Blair Bounces Back

The Malta Independent on Sunday

 

This time last year I had described Tony Blair, the British Prime Minister, as one of the major losers on the international scene of 2002, completely outshone by French President Jacques Chirac who dictated matters on the EU and international stage.

Specifically I had stated:

“The international personality who ought to consider 2002 as a personal disaster is UK Prime Minister Tony Blair. Humiliated by Chirac who edged him out of the tandem with German Chancellor Schroeder, Blair has been made to appear as the US lap-dog rather than the strategic link to co-ordinate the policies of the US and the EU. While Chirac has brought Schroeder to make huge concessions as Schroeder was still reeling from the fatigue of a bruising re-election campaign, coping with a rebuff from the US for German non-participation in the pressure of Iraq, and economic woes on the home front risking a recession or outright deflation in Germany, Blair lost the strategic support which he had taken for granted from left wing colleague Schroeder.

“On the domestic front Blair is seeing his re-election shine wearing off as the shield of protection of his PR machine is getting predictable and ineffective. Blair is also under pressure from the man next door at No. 11 Downing Street – Chancellor Gordon Brown. Brown is winning more support for his cool approach to Blair’s determination to take sterling into the euro as interest rates and the economic tempo of the UK and euro areas continue to diverge rather than converge for an eventual docking in.”
What a difference a year makes! Blair can look back with satisfaction that during 2003 his risky bets paid off handsomely and he can look forward with confidence to the electoral test that awaits him in 2005/2006.

It did not look like that for the most part of the year but the dividends came in December permitting Blair to have the last laugh on his critics.

On the international front Blair went against the current of the Franco/German tandem by supporting the US invasion of Iraq. While for most months following the successful military invasion, the UK Prime Minister seemed to be losing credibility through the unsuccessful search for WMDs upon which he had justified the war, December changed fortunes with a double whammy.

The capture of Saddam Hussein alive and capable of being put through the wheels of justice to answer for his atrocities against humanity has made the invasion of Iraq justified in public opinion independently of the existence or otherwise of WMDs. It has turned the cards on Chirac who is now seen a Chamberlain advocating appeasement to certified mass murderers.
Libya’s unilateral declaration of abandonment of WMDs and nuclear programmes, and its willingness to open itself up for inspections checks on good behaviour by the international community, came hot on the heels of the Saddam capture after months of secret diplomatic negotiations between UK and Libya. Blair could face the world stage waving the effectiveness of the carrot for countries like Libya who are determined to put the past behind them and use their natural wealth for the economic development of their own country and abandon all hopes of imposing a new world order through the endorsement of terrorism and abuse of human rights, and the stick for rulers like Hussein who remains defiant, possibly through miscalculation, that appeasers like Chirac will guarantee his survival by blocking UN sponsored military action.

Blair has scored successes on the EU front where Chirac and Schroder messed things up quite considerably. The failure of the Brussels summit to agree on a new EU Constitution can be pinned mostly back on Chirac for the way he had handled and dangerously compromised at the Nice summit in favour of France but at the expense of Community benefit. To remain at par with Germany he had conceded to Spain and Poland an overweight in voting rights which both are now defending as they based their home support for the enlargement on the acquisitions made at Nice.

But more than that Blair shone on the EU stage not just by default of France and Germany but also in his own right. He graduated from the perception of being a lap-dog of President Bush to a person who has considerable influence in shaping US foreign policy. He persuaded Bush to accelerate the transfer of internal self-rule to Iraqi citizens before writing up the country’s

Constitution and also persuaded the US to accept, with reservations, the creation of a separate EU military unit. France and Germany had to retreat from going their own way realising that an EU military unit without Britain would be meaningless and in the process gave the opportunity to Blair to shape this unit in a way which makes it a collaborator and not a competitor of Nato.

Even on the economic front Britain can boast of a performance much superior to that of the continental titans who were forced into the humiliation of breaking the euro growth and stability pact whose discipline they had themselves designed to protect the system from traditional fiscal abusers such as Belgium and Italy. The breaking of the rules in a high handed manner by France and Germany just before the Brussels summit set a very dim prospect for making the necessary compromises on the EU constitution.

Blair’s achievements gain significance when considered against the back-drop of substantial internal party dissent against his liberal policies that offend the traditional values of left wing party luminaries. But Blair could brush aside internal dissent by proving that it is only his policies that permitted Labour to regain the mainstream of British politics and send the Conservatives into disarray, forcing them to continue changing leaders with monotonous regularity.

What a contrast to Maltese Labour who seem well resigned and apparently enjoying its overlong stay in opposition, confirming the same leader who somehow fails to deliver even when the odds are well stacked in his favour. May 2004 force Maltese Labour to shake off its lethargy and reach out for a touch of Blair.

Wishful Thinking

The Malta Independent 

This being my last contribution for the year I thought it appropriate to spice my best wishes for a peaceful Christmas and a prosperous New Year with some economic wishful thinking.

Now that we have run out of all other easy solutions and with government`s back economically against the wall, we are hearing much talk of the inevitability of consensus driven painful measures through the promotion as some new discovery of a vintage idea termed as social pact.` Reality is that government can only be successful in economic management if such social pact is a permanent fixture in our economic firmament and if it is used effectively to drive the message that government can only set a fair and positive backdrop for economic growth. The real drivers of such growth have to be the social partners through their joint collaboration.

So whilst the Irish celebrate the first successful decade of the social pact we are still trying to understand what it is all about and we have everyone repeating the catch-phrase without concretising on what deliverables we should expect from such an objective.

As some wishful thinking is not out of season in the run-up to the Christmas festivities I thought of concretising the Social Pact into ten clear deliverables to see if those paying lip-service to this abstract notion really have the courage to translate it into an effective and lasting economic cure. 

1. Rebalancing in the rights and obligations of workers across the whole economic spectrum facilitating the mobility from public to private sector employment.
2. Funding a massive training and re-training mechanism to render our employees multi-skilled and employable as technology continues to kill old jobs and create new ones.
3. No new taxes/tariff deal from the government to ensure that we stop the addiction to tax and spend policies
4. A deal whereby additional revenues from better tax enforcement are allocated specifically as to 50% for reduction of the tax burden to the lower and middle sector of society, especially those in employment who never needed any tax enforcement mechanism to pay their tax dues, and 50% to fund re-training schemes.
5. A freeze on public employment recruitment and on public sector payroll costs ensuring that benefits are mostly given in re-training opportunities and in subsidising/promoting transition of excess public sector personnel to productive jobs.
6. A freeze on all public sector operating expenditure
7. Rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level in order to protect non-unionised employees who normally operate at or near minimum wage levels.
8. No new debt until we get the debt level down to 60% of the GDP. Any capital expenditure has to be financed by one off revenues (privatisation, sinking fund and similar arrangement) to avoid recourse to new debt issues, other than roll-over of maturing debt.
9. Keep social benefits at their current real level and forget all possibility of giving tax incentives for private pensions before government finance comes in good shape to make this affordable.
10. If all this is agreed make a one-off adjustment to our rate of exchange to re-establish our international competitiveness and prepare for joining the EURO at a rate which is sustainable and which attracts FDI and promotes economic growth.

