Friday, 28 July 2006

Money Matters

28th July 2006

The Malta Independent - Friday Wisdom

Throughout the nineteen eighties the main economic problem was one of obstinately high inflation caused by the two oil price shocks firstly in 1973/74 and then again following the Iranian revolution in 1979.

The main economic credo then was the need to iron out excessive inflation from the system at all costs and for this purpose the monetarist theory prevailed. This centred round the belief that there was a direct relationship between the quantity of money in the economy and inflation, so that if the quantity of money increased at a higher rate than the real growth of the economy the difference would be reflected in price rises and hence growing inflation.

This theory made some rather simplistic assumptions that it is quite possible to actually measure the quantity of money in the economy and that such money had a relatively constant velocity of circulation - as a two pound note that is involved in five separate transactions could make the same function as a ten pound note that changes hands only once.

The upshot of the monetarist theory was that interest rates had to be allowed to go as high as necessary in order to control the quantity of money which was allowed to grow only at a pre-set target reflecting the expected real growth of the economy. Inflation was truly ironed out of the system but with a considerable time lag and at the expense of severe economic recessions throughout most of the eighties and early nineties. Double-digit interest rates discouraged investment and consumption, killing off demand and forcing property prices to plummet.

I well remember the UK situation in 1992 when property prices went so low that they did not cover the mortgage that many borrowers were struggling to service merely to repay the interest, let alone the capital. Negative equity in mortgages was the rule of the day, defaults mounted and with a deteriorating loan book which was hitting Bank’s profits the appetite for new lending disappeared altogether, further stagnating the economy.

Given this background the obvious question that is asked is how is it that this time round, with oil prices reaching an all time nominal high just a whisker off seventy nine dollars per barrel and obstinately well above the seventy dollar mark, which in real terms is not far off the peak real price hit in 1979, high energy prices have not produced similar inflation problems.

One could write a thesis about this giving a myriad of reasons that in their own way contribute to this favourable state of affairs. The fact that economies have become much more energy efficient obviously helps.

Globalisation has meant that developed economies are now more based on service industries that are not as energy dependent as manufacturing, explaining why the impact has been less severe than previously. Manufacturing has been substantially outsourced to low cost countries, especially to China who compensate for increased energy inputs by lower labour costs making it possible for the final price to remain low in spite of higher energy costs.

Few central banks these days put much reliance on strict monetarism and on money supply statistics in determining their interest rates policies. Probably the ECB is the only important Central Bank in the world which makes reference to money supply growth in the decision making process for interest rate levels but there is no automatic link as hitherto between the money supply growth and interest rate levels. If there were such a strict link in the monetarist school of thought, interest rates would be much higher than they are, probably causing recession. Instead we have had one of the longest economic upswings since 2001/2002 and the interest rate cycle seems already to be peaking at rather historically low levels.

Strict monetarists would argue that Central Banks are inviting trouble by keeping interest rates so low. The fact that no undue retail price inflation has been caused by the abundant liquidity they pumped into the system as a direct result of their keeping interest rates at historically low levels, does not mean that another type of inflation has not been created. It is like pushing on a toothpaste tube with the cap closed; the pressure is simply transferred.

Should Central Banks be mindful of the asset price inflation they have created, particularly in the real estate market? Are Central Banks only responsible to control retail inflation and they can neglect asset price inflation even if the formation of price bubbles in property prices could risk financial instability, as has been experienced in Japan?

The mission statement of our Central Bank states that its goal is “to maintain price stability and to ensure a sound financial system, thereby contributing to sustainable economic development”. The objective of retail price stability is obvious but the objective to achieve also asset price stability is implicit in the need to keep sustainable development and a sound financial system.

Our property market could have reached an inflection point. Rising interest rates and increased supply generally lead to reduced demand, stock building and eventual price curtailment. Developers should also bear in mind that in Malta property prices have yet to experience a truly rising interest rate scenario. In the interest hikes of the eighties and nineties, we were shielded by rigid exchange controls that kept local interest rates steady. This is no longer possible. If interest rates internationally go up, we will have to follow suit. Moderately rising rates could produce a healthy soft landing for our property market. Aggressive interest rate rises could render the landing hard and painful. However, moderate or aggressive, it is no longer our decision.

