Sunday, 29 May 2005

Blessing in Disguise

The Malta Independent on Sunday 


If opinion polls matter, it is likely that the French will today vote against the adoption of the EU Constitution authored by the Giscard d`Estaing convention, and the Dutch will follow suit during the course of next week.

For many who have worked hard to give the enlarged EU a workable set of rules that balance the sovereignty of the individual member countries against the need to transfer power to a central point that co-ordinates Community-wide policies, this would be a slap in the face.

Not that we have not been through such experiences before.` The Irish and the Danes had said no in referenda to approve similar Treaty changes. However, the issue was subsequently resolved following second attempt referenda that where promoted by strong PR campaigns.` The Irish and the Danes were persuaded to vote yes not to appear as the spoilers of the process of European enlargement and integration.

It might not be that easy with the French if they vote no today. It will be almost impossible if the Dutch electorate also thumbs down the EU constitution as this will probably block any possibility of such Treaty being adopted by the UK electorate if their referendum is held as planned during the course of next year.

The consequences of such a vote would be that the EU will have to continue to function on the basis of the messy and complicated Nice Treaty which is unsuitable for an enlarged EU of 27 countries and which offers practically no scope to consider further enlargement to embrace Turkey and other Balkan states into the EU within the next decade.

Many tend to view refusal of the Constitutional Treaty as leading to a process unravelling the EU project.` If the new rules are unacceptable and the old rules are unworkable then the system will disintegrate. I am not that pessimistic.` Indeed I think it could be a blessing in disguise.

It could bring a dose of realism to the minds of the bureaucrats that are attempting to force EU integration over people`s heads and make them to realise that in such matters leaders cannot run much faster than the people they are leading without creating a dangerous disconnection that will explode on the altar of the ballot box.

A no vote to the Constitutional Treaty should not mean that the Nice Treaty will have to stay on as a permanent fixture. Clearly that is unworkable. It means however that bureaucrats and leaders will have to re-design the EU project more flexibly than the original plans, leaving integration to grow organically from a looser type of arrangement that co-ordinates the policies of member states through some variable geometrical model.

In essence such variable geometry model was available for some and was being denied to others.` What sense does it make to give the UK, Denmark and Sweden a permanent opt-out of the Euro system, but then impose it on all the rest, new members included`

What sense does it make to force 22 countries to make full disclosure of investment income paid to persons residing in other member states and then exempt 3 older members, including 2 founder members, from such disclosure and instead adopt a withholding tax model.

If flexibility is needed by some it should be made available to all allowing the process of integration to grow organically as members who are comfortable with deeper integration forge ahead and attract others with their successes, if such integration proves successful.

Re-design of a new treaty for the EU would have to focus mostly on strengthening the mechanics of the single market and the four basic freedoms underpinning such single market, make a long term commitment for the eventual integration of monetary and fiscal policies to adopt a common single currency for the whole EU, but allowing for flexibility for participation or opt-out in all other areas, foreign and defence policies included.

The immediate impact of a French refusal of today`s referendum will probably be felt in the foreign exchange market where the Euro could suffer loss of value caused by the crisis of confidence regarding its sustainability as a community-wide single currency. Given that the Euro is well above its 1999 launching value against the US Dollar and Japanese Yen, and considering that the Euro has hardened by more than 50% against the US dollar since the bottom level reached in October 2002, the fall in value of the Euro in the foreign exchange market resulting from the French refusal of the Constitutional Treaty could be a blessing in disguise. Given the fragile growth experienced by the EU economy in the context of the healthy growth of the US economy and the surge in economic fortunes of China and other Asian tigers, the strength of the Euro is the biggest impediment to benefiting from export growth by European economies.

As had happened when the British Pound had to abandon the ERM 1 mechanism in September 1992 what initially was considered as Black Wednesday was in` the fullness of time re-branded as White Wednesday.` The British economy started growing again as it benefited from export growth caused by a more competitive rate of exchange and from lower interest as the need to raise interest rates to defend unrealistic exchange rate regimes was rendered unnecessary.

Could it be that refusal of the French in today`s referendum on the EU constitution, rather than be a negative drag on the EU economy, turn out to be the most important single event that re-prices European products on global markets more competitively thus opening the way for sustained export-led growth for the Euro economies. Could it be that today we will have a blessing in disguise`

Friday, 27 May 2005

Back to Basics

The Malta Independent - Friday Wisdom

Chiara gave the whole European continent a back-to-basics lesson that we would do well to apply in other spheres of life.