If we can build a Malta Consensus (plagiarising the Washington Consensus from John Williamson) around these 10 deliverables than may be we can pass from platitudes and wishful thinking to the formation of a concrete action plan where all parties acknowledge that solutions cannot be painless, that expecting all else but themselves to carry the pain is unworkable, and that a fair sharing of the burden of the adjustment pain will make the sustainable pain acceptable as a fair price to pay to get to the light at the end of the tunnel.

I wish all readers a merry wishful thinking Christmas but more importantly a full year of effective consensus driven solutions.   

True Solutions

The Malta Independent on Sunday 

 
I was not in the least surprised that almost 60% of those surveyed in a poll carried out on behalf of The Sunday Times said they were 'badly affected' by the Budget for 2004, and that a high 71.3% do not think that its measures will solve the deficit problem.

  I was even less surprised that when asked which party they would vote for if a general election were to be held tomorrow, 43% said they would vote "for nobody", while 25% said they would vote for the Malta Labour Party, 23.3% for the Nationalist Party, 3.3% for Alternattiva Demokratika, and 5.3% gave no answer.

The only logical conclusion is that we are becoming a nation of realists and that the nation has been forced to choose a government by default of the opposition and not as a positive choice.

It is indeed frustrating that the government presents us with long-standing structural economic problems and pretends they are new developments which have forced a new spring to change into a harsh winter. It is even more frustrating that the government continues to insist that the solution to these problems is to simply talk positively about them whilst continuing the tax and spend policy typical of the Wilson Labour UK governments of the sixties when in fact we require a growth budget in the Bush style of the new millennium.

And the frustration gets compounded when the Opposition suggests that to raise awareness to the problems and to refuse the solutions being offered by government the best approach is to organise popular demonstrations of dissent.

As the Times survey shows there is no need to raise public awareness either to these problems or to the futility of the solutions proposed in government`s budget. What the public needs in order to warm the hearts of the extraordinary large segment which seems to be writing off Maltese politics in general, is to proof with practical means that the opposition could be an alternative government that can offer positive, though not painless, solutions to our problems.

We have been talking far too much about our problems whilst taking little or no effective cure measures. We can and should of course make the point that the government is by and large responsible for getting us into this financial and economic mess, mostly through buying our votes with fictitious feel good measures which were based on debt rather than growth. But this will not in any way help to offer any solutions as to how we should get out of the deep water and swim gradually to safer and higher grounds.

Let`s look at things objectively. We have two major problems. We are suffering from lack of economic growth and we are suffering huge and unsustainable imbalances in public finance which translates itself into public debt growth as a percentage of the GDP which is galloping forward. On these facts there should be no dispute. There is no room for shady or creative interpretations to colour reality with wishful thinking.

To offer solutions one must understand the causes.` Pseudo solutions which do not address the causes are simply a waste of resources which would make the eventual real solution that much harder as we do not have access to endless resources.

The absence of economic growth is because our economy is no longer competitive globally. This is showing in low or no growth in our exports and tourism earnings, the lack of FDI and the failure to create new job opportunities.` Central Bank`s own studies of the real rate of exchange show that we have been dragged down by an overvalued real exchange rate in the region between 6% and 12% since 1999 (Central Bank of Malta Quarter September 2003 page 33 Chart 4.3).` Past growth has been based on consumption and debt and as both are hitting unsustainable levels their retraction is causing economic sclerosis.

Government finance structural deficit is the result of over-spending, certainly not of shortfall in revenue flows.` On the contrary the government deserves credit for rendering the revenue collection mechanism more efficient and whilst there is still room for tax enforcement and compliance, resultant increased revenues should go to reduce the burden on other taxpayers who have never had any room to deviate from tax compliance.

True solutions must therefore be based on a tripod solution. The first leg is growth. This has to have priority, as without growth there can be no re-structuring. Re-structuring implies the replacements of old uncompetitive economic units by new bubbly start-ups that offer opportunities for productive jobs built on current economic realities. Killing old units without succeeding to promote new ones is not re-structuring. It is pure and simply contraction.

The second leg has to be expenditure control of the public sector. Not necessary expenditure reduction but expenditure control ensuring we do not continue to pay for inefficiencies but invest in infrastructure and productive investments and in re-training to make unproductive labour mobile and affordable. If we accept given positions as immutable that we lose the game before actually starting to play. Why all the priority to address the Drydocks problem and allow much bigger, even though may be less evident, problems in the public sector to go on unaddressed.

The last leg is, as earlier indicated tax enforcement.  A pact that no new taxes will be introduced and that the efficiency in tax collection will be applied to offer relief to the over-taxed lower and middle layer of society.

A solution without a tripod approach will get us nowhere. The government is not offering it.` No amount of street protests by the opposition will get us an inch nearer to a real solution. May be we expect a miraculous touch that EU membership will force us to do what we need to do. This will obviously not happen and if we continue as we are doing, people will lose their only hope left for real re-structuring.

The simple truth is that we will re-structure only if we really want to.` My impression is that our politicians do not really care and therefore small wonder that the electorate is reacting by not caring about our politicians.

Euro Diet

The Malta Independent 
 

The diet to join common currency is not to everyone’s taste, wrote Tony Barber in this week’s Malta supplement in the Financial Times. This is most definitely so given that we have been duped into thinking that we can continue living beyond our means purely by amassing debt rather than investing for growth.

One person who seems to be developing an early taste for this diet is the Governor of the Central Bank, Mr Michael Bonello. He was quoted by Barber as advocating urgent fiscal consolidation so as to make it to the Euro by the earliest possible date in 2007. He stated that late adoption of the euro would imply that the enjoyment of the relative benefits would be postponed and that the country could lose competitiveness if other new member-states successfully adopt the euro at an earlier date.

This type of reasoning worries me. It seems that Mr Bonello would have us reduce the budget deficit from 6% to 3% over a three year 2004-2006 period and in the process work out a miracle to reduce the debt level from the current level of nearly 70% of the GDP to 60%. With the economy expected to stay with real growth of just 1%, with inflation near historic lows and with the public budget in deficit though on a hopefully reducing level, there would remain only two ways how a reduction of relative debt to GDP to the tune of 10% can be achieved over a short period of 3years.

This could come about through a devaluation of the local currency in view of the fact that the large majority of the public debt is internal, denominated in Maltese Lira, whereas the major determinants of the GDP are our net earnings on exports of goods and services. However, with the rate of exchange policy adjustments semi-officially ruled out as a possible source for a solution to our economic ills, the only remaining source of adjustment would be mass-privatisation to provide one-off revenue flows for debt reduction.

Nothing of this sort was provided for in the three year financial framework presented with the budget. This provides for privatisation revenues of Lm135 million over three year which would reduce, though not eliminate, the need to take on new debt, but will certainly not contribute to the reduction of debt.

Which leads me to conclude that the issue of our joining the Euro at an early date is subject to loose talk and wishful thinking.

Why should we hurry to join a monetary union the rules for which seem to be changing to fit the needs of the big countries while being applied with rigour to the not so big countries such as Portugal? And who is going to decide the level at which we will fuse the Maltese Lira into the Euro?

