Something`s Got to Give

The Malta Independent 

I just finished reading a book titled ‘The Price of Loyalty’ that relates the experience of Paul O’Neill in his two-year stint as Treasury Secretary under George W. Bush between January 2001 and December 2002.

As the Italian saying goes it shows that ‘tutto il mondo e un paese’. Even in the oracle of democracies, the USA, politics is heavy going for genuine people in the field of finance who stick to the principle that short term electoral stimuli should not be allowed to compromise long term sustainable economic growth. O’Neill was fired by Bush when he could not accept the unproven thesis favoured by politicians that that deficits do not matter.

O’Neill was considered as a stumbling block to fairy-tale gun and butter politics. He maintained that America cannot run and finance expensive wars throughout the world while simultaneously treating its citizens with multiple tax-cuts. Any attempts to do so will unavoidably result in huge deficits, currency depreciation and unstable commodity prices, not least those denominated in dollars including oil. No wonder the financial markets are jittery on the sustainability of such loose policies which O’Neill opposed whole-heatedly.

America being America, basically in charge of the dollar printing press with which it can flood the world to ease financing its deficits inexpensively, can probably prolong such financial irresponsibility well into the future and beyond the President’s re-election test. Next November will prove whether the US electorate is solely impressed by the immediate positive impact of a growing economy or whether it takes also into account that unsustainable deficits will undermine such growth in the long term and challenge America sole-superpower status, dented as it already is by its imprudent use of irresponsible unilateralism.

In the nineties we have had a similar experience in Italy. When its politicians drove it to financial decadence, the electorate had to recall finance people like Ciampi, Dini and Prodi to sort it out of its financial mess and straighten it up to face the Euro challenge. It looks like the politicians are driving Italy again into financial sclerosis which explains why Prodi is ticking off the calendar at his Brussels office, counting the days for his return to Italian politics.

I have been through it in Malta too. When I tried to make some sense on issues like VAT and EU membership, because I argued logically, because I went to the conclusions where the facts led me to, rather than to the conclusions that someone else pre-determined and expected facts be made to fit into such prejudgements, I also found local politics heavy going. Out of loyalty to my own intelligence I had to kiss politics good-bye.

But the story is never ending. Even whilst out of politics what I say does not seem to please politicians. Take the issue of the right level at which the Malta Lira should be fused into the Euro.

I wrote and spoke extensively on the subject. Basically my point was that the Central Bank’s own research shows that the Maltese Lira is some 10% overvalued benchmarked in real terms to its 1995 base. I said that this is one of the reasons why our country is losing out on the attraction of investments as our economy is not competitive.

I argued that the true solution is economic restructuring and that as part of such restructuring we should revisit the value of the Maltese Lira to ensure that we do not join the Euro at an over-valued rate. I warned ferociously against quick-fixes of stand alone devaluation as this would lead to nowhere and any short-term benefit fizzles out leading instead to a spiral of inflation.

Last week Vannessa Macdonald of the Times asked the new Parliamentary Secretary responsible for Finance. Hon Mr Tonio Fenech “Alfred Mifsud suggested a devaluation to remove "over-valuation" and to ensure that we join the euro at a competitive rate. Devaluation is not a four-letter word is it?”

Mr Fenech replied: ”It would be crazy, as simple as that. I disagree completely with Alfred Mifsud's theory. We devalued in the past with zero effect. We had a competitive advantage for a few days which was lost soon after when prices started going up again. All that happened was that we made pensioners poorer.”

Absolutism at its best! Who cares that I did not propose devaluation on its own but accompanied by other measures to ensure that we will not devalue with zero effect as in past. But because Government does not know or does not want, till now, to re-structure, so it tries to kill through misrepresentation those of us who argue on facts rather than wishes.

One could argue that if we re-structure we need not devalue. Fair comment, though I think that the effects of restructuring could produce better and quicker results if the overvaluation that has been allowed to creep into the Lira external value is addressed as well.

We do not unfortunately, have a dollar printing press like the US Treasury has. If we don’t re-structure than something’s got to give. If not the external value of the Lira than it’s the real economy, it is jobs, it is growth, it is our standard of living.