To perform well in the grand scale of the Eurovision Song Contest, one needs a successful combination of many ingredients. To perform so well, twice in the space of seven years, with the limited backing and resources that a small country like
Malta can give, the mix has to be calibrated to perfection.

The promotion during the weeks leading to the festival has to be elaborate and capillary to ensure that the voting public gains familiarity with the song well before the night of the contest. The media management during the final week of the festival has to be well cured as in that crucial period the media can make you or break through. The media cannot win you the festival but they can certainly help to create a perception that your entry is really in the running.

And ultimately there have to be good quality basics. The song has to be catchy, easy to remember, penetrating the mind and heart of the audience. The performance not only has to be top notch but has to have some unique ingredient which makes the entry stand out among the 24 contestants so that the voting public can pick your flower out of a bouquet of 24 that are heard in quick succession.

This explains why, over the years, the stage performance of the contestants has shifted to place great emphasis on choreography and accompaniment. It also explains why singers and performers chosen to represent their respective countries are not chosen strictly for their singing abilities but equally importantly for their personality, beauty and showmanship. These last three years this has worked for
Turkey, Latvia and Ukraine, who carried the festival more on the basis of stage choreographic performance than the quality of their song and their singer.

Chiara went against the general trend in 1998, at a time when the trend was still taking shape. It worked and she missed it by a whisker, coming third but amply in the running till the last vote. Sticking to the 1998 back-to-basics formula in 2005, when the trend was in full force, was a daring gambit.

But it worked again and even better, as while all the other 23 contestants looked quite alike, with a strong stage choreography performance, Chiara achieved more distinction through her back-to-basic simplicity. In those three short minutes, she gave the vast European audience a clear message. She told them that she was probably the only performer on the night who was being truly herself: what you see is what you get.

She was telling them that the charm of her melody and the sweetness of her voice could only really be enjoyed if undiluted by the distractions of stage performance and choreography. She was inviting her audience to take her for what she is, not necessarily her looks but her singing and composing abilities. She invited her wide European audience to go back-to-basics.

And evidently they accepted Chiara’s invitation. If the final result is stripped of the natural preference that neighbouring countries give to each other, which has helped Greece garner points from Cyprus, Turkey and the Balkans – votes beyond our reach given Malta’s geographic realities – then there is no doubt that Chiara was the real winner on the night.

We should transpose this lesson to other spheres where we can use our distinctive feature to compete and win not merely by copying but by being different.

Take tourism in particular. We have what it takes to be different. We can present ourselves to European travellers as being so near and yet so different. We have cultural treasures that are the envy of much larger nations. We can offer our visitors the opportunity to walk and touch history. We have a
Grand Harbour that, apart from shouting history at the discerning visitor, could be branded as the eighth wonder of the world in the way mother nature has constructed an architectural gem offering natural shelter which mortal architects could never match.

So why on earth should we just let ourselves go with the trend of low cost airlines that are generally sought by the sun and sea mass market tourists rather than seek value added in quality short break tourism? Why can’t we stand up and shout that we are different and that quality tourists can come here because what they can see in
Malta in three or four days would take more than two weeks in many other larger states, if at all.

For this to succeed, we have to improve our product, which really should take very little effort. What does it take to ensure that taxi drivers charge the correct fare through a well-functioning meter? What does it take if horse-cab taxi owners are made to wear a uniform and to expose an authorised tariff on the cab? Rather than the quantum charge, what is important is that the tourist does not get the feeling, which is often a reality, of being overcharged.

And what does it take to convert the royal theatre site in Valletta from a derelict car park to a soft ceiling museum giving the story of the Barry Museum, its predecessor that was burned down in 1873, as well as exposing such unique memorabilia as the George Cross, matters related to the Santa Maria convoy, the award of Independence and other significant events in Malta’s young political history?

Is it not time to go back to basics and start competing in the world by selling the distinctiveness of being Maltese?