If it is the Central Bank than my worries compound. Because the Central Bank regularly publishes research which shows that Malta has been forced to live with an over-valued real exchange rate in the region of 8-10% for the last five years. They kept the USD content in the Maltese Lira basket at on overweight 21% when the average rate was USD2.25 for one lira and then reduced it to 10% in August 2002 just when the USD was about to collapse from the then level of USD 2.34 to the current level of USD 2.83. This has deprived us the possibility to cleanse the Malta Lira rate of exchange from its full dollar-induced overvaluation.

The risk of joining the Euro too early is to my mind far more serious than of joining too late. If we put the economy through a sausage machine to meet the technical triggers of the Euro we would be missing the wood for the trees. Existing and much stronger Euro members are doing their damn best to extricate themselves of the fiscal straight jacket which would deprive them from cultivating the nascent economic growth, still too fragile to withstand fiscal repression.

The ultimate objective has to be that we have to get our economy efficient and globally competitive and this cannot be done by blindly following the Euro rules just to make it in there at the earliest possible date. The Euro diet is needed to make us competitive and not just to make us qualify for euro membership. And this can only come from efficient allocation of resources and from growth stimulation of which there are pretty few indicators. Indeed the Central bank should itself put deed to its words and set the example by making the organisation more efficient.

It is almost unbelievable that during 2002, when bank regulation was migrating from the Central Bank to the MFSA and when exchange control was being dismantled the Central Bank needed to employ seven trainees economic officers, ten clerks and a part-time gardener taking its workforce to the equivalent of 310 full time employees. The Central Bank of Cyprus, that is also responsible for the entire regulation of a financial sector much larger than ours, employed only 287. The Central Bank of Luxembourg with one of the largest financial centres in Europe employed 208.

The Central Bank should start setting some example about the sort of diet we require to help us join the Euro in good shape rather than force us to join the Euro to take on the discipline which would stifle growth and employment.

 

Time to Go

The Malta Independent 

This was the title of an editorial of the Financial Times last Wednesday when it was commenting on recent boardroom shake ups in two major benchmark US corporations.

Boeing accepted the resignation of its Chief Executive Philip Condit, which followed that of the finance director Mike Sears the previous week, to give the company a chance of a fresh start following ethics digressions in competing for military contracts of the Pentagon.  Boeing had as a result been stripped of multi-billion dollar contracts it had been awarded by the US government.

Disney this week marked the departure of two board directors, Stanley Gold and Roy Disney (the last Disney on the Board), who in a letter of resignation complained bitterly of the fossilisation which the leadership of Michael Eisner has brought to the organisation. They even accused Eisner of stifling discussion on the Board.

I dare say that Eisner`s criticism is justified in that the company that invented the cartoon film has lost all the edge on the product and needs to rely on smaller animation film-maker Pixar to supply it with such successes as Toy Story, Bug`s Life and the latest showpiece Finding Nemo.

The final comment of the FT editorial is indeed telling and worth quoting: 'There are lessons for those who believe the unity of the board is the key to business success. Unity has to be the outcome of vigorous discussion, not the suppression of dissent. However much directors might feel like supporting one another, sometimes the top person has to go. And if the reluctance of the board to act imperils the company, directors might, very rarely, have to expose its failure with well-publicised resignations'

Following the performance of the two main Party leaders this week in criticising the budget and the replica to such criticism, I could only conclude that the `Time to go` appeal is very much applicable to Malta`s political scene.

The Prime Minister still believes that we can continue to solve the accumulating problems by simply talking positively about them. It is clear that to make a success inside the EU we need different leadership skills from those the Prime Minister has used to get us there. The Leader of the Opposition, rather than position Labour as an alternative government with bubbling solutions to the problems that government can`t solve, has re-proposed taking people to the streets in protest demonstrations. Government incompetence is now so glaring, its fatigue so tangible, that any Leader of the Opposition without Dr Sant`s problem of credibility, could instantly become the people`s majority choice. But credibility is much like virginity, once lost it cannot be recovered.

The `time to go` concept should cascade further down. Certainly there is ample case for a new hand at the Ministry of Finance. Presenting 10 budgets in 11 years would exhaust even the most capable. Exhaustion acts as a barrier to devising new solutions to problems which incumbents have difficulty to acknowledge and much greater difficulty to admit fault to.

The President of the Republic has also had his ample turn in Maltese political life and nothing short of an outright negation of any intention to pursue any other political appointments can preserve the dignity of the highest post of office.

The Archbishop has already offered his resignation.  A new hand at the Church also needs to re-generate the Church to take it back to its evangelical roots ensuring that it remains the social conscience of the nation rather than seeking cosy relationships with the establishment.

If our leaders really mean well to the country and want to give us a prospect of a better future they should organise their gentlemanly exit during 2004 to make space for a new breed of leaders who can really take us forward to making a success inside the EU.

One of the main qualities of leadership is in knowing when it is time to go for the larger benefit of the organisation at the expense of unavoidable personal recrimination. The inner strength to surpass the natural inclination to hold on. Leaders are also judged by history through their judicious choice of the time to go. If only our leaders will acknowledge that the time has come for them to serve us better by going rather than by staying.  

Missed Opportunity

The Malta Independent on Sunday 

 
Every first budget of a new legislature presents a rare opportunity to restore sanity to an economy abused for political convenience through budgets presented in pre-election mode.

If the first budget of a new legislature happens also to be the last one before we join the EU in membership, and one of the last before we join the Euro monetary system, than the rare opportunity turns into a unique one which would be fatal to miss. In presenting the budget for 2004, the Minister did just that. We can just as well cry for it.

There are two major problems which are drawing blood out of our economy leaving it lifeless and just ticking whilst the economies of other candidate countries keep roaring forward.

The first problem is the structural public deficit which in absolute terms is still were it was in 1996 when it was first discovered by an incoming Labour administration. Seven years later we still have a three digit million gaping hole in public finance. Over these seven years some Lm225 million of extraordinary funds (through sale of assets ` privatisations- and draw-down from the sinking funds accumulated in the more financially sober days to build a reserve for repayment of the national debt) were put through the Consolidated Fund. Without these the public debt would be Lm 225 million larger than it presently is.` Yet public debt has more than doubled since 1996, from Lm517 million as at December 1996 to Lm1175 million projected for December 2003.

Unless we address the structural public finance deficit, the public debt is destined to continue growing faster than the economy so that the percentage of public debt to GDP has risen from 40% in 1996 to 69% presently and still growing way out of the Maastricht limit of 60% necessary to gain a ticket into the monetary union. How is it that many (including the Prime Minister, the Minister of Finance and the Governor of the Central Bank) sing praises to the virtues of joining the Euro at the earliest possible date but stop short of explaining how we are going to reduce the debt level to within Maastricht criteria remains a mysterious local version of trivial pursuit. 

The other even graver problem is that the economy is not growing healthily and the anaemic growth it is registering is dependant on unsustainable bad habits of over-consumption and government spending largesse.

The budget presented last Monday attempts to address the first problem over a medium term but gives scant, if any, attention to the latter graver problem of growth.` This is short sighted and counter-productive. Restoring healthy economic growth could of itself make a substantial contribution to the resolution of the public deficit problem.  

 Indeed during this very same week France and Germany forced the ECOFIN ( Meeting of EU Finance Ministers) to accept to interpret the Stability Pact underpinning the monetary union more flexibly to avoid tightening the fiscal screws to address the deficit and dampen the nascent growth.