Sunday, 23 July 2006

A do Nothing Solution

23rd July 2006
The Malta Independent on Sunday

There is momentum building behind a general impression that this government has damaged itself beyond repair and that the next general election is for the opposition to lose.

It is not an impression built out of thin air. It is supported by independent surveys showing that the opposition has held its ground whilst the government has disgruntled a good part of those that voted it power at last election.

There are three particular reasons why this has happened.

Firstly it is because that the government had over-promised regarding the immediate impact of EU membership and in people’s perception it is therefore under-delivering on the promised benefits. At next elections government will be judged on its performance as there will not be, as the EU issue was in 2003, a higher order issue which distinguishes the PN from the MLP and veils over the PN’s shortcomings on its performance in office.

Secondly it is because people tend to judge their government by the money in their pocket. Clinton had coined the dictum ‘it is the economy stupid’ to define this concept that government’s popularity depends on economic performance irrespective of government’s merits or demerits for such performance.

There is no doubt that on this score there are many disillusioned voters who care not so much that government has no control on international energy prices, but do care very much that the surcharge on their utility bills as well as the increase of fuel prices at the pump are chipping away at their standard of living just when the opportunities to earn something extra are hard to come by. In this respect there is rough justice being meted out seeing government tasting its own medicine considering it had ferociously criticised a Labour government for raising utility rates in 1998 following 16 years of price freeze.

Unlike, economists, central bankers, rating agencies and financial analysts such people are not the least impressed by progress made in controlling the fiscal deficit or the public debt. The benefit from such macro-economic successes will only cascade to the consumer at glacial speed through enhanced economic growth which is hardly visible and difficult to materialise in time for the next electoral test.

In fact government has seriously got its electoral timing wrong. The sort of fiscal discipline meted out in 2005 and 2006 should have been delivered in the first two years of the legislature in 2003 and 2004 giving such measures time to bloom into economic buoyancy in the years leading to the next general election. However the first two years of this legislature have been wasted through changes of PN leadership and the run up to EU membership. Government was in celebratory mode then when it really would have been in prescriptive mode.

The third and final reason for government’s loss of popular support is the decision to join the Euro in 2008. By so deciding government has bound itself with an additional wrapper of fiscal discipline which thankfully ( from a macro-economic point of view) does not allow much space for economic pump-priming for short term electoral purposes. Again this might earn the government applause from rating agencies and financial analysts but does pretty little to generate any feel good factor that tends to be the ultimate ingredient for electoral popularity.

Many other countries that joined the EU with us in 2004 have now resigned themselves that the Euro bar is too high to reach in the short term and are planning Euro membership in 2010 or later, no doubt keeping the domestic electoral calendar in mind as well. We chose to plod on regardless and are taking a very serious risk of finishing with an egg on our faces this time next year if, like Lithuania, we fail to make the grade for Euro membership. We seem particularly tight on the inflation test and given that inflation is calculated on a moving average basis for the year ending March 2007 and that there seems pretty little we can do to change our fortunes. One has to bear in mind the considerable time lags before any measures we may take actually impact the measured inflation indices.

Against this backdrop the opposition is adopting a do nothing approach. If the government is sinking letting it sink as default presents the most practical way of regaining the electoral mandate without having to be very specific about the opposition’s own policies. Policy document updates are therefore understandably vague on the methodologies and focus mostly on the objectives. They give the final destination without explaining, even in generic terms, the route to get there.

Its experience of the last three elections conditions Labour to such an approach. In 1996 Labour opposition adopted the removal of VAT as a major electoral issue as a matter of convenience not conviction. There is nothing in the socialist credo that should render VAT as more socially regressive than the high import duties it replaced. It worked. VAT convenience delivered the government mandate in the 1996 elections.