Friday, 20 May 2005

Hostages to Fortune

The Malta Independent 


How sustainable is government`s decision, with the concurrence of the monetary authorities, to lock the value of the Maltese lira in the ERM II at a fixed rate of just under forty three cents per euro`

How credible is government-expressed intention to use this central rate as the eventual conversion rate when the Maltese Lira gets fused into the euro sometime in 2008`

One must point out the ERM II mechanism permits wide fluctuations of 15% on either side of the chosen central parity rate and it was Malta`s own choice to declare that it is not minding to use such flexibility and instead to lock in a fixed rate arrangement. It is also to be pointed out that the ultimate rate for conversion into the euro will have to be re-visited and re-discussed with existent members of the Euro area a few months before the actual euro conversion date.

The sustainability and credibility of government`s decision depends to a large extent on the success of truly addressing the fiscal deficit problem over the next 2/3 years and on doing so without accelerating inflation, without sacrificing growth and without causing sharp swings in the domestic level of interest rates.` The simultaneous achievements of all these objectives depends in turn on the success or otherwise of accelerating the economic restructuring programme which generally entails the taking of politically unpalatable decisions that politicians normally avoid taking in the second half of any legislature.

These are decisions like abolishment of universally free state health services and introduction of co-payments system, possibly on a means tested basis. It involves the extension of retirement age to reduce the deficit on the pension fund.` It involves charging fees at commercial rates for government services which were hitherto offered free of charge or below cost. It involves offering no real increases to public sector employees in agreeing the next collective agreement possibly including revision of certain privileges to facilitate the migration of excess unproductive resources within the public sector to productive jobs in the private sector.` It entails achieving success in attracting foreign direct investment in manufacturing, ICT services, financial services, education services and the film industry.

This is indeed a tall order and it would take a strong dose of optimism to believe realistically that all this can be achieved in such a short time by the same government that has expertly manufactured the problems we have by continually giving priority to its electoral popularity over prudent management of the economy in general and its fiscal position in particular.

But even if we do all this successfully we are still hostages to fortune in respect of international events over which we have absolutely no control.` It makes a big difference for our chances of achieving the set goals whether the general world economy over the next two three years will be booming or whether it will fall back into protracted slowdown caused such events as high oil prices, international terrorism, disruption of financial markets or pure and simple cyclical movements.

A case in point flashed this week in one of the headlines in the Financial Times of Tuesday May 17th which read `ST Micro unveils more job cuts`.

ST Micro is our major exporter and one of the major employers in the export sector. The Maltese economy is heavily influenced by the fortunes of ST Micro.` I often argue that our general economic statistics (exports, imports, investments etc,) should be analysed both on a total basis as well as excluding the figures of ST Micro to get to the real underlying trend.` Such is the dimension of influence of ST Micro on the local economy.

The FT report said that the jobs cuts were due to ` continuing weakness of the dollar (that) was forcing the company to restructure its cost base.The company said it planned to cut a total of 3000 jobs outside Asia by mid-2006`..About 1500 jobs will be transferred to Asia.`

In plain and simple language this is saying that unless there is a sharp reversal in the value of the US $ the company is embarking on a plan to migrate jobs to the Asian dollar based economies to achieve cost competitiveness with its dollar based competitors such as` Intel and Texas Instruments that are performing strongly and winning market share.

With no assistance possible from in inflexibility of the exchange regime that we have voluntarily placed on ourselves, jobs at ST Micro in Malta can only be preserved by restructuring at company level to achieve cost competitiveness.

This would mean that the most efficient amongst our workforce will again be the most penalised whilst the least efficient will continue to enjoy summer half-day privileges, job security irrespective of performance and probably pay increases.

It just does not make sense. Ask any corporate manager.` Any system that penalises the efficient and rewards the inefficient is doomed to failure later if not sooner, wasting much needed resources in the process.

Sunday, 15 May 2005

Consensus Lost and Found

The Malta Independent on Sunday 


What a breadth of fresh air it was last weekend when the Leader of the Opposition announced that Labour`s parliamentary group had agreed to vote for parliamentary approval of the treaty regarding the new EU constitution!

Whilst the final decision belongs to the Party`s general conference, and residual opposing views will remain within those factions that continue to oppose EU membership as a matter of principle, one ought to feel comfortable that the general conference will endorse the position of the parliamentary group with a significant majority.

At least now Labour can present itself to the electorate as a realistic alternative for government and will not continue to scare off the many who think that whilst the PN has overstayed its tenure of government, are unwilling to elect Labour if that means re-opening the EU issue.

