Shame on the Governor

Maltastar 

 

On the first Thursday of every November senior bankers and their business guests get together in a very formal environment for an annual dinner that is marked by a keynote speech delivered by the Governor of the Central Bank in the presence of the Minister of Finance.

This event has a meaning. The Governor of the Central Bank is meant to be above politics. He represents the autonomy of the Institution he heads tasked to protect the value of domestic savings from excesses of politicians. The fact that the speech is delivered a few days before the Minister presents in parliament the budget estimates for the following year continues to add to the meaning of the occasion.

The Governor generally takes this opportunity to make an assessment of the economic performance of the country during the first three quarters of the year and generally gives sound words of advice to the Minister to design his fiscal policy in the interest of the long term health of the economy and not for any short term political benefit.

“He delivered one of the most biased speeches making the case for Malta's membership of the EU”

So this year I was expecting from the Governor a real in-depth analysis of the true economic performance of the country and a strong admonition that the fiscal deficit cannot just be addressed by hiding it. I was expecting the Governor to condemn outright and in no uncertain terms, right there in the presence of the Minister of Finance and of the Director General of the Ministry, the practice to finance off budget social capital expenditure funded through commercial bank loans against government guarantee. I was expecting the Governor to rebuke the Minister for including as ordinary revenue engineered extraordinary funds invented out of thin air by a sale and leaseback deal of the airport terminal building.

 

 

This year, more than any other, in the run up to the last budget before the elections, is when the Central Bank is needed to stand up to perform its functions with all care and diligence. The primary function of the Central Bank is to defend the real value of our domestic savings from the consequences of government following too lax fiscal policy which would feed future inflation. This was the occasion for the Governor to give an overdue warning to politicians against playing with figures for short-term political gains. The Governor ought to know so well the games that were played by the same Minister in presenting the 1996 Budget, the last one before the 1996 election.

Oh how I was wrong! Instead of fulfilling his duty for which he is paid handsomely in medium five-digit tax-free money, the Governor decided to play the political game himself.

He delivered one of the most biased speeches making the case for Malta's membership of the EU. His logic was so perverse, his analysis was so subjective that anyone worth his salt must be seriously concerned that such an important autonomous post as the governorship of the central bank, is occupied by such a political acolyte shorn of the abilities of making a real objective analysis of the challenges facing the nation in making its choices for its future relations with the EU.

“The basic truth is FDI goes to economically stable and cost efficient locations permitting investors to get the best returns for their investments and guaranteeing stability of market access”

Still for all its offensiveness and failings the case made by the Governor has to be exposed for what it really is - a subjective analysis which twist facts, warps analysis and screws interpretations to lead to a prejudged conclusion.

Only this could lead us understand why the Governor chose Singapore as a benchmark of the need for a small state to adopt a regional approach to building its international competitiveness and then abandoned all logic which explains how Singapore has been so successful in achieving such targets without being absorbed into some political membership of a much larger organisation. No effort was made to explain how Singapore has achieved its successes purely through internal discipline and regional free-trade agreements.

Only prejudice could lead to conclusions that Switzerland has had to approximate its national laws with those of the EU as a precondition for access to its markets. The Governor, having lived in Switzerland for two decades, cannot be uninformed that Switzerland has had and continues to have free access to EU markets and is only approximating to EU laws certain aspects of common agreement; and this over a time scale which suits Switzerland and with safeguard clauses that leave Switzerland in control to slow down the process if such need should arise.

 

 

“The Governor has put to shame the organisation which we need to keep in high esteem to safeguard the stability of our financial system. He should resign!”

It is prejudice that leads the Governor to conclude that because other applicant countries have seen a surge in FDI, Malta should have the same experience when we become members. We, like other candidate countries, are, according to our Prime Minister, just one step away from membership. So why does not the Governor explain why we have not shared the same FDI inflow experience rather than speculate on materialisation of such inflow upon membership.

And the cherry on the cake came when the Governor disclosed that he holds some study or economic model which shows that in membership Malta's growth rate would be superior to non-membership economic growth rate by between 1.7% and 1.9% p.a. initially eventually widening to 4.4% - 6.1% p.a.

If these studies and economic models are built with the same bias as that exposed by the governor in his speech than they are worth nothing in the real world of serious political decision making. Just like the many projections of huge funding flows in pre-accession and post-accession aid have come down to nothing, the same will happen to promises of such superior economic growth rates.

Economic growth depends on the level of productive and supporting infrastructure and social investment. There is no case that proves that in membership we will get more FDI than outside membership. If anything the run-up to membership has shown the exact opposite and shows that Malta, unlike other candidate countries, is missing on FDI flows.

The basic truth is FDI goes to economically stable and cost efficient locations permitting investors to get the best returns for their investments and guaranteeing stability of market access.

 

 

Through partnership Malta will get market access in practical terms very comparable to membership for EU and Mediterranean markets (who said we should not be able to reach bilateral agreement with North African and Arabic Mediterranean nations?). We will do this whilst safeguarding our flexibility to keep our cost base competitive and our incentives more attractive than those offered by other candidate countries thus overcoming the advantages of higher transport costs imposed by our island characteristics.

The Governor was saying outright untruths when he said that Luxembourg was showing that as a small country through membership could force third countries like Switzerland to give up its advantageous bank secrecy rules. The truth is that Switzerland has not conceded anything regarding that banking secrecy and Commissioner Bolkestein in charge of monetary affairs has expressed his frustration that Luxembourg and others keep making impossible demands knowing that the Swiss will refute them so as to scupper the whole arrangement for cross border tax on savings so much demanded by France and Germany. The truth is that Switzerland as non-member has the ability to refute what Luxembourg could not refute and Luxembourg is now trying to use Switzerland's strength to safeguard its own!

The Governor has put to shame the organisation which we need to keep in high esteem to safeguard the stability of our financial system. He should resign!