, even Malta risk losing its competitiveness. We are already late on the competition to transit very-high and high-risk sectors to greener practices. And we must avoid falling behind due to new competition in renewable energy. 

To conclude, from 2027 onwards, besides our own national debt, we must start repaying the NextGenerationEU funds, which would further increase the government repayments. Whether this will be offset through new own resources we still need to see. However, what is certain is that Malta requires a national plan, on how to smoothen the impact of the green transition. This must include which sectors will be affected most, which industries must be kept, and which deficiencies require a comprehensive assessment to transit our economy. What is certain is that Malta requires a forum that bring together, engineers, geologists, cliamte experts, economists and sustainability investors to be able to attain a smooth transition.

Ultimately, politicians cannot be the experts of each sector. They are elected to give guidance and to take decisions. But they do require such advice, else we are doomed to fail.