The Malta Independent
M
ake 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.
Nothing can restore our international competitiveness as instantly and effectively as a downward revision of the Maltese Lira rate of exchange to account for the over-valuation that has been allowed to creep into its present level by injudicious adjustments to the peg-basket of currencies, and by the tolerance of inflation rates higher than those of our main trading partners.
Yet this measure should be resorted to as a last resort and only if it forms part of an overall package of adjustment on the lines of the 9 deliverables I have indicated in previous contributions in this series. The soft option of taking this measure on its own will unavoidably lead to unsustainable temporary respite that serves only to complicate the long term solution.
It is for this purpose that I kept this measure as the last in a series of 10 deliverables as it can only have be an effective and durable cure if it forms part of a whole package of re-structuring. It is no use resorting to such a measure if the unions flex their muscle to extract wage increases to make up for the one-off price adjustments generated. It is also of no use if the wage mechanism, which effectively indexes inflationary impulses into statutory wage increases, is kept intact.
A devaluation of the currency, can only be effective if it is accepted for what it is i.e. a general across the board retraction of our standard of living with the rest of the world aimed to restore competitiveness as a basis for future growth. It is a step back in order to build a solid foundation for taking further steps forward.
From a social point of view I think a devaluation, if accepted for what it truly is, represents a very fair arrangement in spreading the burden of re-structuring across the board so that nobody gets crushed by carrying an unfair part of such an adjustment. It is a process whereby those who remain in employment make a contribution to the adjustment process by taking a small cut in their living standards to give a better chance to those who lose their job, as an unavoidable part of economic re-structuring, to place themselves into competitive employment sooner rather than later.
If framed in this context I am positive that devaluation will be removed from the dirty word dictionary where our politicians and economic managers have placed it. Rate of Exchange adjustments happen all the time in order to account for changing economic realities. The USD has moved from 1.22 Euros in autumn 2000 to its current 0.79 Euro to take account of its huge twin deficits, fiscal and balance of payment. Similar adjustments happen between other currencies even if $ swings are excluded.
Take the softening of the Swiss France vs. the Euro. No way are the Swiss begrudging this drop. On the contrary they are fearing it could be too short lived.
In the absence of a free currency market to establish the external rate of the Maltese Lira its value is determined by administrative decisions taken political leaders acting jointly or in consultation with monetary policy operators. In the meantime the Monetary Policy Council chaired by the Governor of the Central Bank continues to operate an interest rate policy aimed to prop up the current currency peg forcing us to keep domestic interest rates at a premium to its theoretical composition in the peg-basket of currencies. This has a diametrically opposite effect to the days of rigid exchange control on capital movements when domestic interest rates used to be at a discount, sometimes quite substantial, to international interest rates.
Whilst we should not long for the return of such rigidities which in turn create other problems of inefficient misallocation of resources, one must take note that domestic operators are being rendered less competitive under the new monetary policy regime than under the previous one.
For a wide-open economy like ours where imports and exports form a very large percentage of the GDP one ought indeed be very cautious in recommending exchange rate adjustments.` There is always a grave risk that even if such adjustments are economically needed they are in practice rendered as a soft option to the more painful re-structuring, leading instead to a spiral of inflation and further devaluations in the Italian style` of the 70`s and 80`s.`
However on the eve of our applying to join the ERM II mechanism leading to the fusion of the Maltese Lira into the Euro such risk is much more manageable and forces me to conclude in favour of a one-off adjustment to our rate of exchange before taking the Euro plunge.
By joining the Euro we would be removing a shock absorber of economic stress and hardening the entire public debt from domestic currency into a hard currency. The risks of joining the Euro at too high a rate are unbearably painful, as the German experience shows, and caution should indicate that we should favour joining at a lower competitive rate, imitating the Irish who continue to use the monetary union to their economic delight.
Dogma that rate of exchange policy is untouchable, is, in the current circumstances, misplaced and perilous, risking shift of the whole pain of adjustment onto the employment sector.
