Glory for Keeps, Sacrifices to Share

The Malta Independent - Friday Wisdom

After months of shop talk round the MCESD table, ultimately, when it came down to hammering the specifics of a much wished-for social pact meant to restore the international competitiveness that has long slipped through our fingers, the necessary consensus was found wanting. This is hardly surprising. In fact, I labelled these negotiations in one of my recent writings as the “dialogue of the deaf”.

Global competitiveness can be restored in one of two ways. It can be addressed by means of an instant adjustment to the exchange rate value of the Maltese lira. This is a high-powered tool with immediate positive impact on global competitiveness. Equally it carries the negative impact of reduction in the real value, as against the nominal value which remains intact, of fixed income earnings and financial assets denominated in domestic currency.

For an open economy like ours, where we import most of what we consume and export most of what we produce, such an exchange rate measure is normally avoided on the grounds that the instant benefit to competitiveness is quickly eroded by the price inflation generated by the higher cost of imports.

I would subscribe to such an argument in normal circumstances. But our circumstances are not normal. We are suffering from structural economic fatigue, where growth is at best anaemic. We have structural disequilibrium in public finances. We have a wide consensus that the country is living beyond its means and that this can only be effectively and quickly addressed by a roll-back, hopefully very temporary, in the general standard of living.

We have studies which show that main cause of loss of competitiveness is an artificial real over-valuation of our exchange rate in the region of some 10 per cent, accumulated over the last 10 years by tolerating inflation rates higher than those of our global competitors. And above all we are on the eve of taking a once in a lifetime irreversible decision to fuse our currency into the Euro single currency system, which would remove the potential to use the rate of exchange policy as an economic management tool. Furthermore we have clear case studies showing that countries that joined the Euro at a competitive rate (a rate which is equivalent or below the purchasing parity equilibrium rate) have fared much better than countries that joined the Euro at an over-valued rate. Among the former one can typify Ireland while the latter are typified by Germany.

I continue to make the case that the possibility of using the rate of exchange as an economic policy tool to immediately restore our global competitiveness should in the current circumstances be seriously considered as a feasible alternative to the much wished-for but quite elusive social pact.

The leader of the opposition gave this policy a nod of approval in parliament this week, even though his suggestion to phase the adjustment over a number of years seems unworkable. A phased approach would extend the period of destabilisation, forcing the Central Bank to substantially increase the premium for domestic interest rates to compensate local savers for the programmed rate of exchange adjustment spread over an extended period. However, implementation method apart, there could be a rare but precious consensus between the government and opposition on the need to use the rate of exchange policy to regain global competitiveness. It should not be discarded too lightly.

Not least, because even in the event of a social pact, but particularly without it, the default alternative could be much more painful. If we fail to regain competitiveness, the market will itself make its own adjustment. Not only we will fail to attract the much needed new productive investment to generate growth at a rate faster than that of our competitors to catch up to their standard of living, but we could lose existing investment as globalisation pressures force employers to seek more competitive locations.

Alternatively, or concurrently, there will be a micro social pact reached at company level, where the unions have to concede the retrenchment of benefits secured in the past in order to deflect employers from the temptation of relocating.

This is happening in Germany, where the use of exchange rate policy as a tool of economic policy is no longer possible, since the Deustchemark has been fused into the Euro. In Germany, employers like Siemens, Volkswagen and BMW have forced unions to concede extended working hours without additional pay in return for limited no-redundancy guarantees.

Given the local situation, is it any wonder that unions cannot subscribe to a reduction in leave and the forfeiture of overtime entitlements? When the nationalist government of 1987 was elected on the promise of the restoration of seven public holidays formerly abolished by a Labour government and an increase in leave entitlement from 20 to 25 days, the government took unto itself all the ensuing glory and political premium. Now that there are sacrifices to proclaim, is it feasible to expect the unions to subscribe to a government policy of “glory we keep, sacrifices we share”?

In the final analysis, government has the democratic responsibility to govern, to take the measures necessary to address economic ills, with consensus or without it. Trying to restore

competitiveness by rolling back specific measures could be politically unfeasible and should be left to negotiations between employers and unions.

As an employer, government will have ample opportunity to set an example when re-negotiating the collective agreement for public sector employees.

On the other hand, the route to regained global competitiveness through the exchange rate policy route should be not only more politically feasible, but in the current circumstances it spreads the burden of adjustment more equitably.

Its instant impact is an advantage not to be discarded because, frankly speaking, if we go for a gradual medium-term solution, I am not too sure whether we have enough economic oxygen left to see this gradualist approach through.