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How Malta Weathered the Global Financial Crisis

Malta news, Malta economy, Malta corruption, Eurozone crisis, Eurozone economies, Daphne Caruana Galizia Malta, Lawrence Gonzi Malta, Malta Labour Party, Malta passports for cash scheme, Malta money laundering

Valetta, Malta © In Green / Shutterstock

April 16, 2019 01:01 EDT

In this edition of The Interview, Fair Observer talks to Lawrence Gonzi, the former prime minister of Malta.

Nestled in the Mediterranean Sea between Italy and Tunisia, Malta is the smallest member state of the European Union, having joined the bloc in May 2004. A strong economic performance, especially in the face of the 2008 global financial crisis, and high levels of social capital have helped Malta climb to 19th place out of 149 nations on the Legatum Prosperity Index. The country performs best on safety and security, social capital and economic quality markers in the rankings. Malta adopted the euro as its official currency in 2008, replacing the Maltese lira, and survived the eurozone crisis due to low debt and sound banking practices.

Freedom House refers to Malta as a “parliamentary democracy with regular, competitive elections and periodic rotations of power” where civil liberties are widely respected. In its description of the quality of democracy in Malta, Sustainable Governance Indicators points out the progresses made in freeing state-owned media from government influence, rights that have been granted to the LGBTQ community and the improvement of gender-equality protection.

However, not all is sunny on the island. Malta suffers from endemic corruption, with Transparency International’s Corruption Perceptions Index 2018 ranking it 51 out of 180 countries in the world, scoring worse than Rwanda and Georgia in terms of the perceived public sector corruption. In November 2018, the European Commission adopted disciplinary procedures against Malta for failing to apply the European Union rules to prevent money laundering. Its highly controversial passports-for-cash scheme continues despite international outrage.

In October 2017, Daphne Caruana Galizia, an investigative journalist who reported widely on the scheme as well as widespread corruption, nepotism, money laundering and organized crime in Malta, was killed when a bomb detonated in her car. The assassination carried out in a EU country where the journalists are supposed to be unconditionally protected sent shock waves across the continent, yet the case remains unsolved.

Despite the controversies, Malta is a thriving nation that owes much of its economic and political progress to the leadership of Lawrence Gonzi, who served as the prime minister from 2004 to 2013.

In this edition of The Interview, Fair Observer talks to Gonzi about Malta’s economy, foreign relations, the response to the global migration crisis and its bonds with the European Union.

The text has been edited and condensed for clarity.

Kourosh Ziabari: You served as prime minister of Malta for nine years, introduced many reforms, spearheaded Malta’s adoption of the euro and also signed the Schengen Agreement. How do you evaluate yourself now that you are not in the office? What were some of the most notable achievements and some of the most pressing challenges?

Lawrence Gonzi: I took my oath of office as prime minister of Malta on March 23, 2004, practically five weeks before Malta joined the European Union on May 1. Joining the EU was the achievement of a long-standing vision embraced by my party — the Nationalist Party — in line with its policies centered around the concept of a social market economy.

The very first challenge: achieving national consensus. EU membership was an achievement against all odds. Apart from the fact that Malta would be, and still is, the smallest member state, the question whether to join the EU or not was an extremely controversial issue which had been at the forefront of Maltese politics at least since 1987, with Malta’s second largest political party, the Labour Party, determined to do anything and everything to undermine this political project.

I will not go into the details of the enormous effort my predecessor, Dr. Fenech Adami, had to put into the negotiations for membership of the EU. But I must highlight the fact that we managed to negotiate a package that was judged by everyone as the best amongst the 10 new members states that joined in 2004. This allowed us to put the question to a referendum in 2003 with the electorate fully informed about the advantages — political, economic, social and cultural — as well as the challenges that would face us both in the event of joining the EU but also in the event of a negative vote.