On the contrary enforcing Lm59 million (3% of the GDP) additional tax revenue to flow to the government purely to reduce the fiscal deficit by less than 1% of the GDP will do nothing to restore growth. It will dampen it.

What was called for was a balanced solution which put as much emphasis on growth as on deficit reduction. Measures to render the economy more competitive globally and more agile internally should have been coupled with revenue raising measures. At least if domestic consumption is squeezed to make up for past excesses, our economic units, especially in tourism, manufacturing and tertiary services would have been in a position to use their spare capacity to compete successfully externally.

Making the economy more agile internally means identifying the under-utilised labour resources across the whole public sector and invest in their re-training to make them employable in the productive sectors. This is the social pact that is needed and that the unions so often demand, a social pact that re-balances the rights and obligations of employees whether they work in the public sector or in the private sector. A social pact where those remaining in employment give up a small part of their standard of living to permit those losing their job through re-structuring, to find alternative productive employment. This is the sense of real solidarity! Solidarity is not that abused by the political leaders when they expect citizens to accept the pain of more taxation so that the government can burn up more resources without addressing the real underlying problems.

Unless we make our economy globally competitive again we will not attract investment and without investment economic growth will grind as the government tries to squeeze within the EMU criteria solely relying on increased taxation through better enforcement and new fiscal measures.

We continue to stare at the problems looking us in the face and yet go for the wrong solutions. What skills does one need to raise more revenue by jacking the general VAT rate up by 3% What skills are needed to raise excise duty on cigarettes in each and every budget with monotonous regularity?

What we need is real solutions through leadership and creativity. Such solutions cannot be painless and fiscal enforcement would have a part to play in the whole package. But the greater emphasis must be on economic growth, on measures which though painful can give reasonable expectations that they can make us again competitive.` We need leadership to work a social contract where the pain of adjustment is equitably shared with the motivation that economic growth will be restored to roaring levels in the medium term.

Indeed an opportunity has been missed. It is a pity. Rather than devise real solutions the government is more bent on massaging the media so that they refer to hard tax increases politely in their next day headlines as `revenue raising measures`. Pull my other foot!   

From Where the Growth

The Malta Independent 

The Budget presented last Monday is a deja vue. In 1999 the Minister of Finance published a projection of public finance up to 2004 which targeted that the budget deficit for 2003 to be 5.38% of GDP and Public Debt to be 57.36% of GDP.` Instead 2003 deficit will be 6.31% of GDP and the Public Debt will be 68.93% of GDP.

By everybody`s admission the patient is sick and the medicine is not working. Yet the Budget presented last Monday does nothing more than prescribe more of the same tax raising measures which were somewhat eased between 2002/2003, certainly with the elections in mind, and are now being put back in 2004 to the same level of 1999-2001.

Tax revenue growth which had come down from Lm60 million in 2000 and Lm53 million in 2001, to Lm41 million in 2002 and Lm 33 million in 2003, is expected to grow again next year by Lm59 million.

Yet just as the deficit was not controlled in 1999-2001 despite of hefty increase in the tax take, the same will happen again. In Appendix D to the Budget speech there is stated:

 

"The deficit (for 2003) would be equivalent to 6.3% of the GDP. One should note that, were it not for a serious and timely cost cutting exercise that was made half way through the year, in the expenditure of Government Departments and Public entities, the deficit this year would have certainly gone up to 7.3% of GDP".

Does the Budget Minister expect our gratitude for reining back after the election the control he let go of before it? Are we playing political games with public finances? Why was such control exercised only half way through the year and not on each and every single day of the year for the last seven years since the problem of the exploding public deficit was exposed late in 1996? 

The government insists on solving it own deficit problems by taxing its citizens.  Growth is nowhere to be seen and indeed government is only targeting nominal growth of 3.5% in each of the next 2 years. What the budget should have done is take measures to ensure that we get real growth in the order of 6% p.a. on a consistent basis. This can only be done if we get our economy competitive again and efficient enough to attract substantial FDI flows. Nothing of this sort has been provided for in the budget. It is the work of an accountant and not of an economist. It provides for deficit reduction through taxation rather than growth.

Taxation is easy. Using the middle class as sitting ducks to extract their purchasing power and compensate them on a minimum wage basis, requires no ingenuity. Raising excise duty on cigarettes has become a budget bore.` Raising VAT by 3% is a simple administrative step. But such measures will simply make the economy even less competitive as inevitably they raise inflation rendering real growth more elusive.

The fallacy of this approach is borne out in the government`s approach towards the Euro. The Governor of the Central Bank has gone on record that he favours early entry of the Maltese Lira into the Euro.` The Prime Minister expressed his willingness to oblige. The Budget Minister in his speech was even more specific.` He made a categorical declaration that he was `in favour of an early adoption of the Euro. This being so, it would, therefore, be appropriate to take the first step by applying soon after membership next May to participate in ERM II by early 2005.

This means that Malta is planning to join the Euro in early 2007 after the obligatory two years waiting period in the ERM II. To do so we have to reduce not just the budget deficit to 3% by 2006, which is at least on paper is provided for in the budget projections, but we have to reduce the public debt to below 60% of the GDP. However appendix D to the budget speech shows that by end 2006 in spite of Lm135 million extraordinary revenues from privatisations expected over the period 2004-2006, we would still have a public debt of 68.4% of the GDP. The 8.4% excess over the Maastricht criteria is equivalent to Lm160 million. No flick of the fingers really!

Not even on paper are we trying to get close to the Maastricht criteria and reality has a consistent habit of turning out worse than paper projections. Without growth there is no solution to our economic maladies and this budget does not provide for growth. Quite the opposite!   

Insulting our Intelligence

The Malta Independent 

 

On two separate occasions last weekend, main government exponents, in an endeavour to condition public opinion for the tough budget measures to be announced next Monday, chose to insult our intelligence.

The first occasion was the speech delivered by the Minister of Finance at the Bankers’ annual dinner where the Minister spoke of the tough issues that need to be addressed through specific measures in next budget. He chastised those who argue for re-structuring but always act as barriers to reform as they try to put justice at someone else’s door.

I could not disagree with most of what the Minister said. The insult to our intelligence was his forgetting this will be his 10^th budget in 11 years. He spoke as if this was to be his first pretending he could place the blame elsewhere. If today we are in a situation where everybody agrees that government has no choices but to take tough measures the Minister need look no further than the Cabinet table when searching for culprits. Most participants in the economy inevitably defend their patch and try to shift the burden of adjustment onto others. But government has overall responsibility and it was elected with to lead us out of the trouble it has led us straight into.

Perhaps the Minister should have explained what has gone so awry in less than 9 months considering that this short while ago he was emphasizing so vigorously, in pre-election mode, that government finances were on sound footing and that the economy was growing stably. At that time he often tried to ridicule critics like me who exposed the real situation which government is now forced to accept, as pre-election soft dreams change into hard reality.

The second insult to our intelligence came from none else than the Prime Minister himself. In his closing address to the party general conference he admitted his apprehension at the size of the accumulated national debt. But in a vain attempt for self-justification he proclaimed that there were assets to justify this debt. He mentioned infrastructure investments like energy and water generation, production and distribution, airport development, Freeport, telecommunications, and Gozo Channel vessels. This apart from other investments in social and non-productive infrastructure, like roads, housing, hospitals, education etc.