Even on the principle of the matter,` the fact that the new Constitution makes specific provisions for exiting membership (something that is probably possible even in the current legal structure even though it is silent about it) is a crucial proof that the new EU constitution does not create conflicts with our own constitution and sovereignty. If a government ever gets democratically elected on a non-membership ticket, the exit route is now more clear and evident even though its actual implementation could present complications.

Now that Labour`s parliamentary group` has offered consensus on the issue, any calls for the matter to be decided by a referendum seem misplaced. Such referendum could have been appropriate in case of a substantial parliamentary division on the matter but is clearly inappropriate and a waste of time and resources once the elected representatives seems substantially of one mind on the matter.

It is a pity that just as soon as such elusive consensus was found on the EU constitution, a sharp division has developed within the Electoral Commission over the very relevant democratic issue of district boundary revisions for the general election.

In a strange twist of events the proposal modelled by the Chief Electoral Commissioner was supported by the four members nominated by the Opposition and was thumbed down by the four members nominated by Government who presented their own minority report.

It is democratically unhealthy to have the only person on the Electoral Commissioner who as a Chief is nominated by the government after consulting with the Opposition and who was originally appointed in that position by the agreement of both sides, so abrasively criticised by government for presenting a report which seems beyond its boundaries of pleasure.

Government was quick to endorse the minority report presented by its nominees on the Commission. These are broadly the same people who were responsible for drawing up the boundaries in the last three general elections which at least in two out of three cases produced a perverse result with a majority totally unrepresentative of the first count votes as is desired by the spirit of the Constitution. Hardly can the minority report authors claim to have any credentials for proposing boundaries which produce results that truly respect first preference votes.

In 1996 we had a Labour majority of nearly 8000 first preference votes returned with a deficit of three parliamentary seats. Only the supplementary provisions in the Constitution could offer Labour the facility of four supplementary seats to gain a slim one seat majority, very unrepresentative of the size of its majority, which proved fatally insufficient to execute the economic restructuring which was, and still is, necessary.

In 1998 we had a PN majority of nearly 13000 first preference votes returned with a five seat parliamentary majority. So the authors of the minority report feel comfortable with boundaries that translate Labour`s majority of 8000 votes into a three seat deficit and PN`s majority of 13000 votes into a five seat majority.` A spread of eight parliamentary seat with a mere difference of 5000 votes is a serious threat to the democratic substance of general elections.

The rapidity with which government criticised the majority report prepared by the Chief Electoral Commissioner and unreservedly endorsed the minority report suggested by its own nominees can only logically lead to one conclusion.` The minority report was in fact prepared at Pieta` with the benefit of raw data collected at the vote counting stage and is intended to perpetuate the perversity of election results in the hope that if Labour gets elected the next time round they will again re-experience the parliamentary fragility of 1998.

How may I ask, can government expect to get consensus from the Opposition on the such crucial matters as social pact, euro entry and other matters of national importance, if then on this ultimate test of real democracy government continues to play games with the margin of latitude allowed by the constitution regarding electoral district boundaries.

I am no electoral expert and submit myself to the advice of people who are more proficient in electoral numbers. But I read both the majority and the minority reports and I am quite certain in my mind that the majority report is much more faithful to the spirit of the constitution than the minority report.

Firstly the percentage deviation of votes in each district is much tighter in the majority report than in the minority report and on average it is less than 1% whilst the constitution allows a maximum margin of 5%.` On the contrary the minority report boundaries propose deviations which are quite near to the 5% threshold so that it is quite likely that should their proposals be adopted, such boundaries would need to be revised again quite soon if population shifts across towns and villages push the deviations beyond the constitutional limit.

Secondly the test on the integrity of the boundaries depends a lot on minimising the need to split single localities across two or more different electoral districts. In both cases the minority and majority reports propose that Ghajnsielem and Comino have to migrate to the 12th District.` No matter how undesirable this may be,` Gozo cannot remain as a single district within the present parameters of the constitution and both reports therefore propose the minimal possible fractionalisation of Gozo`s electorate.

However whereas the majority report proposes the reunification of Zabbar into one electoral district the minority reports proposes that a bigger slice of Zabbar migrates to a district different from the one that contains the main Zabbar population.` Also whereas the majority report preserves the integrity of St Vincent de Paul with Luqa that hosts it, the minority report proposes the migration of St Vincent De Paul with Qormi to the 7th district.`

What as pity that just when we found consensus where there was none, we have lost it where it should be quite easy and natural to achieve it.