Today, 15 years later, notwithstanding the financial crisis, the Arab Spring, the rise in the price of oil, the migration crisis, Brexit and all the rest, there is ample evidence that the challenge to achieve national consensus in Malta on EU membership has been overcome. The Malta Labour Party has had to change its official policy and adopt a more pro-EU approach. This is confirmed by a recent Eurobarometer survey, released in December 2018, showing that the number of Maltese who have a positive opinion on the European Union is the highest in the EU and stands at 95% of the population.

I list this achievement at the top of what could be a much longer list, because it is a clear indication of the progress registered by Malta during the past years as a result of our ability to translate membership into real and effective improvement in the quality of life of our citizens.

I am personally a staunch supporter of the dignity of every human person, and I have never had any qualms to translate this into my migration policies. I have gone on public record and stated that the dignity of one single person arriving in Malta on a dinghy has the same value as the dignity of one single person arriving on a five-star luxury cruise liner.

It is no secret that Malta has no natural resources of its own. We suffer the disadvantages of being an island on the periphery of our most important market, which means that our manufacturing sector needs to bear the costs of importing raw materials and re-exporting the finished products to the European market, but remaining competitive in quality and price. If one factors into this equation the fact that we do not have sufficient water resources to service our main economic sectors, which includes, of course, tourism, then perhaps one starts to understand the daunting challenge we face in maintaining our edge on our competitors.

Chief amongst these water-related challenges is the realization, a few years back, that we could only service our industries by transforming sea water — of which we have plenty surrounding us — into drinking water using a technology called reverse osmosis. I suppose I need not point out that this is an extremely energy-hungry process, which means that when the price of oil reached $140 dollars a barrel in 2007, we got hit twice over, because energy needed to be consumed not only for our electricity needs, but also to generate the required water resources for our own needs and for our water-hungry industries.

Thousands of jobs depended on our ability to overcome these complex challenges, all of which were interrelated in one way or another. It is with a sense of pride that I look back on the success of our policies which allowed us to continue to provide universal free health care, universal free education right up to tertiary levels, including paying a stipend to our students who chose to continue their post-secondary studies, as well as a relatively strong social safety net that supported the most vulnerable in our society.

Ziabari: During your second term as prime minister, you implemented successful policies to deal with the repercussions of the economic and financial crisis of 2008-09, including introducing new job opportunities and attracting foreign investment. German Chancellor Angela Merkel praised your economy as “excellent.” How did you make Malta a popular destination for foreign investment? Tell us more about the policies you put in place to overcome the economic crisis that had hit Europe.

Gonzi: A small island such as ours allows us to familiarize ourselves with the challenges and opportunities a lot quicker than anyone else. It allows us to design specific solutions to individual problems when larger countries are forced to go for generalized solutions. It gives us the opportunity to be flexible when dealing with individual sectors of our industry. It provides us with more detailed knowledge of what is truly happening on the shop floor and, therefore, it gives us better tools to ascertain that the picture we are being given is indeed a real one and not an inflated version.

Of course, there are downsides and risks, but on balance, this flexibility and speed of action gives us an edge on our competitors.

I personally experienced this during the financial and economic crisis that hit Europe and the rest of the world in 2008. As everyone recalls, millions of jobs were lost, countries that were considered to be paragons of economic success — the so-called economic tigers — faced a major banking crisis, collapse of their housing sectors and a credit crunch that suffocated all growth. Austerity politics dominated the political landscape, with the consequent heavy impact on the middle classes and especially on those who were amongst the most vulnerable in our societies.

The facts recognized by European political and economic leaders indicate clearly that Malta managed to sail through this crisis without suffering the damage that a lot of other countries, some of whom are our close neighbors, have had to go through. The reasons are several, but I will focus on two very specific ones.

The first is the fact that very early in my premiership I decided that Malta should join the eurozone and adopt the euro as quickly as possible. For the moment, suffice it to point out that joining the eurozone required us to go through some tough restructuring of our economy in order to achieve what is known as the Maastricht criteria.