The truth is that the productive investments mentioned by the Prime Minister were in their large majority not financed through borrowings which accumulated in the national debt. They were financed by separate direct bank loans raised by the para-statal entities concerned. So Enemalta has its own debts with which it has financed the power station development and this does not form part of the national debt. The same applies for Water Services Corporation, Gozo Channel/Gozo Ferries, Maltacom and Freeport Corporation. The Airport was financed by its own debt and has since repaid to the government through the part privatisation deal much more than government had originally invested in it.

Furthermore one has to remember that the government has had special privatisation revenues and special revenues from dismantling of accumulated loan sinking funds which have financed a large part of the social infrastructure. Without these special funds the national debt would be much bigger than it presently is. Just to recall, the special one-off privatisation revenues were generated from sale of 100% of Mid-Med Bank, 75% of Bank of Valletta, 100% of Lombard, 40% of Maltacom, 40% of MIA and others of lesser importance together with an average of Lm12 million p.a which has been drained from the sinking funds since 1999.

No, Prime Minister! The national debt has not financed productive or infrastructure investment. It has financed, tertiary education that strokes students to think that success is equivalent to high consumption but starves the library from funding for new publications, building hospitals we cannot afford, roads that get re-done with monotonous regularity and wasteful subsidies which postpone the problems without addressing their cause.

The best proof of this is that whilst the economy is growing anaemically the national debt is galloping forward at double-digit rates and will take a step increase as hidden debt start being converted into central government debt. The first such step will be taken as shipyards debts with the banks and loans to the shipyards from the Treasury Clearance Fund will unavoidably have to be covered by central government debt paper once shipyards loans are being written off as part of their re-structuring exercise.

The national debt is already 65% of GDP and bound to increase. Nothing will in the next few years bring it back to within the 60% to permit early entry into the Euro. Economic growth is just too slow to balance the equation from its side and attempts to solve it through further tax squeezes, just when other countries are loosening their fiscal screws, will only help to depress the economy and augment the problem.

Whichever way you look at it if we really mean to join the Euro at an early date as the Central Bank Governor has recommended and the Prime Minister stressed he wishes, we unavoidably have to render the economy competitive again through an across the board downward adjustment of our rate of exchange which all have to accept as an unavoidable re-structuring measure to roll-back the excess consumption financed by the national debt and bring it in line with EMU criteria.

Attempts to solve the problem without facing this reality is just more waste of time and resources which we can ill-afford.

 

Why Me?

The Malta Independent on Sunday 

This is what 900 shipyards workers who were declared redundant and unfit for the development plans of the new shipyard company were loudly asking last week.

Downsizing the shipyards’ work-force is inevitable for its survival. Given that we are struggling to get more work throughput, efficiency cannot be gained by doing more with same resources. It has to be achieved by doing the same with less resources. Less resources means labour redundancies.

This plan was negotiated with the GWU and voted in by the employees themselves. Yet when it came to the selection process of those employees who had to leave to give a chance for the enterprises to remain afloat and secure the jobs of those who were chosen to remain, those affected inevitably asked why me?

I contend that the way the exercise was handled this time is strategically superior and more sensible than earlier similar exercises. Those employees who are needed to stay have been ring-fenced and are not being offered any early retirement scheme. In earlier versions of slimming down programmes early retirement was generally open to the whole workforce, leading the shipyard to lose some of the most talented hands which were desperately needed in the survival plan. It makes no sense to offer those you need most cash handouts encouraging them to leave.

This time at least the management has protected the human resources it needs for the survival exercises and offered retirement schemes to those it considers surplus to its requirements. This by no means assures that the exercise has been thoroughly objective and driven solely by efficiency considerations. It would have been, and still is, much more preferable if management offers more visibility on the criteria used for the selection exercise to give confidence that decisions were made solely in the best interest of the new shipyard enterprise.

But I think that the “why me?” should be asked to the government in a wider context by the whole shipyards work-force. Why have the shipyards been chosen as a show of force for the government’s determination to stem the financial haemorrhage caused by State subsidies? This is all well in so far as it goes but it definitely does not go far enough.

Who is going to address the far more severe over manning that still remains in the public sector? The fact that this overmanning is camouflaged by direct budget expenditure votes rather than isolated as subsidy to State enterprises does not make it any less serious.

It is in fact far more serious than the shipyards’ problem. At least the shipyard workers used to punch in for work, work a few hours of the punched-in time and earn some foreign currency for the State. Many of the surplus workers in the public sector do not even care to punch in or out, do not bother to work at all and produce absolutely nothing.

In the interest of fairness the labour re-structure programme for the public sector cannot start and end with the shipyards. And it would be wrong to continue relying on early retirement schemes as a viable solution for public sector downsizing. This is expensive and unproductive. We cannot bring about efficiency if we continue to allocate substantial scarce resources to motivate people to drop out of the workforce.

Furthermore, as I have long been arguing, it is atrocious social discrimination for the State to allocate so much resources to free itself of unneeded labour resources while leaving totally unprotected those citizens who lose their jobs through redundancy in private sector enterprises.

Those who profess social democracy, including political parties, the unions and the Church just cannot pretend that it is OK to create such gross discrimination between citizens who work in the public sector and those who work in the private sector. Resources have to be fairly allocated to balance the rights and protection among all citizens who equally contribute taxes on their earned incomes whether earned from public employment or private enterprise.

If we have financial resources to oil the re-structuring process these should not be applied to pay excess resources in the public sector to opt out of the labour market. They should be applied to re-train excess labour resources, whether in the public or in the private sector, to learn new skills to facilitate the transition to new productive jobs.

This is what social justice demands. This is what good economic management demands. Resources applied on re-training will be repaid through economic growth generated when the re-trained resources are placed into productive jobs. On the contrary resources spent on putting people out of the labour market will simply produce more demands as these people claim their rights in social support schemes.

Yet in the face of all this social injustice everyone seems to have lost interest in protecting private sector employees by insisting on fair re-balancing of workers rights and obligations across the whole labour market. Everyone seems blind to the plight of those who are being forced to retire early from private sector jobs not because they chose any cash bundle through some early retirement scheme but because at their advanced age with out-dated skills they have no chance of finding a new job in an economy which is losing jobs at a faster rate than it is creating them.

The plight of these middle aged redundant former private sector employees who daily lament “why me?” remains unheard by those who have the social responsibility to do better.

Euphemistic Flexibility

The Malta Independent 
  

The September Quarterly just published by the Central Bank features on page 33 a chart showing the NEER and REER. For those not conversant with economic acronyms NEER means Nominal Effective Exchange Rate while REER is Real Effective Exchange Rate.

The NEER measures the value of the Maltese lira with a weighted composite of the currencies of our main trading partners and competitors. The REER, that is a more reliable indicator, adjusts the NEER to take account of inflation differentials between those prevailing locally and those applicable in the benchmark composite.

The chart shows that compared to a starting position as at January 1995 of 100, both the NEER and the REER index were at around 108 as at end of last July. In layman’s terms this means that our rate of exchange has hardened by 8% beyond what is justified by inflation differentials.