Friday, 13 May 2005

ERM 2 ad Blair 3

The Malta Independent

ERM 2 of May 2nd was followed by Blair 3 on May 5th. 

  Even though the option to re-elect, with a substantially reduced majority, Tony Blair as UK Prime Minister for an unprecedented third consecutive term was not a tick box on the ballot sheet, collectively the UK voters delivered the verdict which was most appropriate in the circumstances.

They rewarded Blair with the honour that was not given to any other Labour leader and put him in the same class as Margaret Thatcher who had notched three consecutive victories between 1979 and 1990. But they clipped his wings to show Blair that ultimately he represents and serves the people and not vice-versa.

His handling of the Iraq issue and his leading the country into a war without having inalienable proof of the cause for war, and the subjective way in which he interpreted` intelligence to suit the pre-set objective of going to war, has not gone down well with the people. On the other hand the electorate realised that there was no one on the opposition side who could be trusted to manage the economic progress that has made the British economy under Blair the envy of other Europeans.

So Blair has been handed a very conditional mandate to proceed with his third term as Prime Minister with a majority that has been cut from 167 to 66 seats. Given the liberty with which MP`s quite often disagree and vote against their own government this majority is likely to condition the operations of Blair`s third term and force him to lead in a more consensual manner.

The experience of Thatcher`s third term should be an eye-opener for Blair. Thatcher had assumed that she had become irreplaceable as Leader of the Conservative Party and continued to lead in her third term with the iron hand she had demonstrated in her first two terms.` The problem is that long tenure of power corrupts the human ability to continue making objective decisions and` quite often the decision making process shifts from deciding what`s right through proper analysis to deciding what`s right purely because power tenure grants the person in office the assumed right to put the right or wrong label wherever he or she wishes.

Thatcher`s over-confidence in pushing through an unpopular poll tax instigated an internal revolt that led to her ousting. Blair has been warned that he could face the same fate is he continues making decisions in the style of the Iraq war.` He was quick to respond that he has listened and learned, and having pre-advised that he has no intention of seeking a fourth appointment though wishing to serve a full third term, allows him the flexibility of moving out whilst still on top.

Many have speculated that given the conditionality attached to his mandate Blair should reconsider his promise to serve the full third term and leave earlier. This is quite likely but for his personal ego the timing of his departure needs to coincide with a few successes on the home-front in delivering better value public service and with some opening which would give Blair a prestigious role in some international or supra-national organisation.` It is unlikely that Blair fancies going on pension in his early fifties.

ERM 2 has brought no great shakes to the way we live and do things over here. It is doubtful whether more than a single digit percentage of the population has anything more than superficial understanding of the true implications of such a decision.

From the debate that followed the decision it seems that the only points of disagreement among people who pretend to possess deep knowledge on the subject are basically three:

the timing is not right as we should first stabilize our economy before entering ERM 2.

The monetary authorities should have reserved the right to adjust central parity gradually during the ERM 2 process to ensure we join the Euro at a rate which reflects and sustains our international competitiveness.

The central rate chosen is inappropriate as it locks our lack of international competitiveness thus necessitating a deeper economic re-structuring in the real economy.

These are all valid criticism that government and the monetary authorities have so far replied to with more dogma than convincing arguments. Whilst I have sympathy with the official position on the first two points, without negating the validity of the issues raised by the critics, it is on the third issue that I find the official position most worryingly unconvincing.

The general counter-argument goes like this. Even though independent studies have indicated that the Maltese Lira could be overvalued by up to 6%, even though one appreciates that it is better to err on the side of under valuation rather than over valuation in locking into the Euro, the instability which a one-off adjustment to the central rate could bring would risk neutralising the presumed economic benefits of such adjustment. So the argument is that nominal exchange rate stability should gain priority above all else and it is up to other sectors of the economy to undergo the necessary structural changes to regain competitiveness.

This rigidity will do us no good. Stability is important after we regain competitiveness. We should not enamour stability at an uncompetitive level. The stability of the cemetery does not deliver growth and development. The monetary authorities dogma that all around us should change whilst they remain stable smells like the arrogance which have led the British electorate to chastise Blair in giving him a conditional third mandate. As probably nothing around us will change as politicians lose their fervour for painful restructuring as opinion polls point to loss of electoral support and probable loss of power, the whole issue of ERM 2 and Euro entry will unavoidably have to be re-assessed.