M
ake 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. Nothing can restore our international competitiveness as instantly and effectively as a downward revision of the Maltese Lira rate of exchange to account for the over-valuation that has been allowed to creep into its present level by injudicious adjustments to the peg-basket of currencies, and by the tolerance of inflation rates higher than those of our main trading partners.
Yet this measure should be resorted to as a last resort and only if it forms part of an overall package of adjustment on the lines of the 9 deliverables I have indicated in previous contributions in this series. The soft option of taking this measure on its own will unavoidably lead to unsustainable temporary respite that serves only to complicate the long term solution.
It is for this purpose that I kept this measure as the last in a series of 10 deliverables as it can only have be an effective and durable cure if it forms part of a whole package of re-structuring. It is no use resorting to such a measure if the unions flex their muscle to extract wage increases to make up for the one-off price adjustments generated. It is also of no use if the wage mechanism, which effectively indexes inflationary impulses into statutory wage increases, is kept intact.
A devaluation of the currency, can only be effective if it is accepted for what it is i.e. a general across the board retraction of our standard of living with the rest of the world aimed to restore competitiveness as a basis for future growth. It is a step back in order to build a solid foundation for taking further steps forward.
From a social point of view I think a devaluation, if accepted for what it truly is, represents a very fair arrangement in spreading the burden of re-structuring across the board so that nobody gets crushed by carrying an unfair part of such an adjustment. It is a process whereby those who remain in employment make a contribution to the adjustment process by taking a small cut in their living standards to give a better chance to those who lose their job, as an unavoidable part of economic re-structuring, to place themselves into competitive employment sooner rather than later.
If framed in this context I am positive that devaluation will be removed from the dirty word dictionary where our politicians and economic managers have placed it. Rate of Exchange adjustments happen all the time in order to account for changing economic realities. The USD has moved from 1.22 Euros in autumn 2000 to its current 0.79 Euro to take account of its huge twin deficits, fiscal and balance of payment. Similar adjustments happen between other currencies even if $ swings are excluded.
Take the softening of the Swiss France vs. the Euro. No way are the Swiss begrudging this drop. On the contrary they are fearing it could be too short lived.
In the absence of a free currency market to establish the external rate of the Maltese Lira its value is determined by administrative decisions taken political leaders acting jointly or in consultation with monetary policy operators. In the meantime the Monetary Policy Council chaired by the Governor of the Central Bank continues to operate an interest rate policy aimed to prop up the current currency peg forcing us to keep domestic interest rates at a premium to its theoretical composition in the peg-basket of currencies. This has a diametrically opposite effect to the days of rigid exchange control on capital movements when domestic interest rates used to be at a discount, sometimes quite substantial, to international interest rates.
Whilst we should not long for the return of such rigidities which in turn create other problems of inefficient misallocation of resources, one must take note that domestic operators are being rendered less competitive under the new monetary policy regime than under the previous one.
For a wide-open economy like ours where imports and exports form a very large percentage of the GDP one ought indeed be very cautious in recommending exchange rate adjustments.` There is always a grave risk that even if such adjustments are economically needed they are in practice rendered as a soft option to the more painful re-structuring, leading instead to a spiral of inflation and further devaluations in the Italian style` of the 70`s and 80`s.`
However on the eve of our applying to join the ERM II mechanism leading to the fusion of the Maltese Lira into the Euro such risk is much more manageable and forces me to conclude in favour of a one-off adjustment to our rate of exchange before taking the Euro plunge.
By joining the Euro we would be removing a shock absorber of economic stress and hardening the entire public debt from domestic currency into a hard currency. The risks of joining the Euro at too high a rate are unbearably painful, as the German experience shows, and caution should indicate that we should favour joining at a lower competitive rate, imitating the Irish who continue to use the monetary union to their economic delight.
Dogma that rate of exchange policy is untouchable, is, in the current circumstances, misplaced and perilous, risking shift of the whole pain of adjustment onto the employment sector.
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