Many consider devaluation of the Maltese Lira a dirty word to mention let alone to contemplate. There is a strong argument that with an open economy like ours using the rate of exchange as an instrument of economic policy would have scant results given that we import most of what we consume and export most of what we produce. The argument for stable exchange rate is pervasive and the monetary authorities have always considered stability of the rate of exchange as an objective in its own right.

This differs quite distinctly from the behaviour of the Central Banks responsible for the main trading currencies. They profess emphatically that the fixing of exchange values is a market function and their role is to ensure that the market remains orderly and not to suppress it. May be the exception to this is the Japanese Central Bank that is known to intervene heavily on exchange markets to influence the rate and not just to retain it orderly.

Robert Rubin, the former Treasury Secretary under the Clinton Administration, accredited with the strong dollar policy, has just published a co-authored book titled ‘In An Uncertain World’ where he explains how careful he had to be in using consistent and vague phraseology when reply to pressing questions about the US administration exchange policy. He always maintained that the administration favours a strong dollar policy but the actual level is a market function which the Authorities would intervene to influence only in case of undue market disturbance. The level of the rate of exchange should be the consequence rather than the cause of economic performance

On the local front the Maltese Lira is not traded internationally. Its level is determined through a transparent peg against a basket of currencies. The intention is that gradually the basket will be replaced by a straight Euro peg until the Maltese lira is fused into the Euro when eventually we will join the EMU.

But should we disregard the 8% overvaluation at a time when clearly the local economy is struggling to maintain its international competitiveness? Regaining this competitiveness through inflation differentials looks quite impossible. Our partners/competitors inflation rate is very low and getting much lower than that would raise the spectre of deflation. Furthermore this will take time which cannot be afforded either by consequences of our having to compete with an over-valued currency or by the timing schedule for euro-accession.

The risk of locking into the Euro at an over-valued rate that cannot be subsequently corrected, is too grave to contemplate. The pressure to come within EMU criteria solely through fiscal measures will deliver social pain which will be carried by a narrow segment of society i.e. those who are forced to lose their job in the re-structuring process.

An adjustment in the rate of exchange to remove its declared over-valuation will automatically render us internationally competitive, bring us within the EMU criteria avoiding the need for hard fiscal measures, and spread the adjustment pain on a wide spectrum of society and not just on those unfortunate enough to lose their jobs.

If devaluation is too dirty a word to contemplate let’s euphemistically refer to it a adjustment, removal of over-valuation or flexibility of the exchange rate. After all that how the G8 recently referred to the USD fundamental over-valuation. The objective of exchange rate stability should not be taken to mean that we should tolerate or condone an unjustified overvaluation of over 5% which has been carried for over 5 years with clearly dismal economic results. 

Abstract Agenda

The Malta Independent 

 
The general conference of the Malta Labour Party that should conclude its business this weekend is forced to deal with an abstract agenda.

This being the first meeting following the election defeat of last April (the special conferences of May were purely for the election of the leadership) the general conference should be discussing the analysis report which the Party executive commissioned to an autonomous working group` Ever since the working group handed in its analysis report this has been treated with strict confidentiality. It was rapidly buried in the Party`s darkest vault.

The conference delegates collectively form the Party`s highest organ. They have not been allowed to get the slightest glimpse of the analysis report.` They are not being given the opportunity even to air their views in demanding accountability as to why the election victory they were assured was close at hand, in fact resulted so far off. Instead they are being forced to take sides between the present and past leadership in a two-versioned motion on the Party`s future EU policy which ought to leave as much room for discussion as yesterday`s weather.

If the Party is to bring itself in the mainstream of the electorate`s thinking it really has no option but to accept that Malta has decided to seal its future as an EU member and that this is an irreversible step that leaves no room for further discussion. KMB`s motion to keep open the possibility of renegotiating the accession treaty is far less practical than dismantling the Delimara power station he had vehemently objected to and rebuilding it at Benghajsa where he seemed to prefer it. Certain things that happen cannot be made to unhappen.

The wonder of wonders is why has the Party administration allowed, indeed stoked up,` the confrontation with KMB to mature into a full blown debate at general conference level when what KMB is proposing could be accepted in spirit but without the commitment to renegotiate the Treaty.` As events unfold inside the EU, opportunities will present themselves to re-interpret or move away from certain negative aspects of the treaty in deals where we trade our consent on other matters where our vote would carry weight. Inside the EU this happens quite regularly and we have to learn to do it.` Recently Italy got the OK for a long standing dispute on milk quotas in exchange for lifting its objection to endorse a totally unrelated EU savings directive.

One gets the impression the Party administration was not at all displeased to allow the KMB debate to escalate the way it did. Debating the issue with KMB on a third party media bears witness of the wish to stoke up rather than kill the issue. It offers a very effective diversion from the compulsion to demand accountability for last electoral defeat. Had the conference delegates not been alienated by the confrontation with KMB they would probably demand an answer from the Leader and the outgoing administration to very simple questions.

Why did Labour have to lose an election to change its view on EU membership? Why were genuine Labourites forced to vote against their own party when they were offered a choice between Malta as an EU member or Labour in government? Why was Labour`s non-EU membership policy considered so sacrosanct before 12th April as worth losing an election for? Why the rigidity on EU policy before the election and now this flexibility after condemning the party to an overstay in opposition? 

I have repeatedly asked these questions. I never got any reply if not in the form of an admonishment that my questions were harming the Party. Indeed these questions bear no answers that will not place the burden of Labour`s electoral defeat right at the door of those championing the pro-EU resolution. By rubbishing KMB they can avoid being held accountable to the general conference. On the other hand KMB et al continue to damage the party not only by trying to keep it out of the mainstream of modern political thinking but also by giving a pretext to the leadership and the administration to use their stance as a diversion from the real issues that the conference` should be discussing.

Meanwhile the government continues to break every electoral pledge with impunity as the country suffers not only from a fatigued government but also from an opposition that seems more bent to protect individual positions rather than collectively positioning itself as an alternative government.

The general conference agenda is an abstract one indeed!

Just Another Expensive Patch-Up

The Malta Independent on Sunday 

 
Drydocks employees this week approved the structure of the agreement so ably negotiated for them by the GWU. Indeed they should be thankful and appreciative of the solid defence that the GWU made on their behalf. Re-structuring at the shipyards is unavoidable not so much for EU commitments undertaken but more to stem the financial haemorrhage that has been going on for the last 18 years and that has piled up debts exceeding Lm320 million.

Yet taken in a wider macro-economic view this agreement is likely to be just another expensive patch-up. It also raises serious doubts about government`s true resolve to address the issues which have been left festering uselessly for so long and which have burnt up so many scarce resources. Rather than wasted these resources should have applied to achieve real re-structuring that has always been promised but never delivered.

Look at it from the taxpayers` view. Nine hundred employees are being lifted off the books. Assuming that these are surplus idol labour I would reckon that these were costing the shipyards some Lm7 million to maintain.` The remaining 1700 workers will remain employed with the organisation that is to succeed Malta Drydocks and Malta Shipbuilding.` If on average we have been subsidising the shipyards to the tune of Lm15 million p.a. (more in recent due to the financing of early retirement schemes) what assurances have been built into the agreement that efficiency gains of at least Lm8 million have to be included. Where are these coming from? Or is it just the saving in financial charges on the amount of debt that is being written-off? Saved finance charges on written-off debt of Lm320 million could amount to some Lm20 million that added to the Lm7 million saved wages for the 900 workers being lifted-off the books, will render the company profitable without delivering a single impulse of increased productivity. 