I spearheaded this process from day one, sending a very powerful message by taking a highly unusual political decision as prime minister, namely keeping the finance portfolio under my wing. In essence this sent a message to our civil service, our private sector and our local and foreign investors that from that point onward, restructuring and modernizing of the economy was the most important item on our political agenda for the next four years.

Analysts will understand that this restructuring took place during a period when the global economy was moving at a relatively healthy pace (2004-07). This meant that those thousands of jobs that were lost because of our aggressive restructuring program — closing down of non-productive government owned industries such as our ship-building industry and privatizing the ship repair side of that same industry is one example — were compensated by the creation of other new niche sectors that suited the abilities of our present and future workforce [such as] the aircraft maintenance sector, pharmaceuticals, the care sector and financial services sectors are typical examples.

All the above means that at the start of the financial crisis in late 2007, Malta had just completed its most important restructuring phase, it was about to introduce the euro on January 1, 2008, and was therefore well prepared to weather the perfect storm that was brewing globally.

But the second reason why we weathered the storm is just as, ad possibly even more, important. It is the fact that our size allowed us to understand earlier than others what needed to be done to support our industries and protect our competitiveness while remaining resilient notwithstanding our vulnerabilities.

A couple of examples will prove my point. As happened in other countries, manufacturing was hit hard during the latter part of 2008. Companies’ order books suddenly and quickly dried up. European and non-European employers were consequently forced to lay off their workforce and, in some cases, even faced bankruptcy. I recall the sleepless nights my colleagues and I lived through each time we were approached for help by some of our most important employers on the island.

Here is why “small is beautiful”: Our economic realities allowed us to sit down with individual CEOs in order to understand what was required for them to keep their companies operating on minimum resources but without sacking their employees. We were able to provide financial and technical support for employers to retrain their employees and to keep them on their books during that very lean period instead of releasing them with redundancy payments.

This was no social benefit. It was an intelligent move which allowed our manufacturers to retain their experienced workforce and to kick-start their operations as soon as our main export markets started to regain lost ground. And they managed to do so a lot earlier than our competitors, which meant that our order books were already full when others had to re-employ and retrain workers at enormous cost.

Ziabari: How challenging was it to achieve the Maastricht convergence criteria and join the eurozone?

Gonzi: Joining the single currency was one of the most important obligations undertaken by Malta, together with the other nine candidate countries in 2004. The Maastricht criteria included four so-called economic convergence criteria, namely price stability, sound and sustainable public finances, exchange rate stability and long-term interest rates. Adhesion to the eurozone and, consequently, adoption of the euro, was not possible if the applicant country failed to achieve any one of these criteria for whatever reason.

The starting point for Malta at the beginning of my premiership in 2004 presented what appeared to be some insurmountable difficulties. For example, the second economic criteria established a maximum annual budgeted deficit of not more than 3% of GDP and a downward trend in national debt toward a target maximum of 60% of GDP. In Malta’s case, the official figures for the year ending in December 2003 indicated a record level at 9% of GDP, whereas the national debt in 2004 was registered at 72% of GDP.

The enormity of the challenge to achieve these criteria was as clear as crystal right from the very start. On the other hand, I was fully aware of the fact that Malta’s then currency, the Malta lira, although quite stable and resilient, remained the currency of a small nation that depended very much on external factors dominating its most important export markets. The vulnerabilities were there for everyone to see, especially in the event of worst-case scenarios.

Malta’s competitiveness was another important consideration. Our most important markets were part of the eurozone, which meant that we were suffering from extra conversion costs every time Maltese business dealt with euro-denominated counterparts. Our analysis indicated to us that joining the eurozone would improve our overall competitiveness and reduce costs for our businesses.

Reducing the national deficit from 9% to below 3% in less than three years meant that we had to bite some nasty bullets: downsizing the ship repair business; closing down of non-productive government subsidized entities; privatizing certain industries which could be better managed by the private sector; freezing all government employment and introducing early retirement schemes for excess public sector employees; increasing the retirement age from 60 for females and 61 for males to 65 years of age for both sexes; reducing unsustainable subsidies on electricity and water rates whilst incentivizing the use of alternative energy; reducing the number of public holidays and a host of other similar initiatives — all of which were designed specifically to increase Malta’s productivity, deliver better efficiencies and maximize on our potential to attract foreign and local investment.