Alfred Mifsud

Friday, 6 May 2005

Audacious Brave or Foolish

The Malta Independent - Friday Wisdom

What description most fits the decision to join the ERM II at current fixed central rate, in the process putting the authorities (Central Bank and government) on line to defend this fixed rate right up to full euro adoption, proposed for 1 January 2008? Audacious, brave or foolish?

In general, I favour doing what we have to do, the sooner the better. My greater concern is with the timing of the decision to join the euro in 2008, rather than with the timing to join the ERM II in May 2005. This will require fiscal discipline and an accelerated pace of economic restructuring which experience shows that politicians are incapable of delivering in the second half of a legislature.

It takes a strong dose of optimism to assume that this time it will be different and that the euro process will discipline our political leaders to sacrifice themselves to do what’s right rather than what’s popular.

The strategy document published jointly by the Central Bank of Malta and the Malta government admits that most methodologies used to calculate the correct equilibrium rate of the Maltese lira shows that it is currently over-valued, and some studies indicate that it could be so by about six per cent. Other studies not referred to in the strategy document show that taking as a base 1995, the last year we had relative order in our public finance situation, the over-valuation could be higher than 10 per cent.

Consequently I consider it very audacious to attempt to lock our currency into the euro at an uncompetitive rate, as this will require deeper restructuring to achieve international competitiveness. Just look at the pain that
Germany and Italy are going through because they have not delivered on the real economic re-structuring necessary to sustain the fixed parity they chose when the euro was launched in 1999.

In real terms, entry into the ERM II has not changed anything except that the basket of currencies to which the Maltese lira was formerly pegged (which in any case had a 70 per cent euro content already) has been replaced by a complete fixed currency board to the euro. Our rate of exchange will now completely shadow euro movements in international foreign exchange markets and will no longer by influenced by the fortunes of the pound sterling and the dollar as hitherto.

The real difference is more psychological. Now that a target date for joining the euro in 2008 has been set, will Maltese savers have confidence that the government can deliver the promised fiscal discipline and economic convergence to sustain the chosen rate or will they start suspecting that in the end the chosen rate is unsustainable and will have to be reviewed before joining the euro or the whole process will have to be delayed?

The Maltese lira is not freely traded and its value is arrived at by administrative decisions of our monetary authorities. The market test for the value of the Maltese lira will be the performance of our external reserves position during the ERM II period. To protect both the foreign reserves and the chosen central parity, the Central Bank now has only one policy left, ie interest rates.

If we start losing reserves as people start doubting the sustainability of the chosen central rate and government’s ability to deliver in time on its fiscal consolidation programme, then interest rates will need to be increased. Such a measure could of itself dent the macro-convergence programme and force a misalignment in other Maastrict criteria for the single currency.

Because in the past we have been within such criteria for interest rates and price stability, one cannot assume that this will remain so if the monetary authorities are forced to use interest rate policy more aggressively to defend the currency board.

We have now put our credibility on line with the international community. If, at the end of the ERM II period, the misalignment from the criteria is considered to be wide enough to conclude that
Malta has failed its apprenticeship, than the only logical thing to do is to postpone entry into the euro until proper convergence has been achieved. This would be a blow to our international image and coming close to an election would present poor credentials for a government seeking confirmation.

It would, however, be a choice of the lesser evil, as more harm to the economy will result long-term from joining the euro unprepared and at a conversion rate that prejudices our international competitiveness. Compare the performance of
Italy and Germany, which joined at uncompetitive rates, to that of Ireland, which joined at a competitive rate.

It is for this reason that I have consistently argued that in joining the euro it is much safer to err on the side of under-valuation than on the side of over-valuation. I think the government and the Central Bank are taking excessive risks in planning to join at an over-valued rate. The true consequences will not be felt over-night but in the course of time. The anaemic economic growth we have experienced since 2000 is partly due to an uncompetitive exchange rate regime which we are now seeking to harden in perpetuity into the euro.

Audacious, brave or foolish? As always, time will be the best judge.

Sunday, 1 May 2005

Pensions - Getting on with it

The Malta Independent on Sunday 


  Each morning as I walk from the Floriana car park to Valletta, after negotiating my life with a handful of bus drivers, I say a little prayer of thanksgiving as soon as I reach City Gate Bridge.