And yet only increased productivity that can deliver our shipyards to a state of commercial sustainability. If notwithstanding EU rules and all, the slimmed down organisation does not generate a sharp increase in productivity than we are just wiping-off one slate clean to start writing up another one. Productivity improvements comes from investments, flexibility of the workforce, and management obsession with control on timely deliverables on the agreed quality levels and within budget. It takes management systems which track and reward efficiency and discipline defaulters. Are the work culture and work practices so much embedded within the shipyards ready for this change?

Tax-payers will still have to foot the bill of the Lm27 million `saved` expenses which although no longer on Drydocks` successor books are still on the taxpayers` back. The wages element of the savings could be mitigated through the operation of early redundancy schemes. But on a macro-economic basis these schemes are a very expensive method of delivering the necessary labour mobility and flexibility and on a social basis they are an absolute heresy.

Early retirement schemes, especially if operated on a voluntary basis, tend to attract the most able-bodied of the work-force who are more likely to find alternative employment given the skills they possess. They are attracted to the idea of cashing a lump sum of money for a change in the work environment. This could leave the organisation with the least productive layer of employees which will make the achievement of productivity gains within the successor organisation so much harder if not neigh impossible.

On a social level what sense does it make to give such lump sums to those who have no real problem to find alternative employment rather than use such funding to train the whole workforce to gain new skills. It is this multi-skilling which best guarantees efficient job mobility and flexibility. A trained worker is both productive within the organisation and can easily find alternative employment outside it.

And taking it further in a wider context what social sense does it make for the State to offer generous early retirement schemes to employees in para-statal organisations and leave relatively unprotected employees in the private sector whose only protection in case of redundancy is a maximum of 12 weeks notice` Are Maltese working in the private sector an under-privileged lot? Are they taxed any less than their brothers, sisters and friends in the public sector? 

As long as we continue solving problems in this patch-work method we continue feeding the system of political patronage which is the main source of our economic problems. Voters will continue to make pressure on their political representative to procure them public sector jobs where redundancy comes with an `if-you-please` message and a bundle of cash. Why choose a private sector job where you have to work much harder, including full days in summer, and were job-security is not much better than a closed door and 12 weeks pay? 

We are all witnessing the structural financial problems of the country. We have been warned of a stern budget as a result. Does it make sense to continue burning resources in this unsociable and unproductive manner rather than address the problem in a holistic manner and devise re-training schemes for the entire over-manning across the whole public sector?  

And how can we promote early retirement schemes with one-hand and push for extended pension retirement age with the other? Can we go both left and right at the same time?

We seem to have lost all sense of creativity and all elements of true leadership. The taxpayer will unavoidably have to pay the price, yet again, of this just another patch-up.  

Czech eye-Opener

The Malta Independent 

  

That Vaclav Klaus, the President of the Czech Republic, was labelled a euro-sceptic I knew. But that he held such strong convictions that the EU enlargement is not serving the interest of the accession countries still came to me as a surprise.

I had the priviledge last week to attend a conference where Klaus was invited to relate his views on the enlargement. In no uncertain terms he stated that the catching up process of his country to the EU average will be slowed down and not accelerated by the terms of the negotiated membership. He also felt dismayed that with each Treaty and after each EU summit a further step is taken to the final objective to render Europe a single political entity.

He argued vehemently that after 40 years of communism, eastern countries deserved to be given a longer period where they could catch up to EU average free form the bureaucracy of membership. This view indeed reflects the findings of a research conducted by the Cato Institute, a Washington-based public policy research foundation, that challenges the belief that joining the EU will improve the competitive position of Central and Eastern European Countries (CEEC) in the world economy. I had written about this 4 weeks back ( Researchers vs the People – 3rd October 2003).

One could argue that Klaus has no prerogative on the truth and that his views could be challenged on the basis that it takes too much an economic perspective of the matter. He may be criticised as giving too low weighting to the political stability benefits of the enlargement which could lead to a speedier influx of foreign direct investment than would have been the case if membership was dragged out over a longer time horizon.

I had the opportunity to ask Klaus for an explanation of the disconnection between the views of the President of the Czech republic with those of the population at large considering the overwhelming majority (77%) with which the referendum was carried in Czech republic as in other East European accession states.

The reply he gave me is an eye-opener. After 40 years of communism and after going through the crush of the Prague Spring under Dubcek in August 1968 when Czechoslovakia was invaded by the Warsaw Pact forces, the fall of communism in 1989 gave the Czechs the dream of going back to Europe. The Accession Treaty which Klaus himself signed in Athens last April is the concrete expression of such dreams and in Klaus own words anyone who would have argued against the concretisation of such dreams would have been cut out of the political mainstream and considered a Milosevic. This explains why he had to keep quite silent during the referendum.

He told me that now that the issue has been sealed by the signing of the Athens treaty the real debate on the terms of the accession has started and there are critical views on its terms and on the proposals contained in the EU draft constitution. He said that there is a large and growing section in Czech Parliament that wishes to subject the EU constitution to a fresh referendum and he was confident that it is that referendum which will show the true expression of the people not just to be back in Europe but to go forward into the EU.

I think this is an eye-opener both to the government and the opposition. To the government not to close the door on a referendum on the Constitution. Apart from the democratic significance of such a referendum it could strengthen the government’s hand in arguing for fine-tuning of the draft constitution on the points mentioned by the Prime Minister, most of all the need to retain unanimity voting on foreign security and defence issues.

To the opposition it could give it an opportunity to enhance its new found zeal for EU membership and could appease the genuine though misguided efforts of KMB to re-negotiate the Treaty and instead insist on the Constitution safeguarding our right to veto on Foreign and Security policy (or at least on our participation therein) and on our right to having a fully fledged Commissioner and to participate equally as other States in the EU Presidency rotation.

Such a strategy would not only put Labour in line with quite acceptable mainstream thinking in using the Constitution referendum to stem the EU slide towards political Union, but would also give the MLP conference of next week the opportunity to discuss what it really should be discussing i.e. why where EU policies chosen before the election which were considered worth losing an election for, only to change them after the event.

Time to Shape Up

The Malta Independent 
 

It was a pitiful mind-bending experiencing. Hearing the MLP leader in a live radio debate on PBS with his predecessor under the chairmanship of a former deputy leader discussing the EU policies which the Opposition party should adopt at its upcoming general conference, should have hurt the sentiments and offended the intelligence of all those who have Labour at heart.

Firstly the fact that such an internal conflict about EU policies had to be externalised on third party media exposes the lack of internal space for such a debate upon which the general conference delegates still have to deliberate and decide. Secondly it shows total lack of consistency with other occasions where such externalisation met the wrath and discipline of the Vigilance & Disciplinary Board.