This is why, as already stated, during my first term I decided to retain the finance portfolio under my wing. It proved to everyone that there was political determination to walk the walk.

From early on we realized that we could only achieve our targets if we managed to persuade Maltese families and businesses to take ownership of the euro project, as this would be in their very own best interests. We decided to set up a National Euro Changeover Committee composed of several well-known business personalities, including some individuals with strong executive track records. One of the more important tasks this committee had to address was related to price stability issues and avoidance of inflation as a direct consequence of the changeover. This was a lesson we learned from in some cases bitter experiences of our neighboring eurozone countries that had adopted the euro in the past years.

The nightmare scenario, which was a theoretical one in 2004, became a reality as soon as the global economy suffered this century’s worst financial and economic crisis early in 2008, practically coinciding with Malta’s adoption of the euro on January 1. Thanks to the euro — but, more importantly, thanks to the restructuring and the reforms introduced in the preceding three years — Malta and its people managed to sail through this perfect storm in a manner that allowed it to maximize on its potential in the subsequent years when growth outpaced that of our larger and more important competitors.

Ziabari: The Libyan crisis is said to have been a major foreign policy challenge for Malta under your leadership. Have the efforts to rebuild Libya been successful? What is your opinion on the role of international bodies, including the United Nations, in restoring peace and stability in the war-hit country?

Gonzi: The Libyan crisis was a watershed moment for the Maltese nation. For the best part of the last 50 years, Malta has had to develop a working relationship with Libya and its leadership not least because it remains our closest neighbor, but also because thousands of Maltese have invested in the Libyan economy and have spent a long number of years working with and amongst the Libyan people.

There is no doubt that the people-to-people relationship with Libya was and continues to be one based on genuine friendship and trust. But the government-to-government relationship went through some roller-coaster moments, especially since the alternating administrations in Malta —Nationalist vs. Labour — over the past 50 years differed substantially both in substance and in political perspective. For my party, Malta’s European vocation was always a priority, but the same cannot be said for the leadership of the Malta Labour Party.

Whatever the case, this relationship was sorely tested during the Arab Spring and the popular uprising in Libya in February 2011. Details of my personal experience during those difficult moments are extensively explained in the book, Gonzi and Malta’s Break with Gaddafi – Recollections of a Premier. At the time we earned the plaudits of some important world leaders for the way we handled the thousands of refugees escaping from the horrors of [Muammar] Gaddafi’s wrath at the uprising.

But today I look back with sorrow and frustration at a missed opportunity by European and world leaders who all failed to follow up on the nice words that were expressed during and immediately after Gaddafi was toppled. At the time, the fledgling Libyan administration pleaded for the release of the billions of dollars of Libyan funds that had been frozen in bank accounts all over the world as a result of the sanctions authorized by the United Nations during the crisis. Unfortunately, those pleas fell on some very deaf ears, and that fragile and weak administration was unable to pay its civil servants, its teachers, its judges, its police, etc. The consequences are there today for everyone to see.

Libya and the Libyan people deserve a lot better. They have the natural resources to allow them to rebuild their economy, apart from a rich patrimony and heritage that is unique in the Mediterranean.

As always, it will be up to the Libyan people to seek out the best solutions for themselves and their families. I only hope and trust that the international community, including Malta, will continue to provide the encouragement, support and expertise required for national reconciliation and reconstruction that is so sorely needed by this neighbor of ours.

Ziabari: How has Malta been affected by the global migration crisis? Is public as hostile toward immigration as in Hungary or the United Kingdom?