I keep looking firmly straight ahead in order to avoid the bazaar scene on each side of Valletta entrance, a cheap scene totally unbecoming of the grandiosity of the city that awaits beyond the gate.

Once inside Valletta proper my thoughts land on the two edifices right in front of me where Republic Street starts.` On my right there are the war destructed remains of the main Opera Theatre, a site now serving only as a derelict car-park. On my left there is an the impressive architecture of Palazzo Ferreria that houses the Ministry for the Family and Social Solidarity, charged amongst other things with the administration and safeguarding of our national pension system.

And I reflect with trepidation. It has taken us sixty years since the end of the Second World War, sixty years of think and talk about how best to restore the Theatre site to respect its former glory. Yet we have absolutely nothing to show for it but a derelict car park that insults the status of such a grand city. We have not even brought ourselves to do something temporary, more respectful of the status of our capital city, whilst continuing to deliberate on the long-term use of the site . The least we can do is roof over the remains by means of a soft space-frame structure, call the place by its true name i.e. the remains of the Royal Opera Theatre, and open an exhibition on a fee paying basis with images and replicas detailing the history of the theatre itself set in the context of Malta`s pivotal role for turning the fortunes of the second world war from the Axis to the Allies.

And as I set my sight on Palazzo Ferreria I wonder. Would it take us sixty years of useless talk about our pension system and yet do nothing about it` If we do our pension system would be as derelict as the opposite Theatre site.

In recent days we have had proposals from civil society organizations giving their views on the shape that pension reform should take. Regretfully some of these reports` are not worth the paper they are written upon. Proposals to keep the retirement age at 61 years avoids the reality that people are now ling well past 80 years meaning that if the pension age is kept at 61 the system will have to sustain more than 20 years of pension payments which can only be done through a sizeable increase in contributions by those actively employed to maintain the sustainability of the current Pay AS You Go system. Suggestions to increase the pensionable age to 65 but to exclude teachers from such extension would introduce a precedent where the exception becomes the rule.

It is time to draw conclusions and act on the Pension reform. Further discussions are not adding value. Most are purely putting in views that defend sectorial interest rather that address the issue on a holistic basis.

There are three points about which there seems to be wide enough agreement for government to translate them into some sort of an action plan.

Firstly there is general agreement that the current Pay as You Go first pillar system is unsustainable in its present format, even though the benefits from it are inadequate to safeguard comparable standard of living during retirement. To restore sustainability of the system government has to introduce a mix of measures which has to incorporate the following:

Making benefits directly related to the overall level of contributions and not just the contributions paid in the last time period. Extending retirement age gradually Relaxing the caps on the maximum contribution and the maximum pension but keeping relativity between the two on the pretext that if not, contributions without corresponding benefits become taxes.

Secondly there is enough evidence that the introduction of a compulsory second pillar would do more harm than good and should be abandoned.` Introduction of a compulsory second pillar would substantially dent the spending power of those on fixed incomes causing both hardship and pressure on employers to adjust wages.` This could lead to an increase in our cost base when our international competitiveness is already under pressure.` After all most of our working population has already elected, perhaps unconsciously, to have an automatic second pillar pension by servicing a mortgage on their residence.

By retirement age this mortgage would have been paid and the residence would be the best investment they cold ever have made. Given the wide culture of home ownership what we need is to develop financial structures giving retirees the opportunity to release equity gradually from their residences to generate additional revenue streams during retirement without giving up the comfort of continuing to live where they prefer.` The markets can take care of this without costly incentives if government sets up the necessary legal and administrative structures.

Thirdly government has to decide what fiscal incentives it can afford on a long term basis to motivate current workforce to enter, on a voluntary basis, into private pension schemes that are properly licensed and regulated. Without fiscal incentives there will be little spur for current workforce to lock their savings into private pension plans rather than continue to water their insatiable consumption causing long-term problems on the available of savings to finance our continued economic development without having to resort to external borrowing.

Three points about which government has all the studies it wants, all the information it desires and all the views of civil society. It is now time to act on these three points whilst continuing to deliberate on other long term measures to render our pension system more equitable, adequate and sustainable. Those in charge at Palazzo Ferreria can look out from their windows and see what fossilised inaction can do to grandiose edifices.