Both aspects merit further consideration and analysis. KMB line of argument is hardly surprising. Even if KMB did not put forward the case for rejecting the Accession Treaty as signed by government last April in Athens, it would still be a fact that the mood among a large section of Labour’s rank and file mirrors much of KMB’s arguments. This is unavoidable. Having militated over a long number of years against EU membership in ‘God forbid’ terms it is to be expected that many will have difficulty to adjust to new realities.

But political parties do change policies from time to time. Once policies get rejected by the electorate they would normally have to change to reflect the new realities as part of the quest to gain majority support at the next time of asking. But it is policies that change not the principles. So when a political party raises a policy such as the one about EU non-membership to the level of principle, it will unavoidably sail into confusion as it tries to convince its followers that the principle was no principle but was simply a policy.

Normally such shift of policies become more acceptable by a change of leadership. Things get debated. Policies get contrasted. Personalities argue and put forward their case and ultimately a vote is taken. The majority rules prevail allowing full space for the minority to argue and make their point. Normally after time the majority grows bigger behind the new leader and the minority, whilst holding on to their view, get less vociferous and allow due space for the new leader to execute his/her policies.

When however new policies get promulgated by the previous leadership who had mistakenly elevated the previous policies to principle status, they lack credibility. They harden the minority, if minority it is, in the view that principles should remain principles and cannot be reduced to policies by the same leadership that had emphatically developed them in hard black and white terms.

Can somebody suggest any reason why the internal debate on the new EU policies is being externalised over third party media and then allowed no space on the party’ inner mechanisms and party’s own media, whereas the independent Analysis report has been treated with utmost secrecy and rapidly buried into the Party’s darkest vault? If anything the contrary should apply. The new EU policy could easily be debated internally among the one thousand or so conference delegates with full space being allowed to contrasting viewpoints. The general public is interested mostly on what the policy is when it is decided upon, and has much milder interest on how the Party works to formulate and decides upon its policies

The analysis report is however of interest not only to the Party administration and executive. It is of interest to the general public, certainly those 134000 who voted Labour believing that its policies can gain majority support. These are fully entitled to know why this has not happened. They demand accountability as to who will carry the guilt for missing the objective which had been described as quite easily within reach.

It is time for Labour to shape up into a proper Opposition not least re-ordering its internal affairs and put logic into what should be externalised, as a duty not as a privilege, and what should be debated internally in the policy formation stage. Could it be that the strange willingness to externalise a pure internal debate is meant as a deviation from the need to give proper account to the conference delegates and the public at large of the election analysis report. Whoever elevated the EU non-membership policy into a principle worth losing an election for only to change it after the event has something to answer for.

 

Interim Solutions - Permanent Damage

The Malta Independent on Sunday 

“Are you preparing a very harsh budget?” the interviewer asked Dr Fenech Adami recently.

His reply is awesome. “The country can no longer ignore issues that exist and have to be tackled seriously. Sometimes, interim solutions are sought. The time for that is past. This is clear in the case of the drydocks. We have been seeking interim solutions, which have not given us long-term results. This also applies to other issues, almost across the board. Look at social security and the health system... we have to seek long term solutions.”
I cannot agree more. I have been hammering at it for years that the country was expensively seeking interim short-sighted patch-ups which would in time make real lasting solutions far more painful and difficult. What marvels me is the coldness with which the Prime Minister now admits it. He makes it sound as if he is a new-comer trying to put right what predecessors had fouled. He seems to forget that he has been running the show for 16 years almost uninterruptedly. What marvels me is the gentle strokes with which interviewers accept these sort of replies rather than demand why we had to come to this stage.

One must not forget that barely six months back in pre-election mode the same Prime Minister was proclaiming solemnly that all was fine and dandy. That State finances were on solid foundations. That everything was sustainable and that EU accession would, on its own produce an influx of new investment which will spur economic growth without having to take hard cost cutting measures.

I should repeat an analysis I had written on May 9, 2003, in this paper’s sister daily where I had analysed Dr Fenech Adami’s performance on the 16th anniversary of his first election win on 9 May, 1987. I had stated that:

“Sixteen years of his administration has given the country a false sense of prosperity and well-being built on very shaky foundations that future generations will struggle to maintain as they will have to make good for past excesses. These can best be signified in the three major structural problems which will come to face us with daunting if not horrifying stark reality.

“Firstly we have the fiscal deficit problem. We still await publication of the December 2002 figures. November 2002 figures showed that in spite of Lm21 million cosmetic exercise related to MIA privatisation we were Lm30 million off the mark as at end November. Stories about attempts being made to shift expenditure from year to year to hide the extent of the deficit have been made and never convincingly refuted.

“Be what it may such problems cannot be solved by cosmetics or creative accounting but by sustainable economic growth and serious expenditure controls.

“The environmental faults we have developed are seriously threatening sustainability of economic growth and our quality of life. Waste mismanagement, air and sea pollution, uncontrolled urban sprawl and horrific road and transport problems are a distasteful legacy of an unbalanced administration where short term party political priorities were given precedence over the real national interest.

“Lastly the unfunded pension liabilities which have been allowed to accumulate whilst taking political advantage from short-term over-consumption which fuelled and extended the pension problem, is becoming a reality that can no longer be postponed.

“I have a theory that Dr Fenech Adami’s recent electoral success is totally due to Labour’s unwise decision for the EU issue to be decided through an election not through a referendum. This has placed Dr Fenech Adami in the strange situation where the more he was criticised on the domestic front, the more his re-election prospects improved through the support of the many who thought that the country could no longer do without the externally imposed discipline of EU membership.

“This is fine for Fenech Adami as a party leader. But not so fine for a statesman who should have delivered the country in a good state to decide on EU membership on its merits and not through default because of the imbalances his laissez-fair style allowed to materialise.”
I am pleased that Dr Fenech Adami is evidently sharing my own assessment of his performance and that he seems determined that in the last phase of his political career, free from the pressures of seeking re-election, he seems inclined to put the country back on a sustainable track to make up for past excesses. I think he owes this much to the well-meaning citizens of this micro-State who have chosen EU membership not as a panacea for our ills, but as a external source of discipline to force our political leaders to take decisions and initiative meant to serve the long-term sustainability of the catch-up process of our standard of living to EU averages rather than to serve the short term interest of politicians to acquire or remain in power.

Hard decisions await us. And hard decisions will find great resistance for acceptance especially by those who were consistently led to believe that the free lunch could last forever. To facilitate acceptance, solutions have to be and be perceived as being fair.

I strongly feel that by tackling the issue sectorially the fairness dimension will be missing and resistance will be fortified possibly to the point of aborting the process of change. The obvious question is Why the drydocks? Why Malta Shipbuilding? Why Medigrain? Why PBS? By implication this question means why not the whole central government administration? Why not Water Services Corporation? Why not Freeport? Why not the multitude of authorities who pay themselves private sector salaries for doing a public sector job? I am sure we have among us many Grassos (Richard Grasso was the former chairman of the NYSE) if everything is put in relative proportions.

So let’s indeed stop interim solutions. Let’s look at the problem in a holistic manner and propose real solutions that though painful are perceived as fair and equitable. Maybe a good starting point would be if the Prime Minister were to brush up his reading of a report which “seven wise men” had prepared for the Labour government in 1997/98 and which the Prime Minister had abused so much by instigating the resistance to change that he is now trying to convince us is necessary.