Gonzi: UNHCR statistics for Malta show that during the two terms of my premiership, from 2004 to 2013, a total of 16,406 asylum seekers arrived by boat on our shores. That figure represents an annual average of 1,640 arrivals by boat.

The impact of these figures needs to be measured against the fact that Malta’s population is less than half a million, and that our island is a nation that has the fifth highest population density per square kilometer in the world. In other words, the landing of a boat with 100 people in Malta is equivalent to the arrival of thousands in the UK or, for that matter, in any other major country in Europe.

The same UNHCR statistics quoted above show that in the subsequent four years — 2014 to 2017 — this average figure decreased to 180 annual arrivals by boat. With this dramatic decrease in numbers one would have expected the public negative perception regarding the issue of illegal migration to adjust itself and diminish proportionately. However, the opposite has happened, and the perception remains generally hostile notwithstanding the fact that our economy is becoming increasingly dependent on the economic input of this vulnerable group of persons.

I am personally a staunch supporter of the dignity of every human person, and I have never had any qualms to translate this into my migration policies. I have gone on public record and stated that the dignity of one single person arriving in Malta on a dinghy has the same value as the dignity of one single person arriving on a five-star luxury cruise liner. Indeed, I recognize the fact that I could have done much more to alleviate the plight of illegal migrants arriving on our shores during my premiership.

But I also recognize the fact that our European Union colleagues failed us on this score. We received absolutely no support from the individual member states even though they were perfectly aware of the fact that we were facing the brunt of this wave of migrants who in most cases landed in Malta by mistake as their original destination was mostly toward northern European states. This lack of solidarity by individual member states has poisoned the way our electorate perceives this challenge, to the extent that today’s surveys continue to indicate this issue as one of their topmost concerns.

Unfortunately, few, if any, of today’s Maltese politicians have the courage to point out to our electorate that the contribution of irregular and regular migrants to our economy has gradually become an absolute necessity. Our construction industry, our catering establishments, our environmental services and nowadays even our care services have all become reliant on the active presence and participation of non-Maltese and non-European migrants living and working on the island.

Ziabari: How do you think Brexit will change the politics of the European Union and the EU-UK relations? Did the British people vote for leaving the European Union because they were unhappy with how their jobs were supposedly being taken by the immigrants, or were there other factors at play?

Gonzi: It is rather difficult for me to answer the second part of this question also because it seems that the British parliamentarians themselves are at odds as to the reasons why the British electorate voted in the way they did.

As far as regards the first part of the question, however, in my opinion there are two obvious outcomes so far. The first is the fact that as a result of Brexit, the remaining 27 members seem to have coagulated even more than ever before. Having been around the EU Council table for almost 10 years, I have experienced moments in time when disagreement between member states on some major issues threatened to weaken the institution itself. This issue of Brexit, however, seems to have galvanized member states in a manner that I have not seen for quite some time.

With regards to the EU-UK relationship, considering what we know presently, I sense that the two sides are caught in between two stools. On the one hand, the EU cannot afford to send a message that a non-member state will enjoy the same rights and privileges as a member state without shouldering the related obligations. But on the other hand, it is evident that the relationship between the two will necessarily have to remain based on a pragmatic approach in the full realization of the importance both sides represent to each other in economic, financial, social and cultural terms.

Ziabari: Are you personally concerned about the rise of far right in Malta? Parties such as Moviment Patrijotti Maltin and Imperium Europa are pursuing a nationalistic agenda, and their populist ideology seems to be dangerous for a multicultural Malta. What’s your take on that?

Gonzi: My short answer to this question is no. Fortunately, the vast majority of the Maltese electorate remains firmly located between the center-right, center and center-left of the political spectrum, and so far there is no indication that the extremes are gaining any relevant footing amongst us.

This does not mean that our politicians should be complacent in the face of statements that endorse extreme positions on issues and values that are part of what makes us Maltese and that have helped us to succeed against all odds even in the worst of circumstances. We need to learn the lessons that emanate from other countries of a similar lineage as ours and learn to avoid making the same mistakes.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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