The Malta Independent on Sunday
About this time every year most financial practitioners assemble for a formal dinner organised by the Institute of Financial Services, Malta Branch, in a opulent setting serving food which expands the waist and narrows blood vessels.
It is timed before the budget for the key guest speaker at such an occasion is the Central Bank`s Governor who normally takes the opportunity to review the performance of the Maltese economy during the year drawing to a close and for the foreseeable future, and to offer some words of wisdom to the Minister of Finance for the proper orientation of the Budget which would be in the final phase of preparation.
Those who, like myself, attend such annual event almost without fail, know that the Governor`s speech is becoming a rather boring repetition and a growing list of complaints that his advices of previous years have been largely ignored; that the problems have if anything compounded themselves through the passage of time and the evident inertia of those responsible for leading us to economic prosperity.
With similar monotony there is unfailingly the replica of the Minister of Finance who broadly acknowledges the problems highlighted by the Governor but positively re-assures that the next budget will be the start of a medium term programme which addresses such problems, with particular reference to the fiscal deficit, within a few years.
Almost unfailingly, events between one annual dinner and another unfold to prove that problems are being avoided rather than addressed and that measures taken are generally cosmetic and do not go to the root of the problem. The end result is that failures and misses are financed by loading another odd hundred million liri to the national debt, reducing the ever diminishing residual debt capacity, complicating the problem for the ensuing year by increasing the debt servicing costs by a few additional million liri, forcing us to borrow more to pay interest on the burgeoning public debt.
Last Thursday`s annual dinner of the Institute of Financial Services was basically more of the same. The noticeable difference was that the replica to the Governor`s critical speech was delivered by the Prime Minister who is directly responsible for the budget portfolio and who in spite of the odds of mathematics insisted that the budget deficit will be addressed in the short time of two years, by 2006, so that that Malta could join the Euro with the first wave of new members in the EMU sometime in 2008.
Old age and experience force people like me to take such assurances with a bucketful of salt and to express matter of factly that we prefer to judge on deeds rather than assertions. As it happened sitting at the same table there was a representative of the `private sector who is privy to the ongoing negotiations within the MCESD regarding the much desired social pact, and I could confirm my suspicions that these negotiations are basically the dialogue of the deaf.` A dialogue where each side states and defends it position expecting the other side to offer concession to bridge the gap by pulling the other side to its own point of view. With the government and Central Bank offering no leadership it appears likely that negotiations within the MCESD will either lead to no agreement or to a botched up deal which in no way makes real and effective contribution to restoring the lost global competitiveness which plagues our economy, forcing us to anaemic growth based on unsustainable consumption whilst the world around is growing fast based on investment and production.
And this dialogue of the deaf is continuing throughout the economy where on the eve of deciding whether to join the Exchange Rate Mechanism of the Euro, no one dares to even suggest at what level such docking into the Euro should take place.
Now every country in the world worries when its rate of exchange is taken by market forces to high levels. Just this week we had Jean Claude Trichet, Governor of the European Central Bank, expressing publicly his concern for the rapid appreciation of the Euro against the US dollar reaching a peak of 1.29 dollars per one euro and calling the rapid adjustment as brutal and undesirable.
How come therefore that our monetary authorities, the government and the parties round the MCESD table do not feel concerned with the fact, confirmed statistically by the Central Bank`s own research (Quarterly Review 2004:2 page 39 Chart 5.4) that the real exchange value of the Maltese Lira is 10% over-valued compared to its 1995 base because of negative differentials between our domestic inflation and that our main trading partners`
The argument is often made that removing this over-valuation through an exchange rate adjustment, whilst restoring competitiveness with instant impact, will not have a lasting effect as the inflation generated by such measures will feed back into the system eroding the gained competitiveness and risking a spiral of exchange rates adjustments and additional inflation feeding on each other.
This argument could have applied in the past but certainly should not be a pervasive show stopper in the current circumstances. By joining the Exchange Rate Mechanism at a chosen central rate we would be making a public declaration that the chosen central rate will be very very close to the eventual fusion rate of the Maltese Lira into the Euro. Further depreciations would be out of question and if necessary other monetary policy instruments would have to be used to defend the chosen rate.
The risk of fusion into the Euro at an over-valued rate cannot be over-estimated and if we have to err we would better err on the side of under rather than over-valuation. Just see the fortunes of Ireland who joined the Euro at a competitive rate and compare them to those of Germany who joined the Euro at an overvalued rate.
The risk of doing nothing is huge. As people`s minds gets focussed on the Euro project, Central Bank own admission of the Maltese Lira real overvaluation will make early conversion into the Euro a one-way bet.` An accumulating avalanche of people who anticipate the Euro fusion will force the Central Bank to defend its reserve position and the chosen peg by raising `interest rates way beyond the level needed to stimulate the tempo of economic growth. The recent experience of Hungary should be an eye-opener.
If this country is to regain global competitiveness any time soon and to catapult itself to fast economic growth rates necessary to catch up with our competitors, the parties around the MCESD table, government and Central Bank included, cannot passively await the Unions and Employers to come up with some elusive magic formula. They need to do their part and offer the necessary leadership and remove taboos and red lines from all economic policies, rate of exchange policy included. By doing so the Governor would gain some credibility for next year`s speech as otherwise we can anticipate as of now that next year he can just as well re-read this year`s speech or that of five year ago.
About this time every year most financial practitioners assemble for a formal dinner organised by the Institute of Financial Services, Malta Branch, in a opulent setting serving food which expands the waist and narrows blood vessels. It is timed before the budget for the key guest speaker at such an occasion is the Central Bank`s Governor who normally takes the opportunity to review the performance of the Maltese economy during the year drawing to a close and for the foreseeable future, and to offer some words of wisdom to the Minister of Finance for the proper orientation of the Budget which would be in the final phase of preparation.
Those who, like myself, attend such annual event almost without fail, know that the Governor`s speech is becoming a rather boring repetition and a growing list of complaints that his advices of previous years have been largely ignored; that the problems have if anything compounded themselves through the passage of time and the evident inertia of those responsible for leading us to economic prosperity.
With similar monotony there is unfailingly the replica of the Minister of Finance who broadly acknowledges the problems highlighted by the Governor but positively re-assures that the next budget will be the start of a medium term programme which addresses such problems, with particular reference to the fiscal deficit, within a few years.
Almost unfailingly, events between one annual dinner and another unfold to prove that problems are being avoided rather than addressed and that measures taken are generally cosmetic and do not go to the root of the problem. The end result is that failures and misses are financed by loading another odd hundred million liri to the national debt, reducing the ever diminishing residual debt capacity, complicating the problem for the ensuing year by increasing the debt servicing costs by a few additional million liri, forcing us to borrow more to pay interest on the burgeoning public debt.
Last Thursday`s annual dinner of the Institute of Financial Services was basically more of the same. The noticeable difference was that the replica to the Governor`s critical speech was delivered by the Prime Minister who is directly responsible for the budget portfolio and who in spite of the odds of mathematics insisted that the budget deficit will be addressed in the short time of two years, by 2006, so that that Malta could join the Euro with the first wave of new members in the EMU sometime in 2008.
Old age and experience force people like me to take such assurances with a bucketful of salt and to express matter of factly that we prefer to judge on deeds rather than assertions. As it happened sitting at the same table there was a representative of the `private sector who is privy to the ongoing negotiations within the MCESD regarding the much desired social pact, and I could confirm my suspicions that these negotiations are basically the dialogue of the deaf.` A dialogue where each side states and defends it position expecting the other side to offer concession to bridge the gap by pulling the other side to its own point of view. With the government and Central Bank offering no leadership it appears likely that negotiations within the MCESD will either lead to no agreement or to a botched up deal which in no way makes real and effective contribution to restoring the lost global competitiveness which plagues our economy, forcing us to anaemic growth based on unsustainable consumption whilst the world around is growing fast based on investment and production.
And this dialogue of the deaf is continuing throughout the economy where on the eve of deciding whether to join the Exchange Rate Mechanism of the Euro, no one dares to even suggest at what level such docking into the Euro should take place.
Now every country in the world worries when its rate of exchange is taken by market forces to high levels. Just this week we had Jean Claude Trichet, Governor of the European Central Bank, expressing publicly his concern for the rapid appreciation of the Euro against the US dollar reaching a peak of 1.29 dollars per one euro and calling the rapid adjustment as brutal and undesirable.
How come therefore that our monetary authorities, the government and the parties round the MCESD table do not feel concerned with the fact, confirmed statistically by the Central Bank`s own research (Quarterly Review 2004:2 page 39 Chart 5.4) that the real exchange value of the Maltese Lira is 10% over-valued compared to its 1995 base because of negative differentials between our domestic inflation and that our main trading partners`
The argument is often made that removing this over-valuation through an exchange rate adjustment, whilst restoring competitiveness with instant impact, will not have a lasting effect as the inflation generated by such measures will feed back into the system eroding the gained competitiveness and risking a spiral of exchange rates adjustments and additional inflation feeding on each other.
This argument could have applied in the past but certainly should not be a pervasive show stopper in the current circumstances. By joining the Exchange Rate Mechanism at a chosen central rate we would be making a public declaration that the chosen central rate will be very very close to the eventual fusion rate of the Maltese Lira into the Euro. Further depreciations would be out of question and if necessary other monetary policy instruments would have to be used to defend the chosen rate.
The risk of fusion into the Euro at an over-valued rate cannot be over-estimated and if we have to err we would better err on the side of under rather than over-valuation. Just see the fortunes of Ireland who joined the Euro at a competitive rate and compare them to those of Germany who joined the Euro at an overvalued rate.
The risk of doing nothing is huge. As people`s minds gets focussed on the Euro project, Central Bank own admission of the Maltese Lira real overvaluation will make early conversion into the Euro a one-way bet.` An accumulating avalanche of people who anticipate the Euro fusion will force the Central Bank to defend its reserve position and the chosen peg by raising `interest rates way beyond the level needed to stimulate the tempo of economic growth. The recent experience of Hungary should be an eye-opener.
If this country is to regain global competitiveness any time soon and to catapult itself to fast economic growth rates necessary to catch up with our competitors, the parties around the MCESD table, government and Central Bank included, cannot passively await the Unions and Employers to come up with some elusive magic formula. They need to do their part and offer the necessary leadership and remove taboos and red lines from all economic policies, rate of exchange policy included. By doing so the Governor would gain some credibility for next year`s speech as otherwise we can anticipate as of now that next year he can just as well re-read this year`s speech or that of five year ago.
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