1998 election was fought on the conviction issue of governability and 2003 election was fought on the conviction that a partnership relation with the EU was more suitable than membership. In both cases the personal convictions of the Leader rode roughshod over many who did not share such absolutism and who wanted to put some electoral convenience in the political equation for formulating the policies on which the 1998 and 2003 elections were fought and lost.

Having been so heavily bruised by these electoral defeats it seems that Labour is again switching to the 1996 mode of letting convenience have the upper hand over conviction. Only this can explain Labour’s policy about pensions, as recently announced, which essentially is a do nothing solution as pension reform can wait.

Politically it is very convenient to face the next electoral test without having subscribed to the PN’s commitment to increase pension age to 65 years and to render pension benefits more directly related to pension contributions calculated on a span of 40 years contributions to reflect the longer time spent in active economic activity caused by later retirement.

Labour is correct in arguing that government’s pension reform is not exhaustive enough and should be seen alongside other reforms including the funding for the universal public health service and non-contributory social payments which currently are sourced from the pension fund with government having to finance the annual pay as you go deficit. Labour is also right in stating that part of the funding solution has to come from faster economic growth and increased participation by females in productive economic activities in order to widen the contribution base.

This does not mean however that pension reform can wait or that it is realistic to expect that under any version of widened or revamped reform one can escape the basic measures being proposed by government. The argument that reform does not go far enough does not mean that the few steps proposed, inadequate as they may be, should be discarded until we spend a few more years searching for the perfect solution which in any event will have to include such few steps.

A do nothing solution is a total victory for political convenience but it does nothing to make Labour life any easier once it is returned to government. Governments change but the inherited problems remains for instant ownership by incoming incumbents.

Friday, 21 July 2006

No to Backdoor Diivorce

21st July 2006
The Malta Independent - Friday Wisdom

The tragedy of Lebanon is that as a country it has lost its sovereignty and has allowed itself to be used by foreign countries as a training ground for their eventual direct clash in an unstoppable quest to impose their supremacy and annihilate their opponent.

Syria controls the security services of the country to the point that it has been implicated in the murder of an elected Prime Minister. It considers Lebanon as part of Greater Syria.

Iran sponsors an armed group Hizbollah in the south, which teases Israel and challenges internationally recognised borders. Hizbollah are effectively a state within a state. The old native Lebanese Christians have either fled their homeland or live in terror unable to protect their country’s sovereignty and their freedom to live in peace without being used as a war proxy for other countries. Israel is now unlikely to stop before they push Hizbollah further north and establish a border cushion wide enough to ensure that Israeli territory cannot be reached by rockets fired from Lebanese territory.

What has this got to do with Maltese divorce? It has, if only in the way fundamentalist religion in both cases seeks to impose itself on civil liberties of individuals.

The Islam fundamentalists do not want what the rest of the world wants i.e. a peaceful co-existence of countries free to practice their religion within internationally recognised borders. Iranian President Ahmadinejad believes he is Allah's "tool and facilitator" bringing the end of the world as we know it and the ushering in of the era of the Mahdi. He has a blind messianic belief in the Shiite tradition of the 12th or "hidden" Islamic savior who will emerge from a well in the holy city of Qum in Iran after global chaos, catastrophes and mass deaths and establish the era of Islamic Justice and everlasting peace. Unashamedly he wants to seal his place as top Jihadist for Allah by making good his promise to "wipe Israel off the map”.

Maltese religious fundamentalism is by contrast a purely domestic affair. The Church imposes its will on whoever has political power to ensure that the word divorce is struck out of the local dictionary so that it is not even considered let alone debated. A Maltese citizen is not allowed a right which is enjoyed by the rest of the world, bar the Phillipines.

Only this week the EU has proposed endorsement of national governments to allow citizens of a member country residing in another member country to seek divorce in the courts of the country of residence under the law of their country of citizenship. This means that a Maltese living abroad would still be unable to seek divorce foreign courts under Maltese law as Maltese law does not permit it. But our politicians prodded by a fundamentalist church immediately expressed reservation on such a matter to ensure that divorce is not introduced through the back door.

The poverty of such reasoning is that divorce through the back door already exists and a Maltese residing in a foreign country can seek divorce from a marriage celebrated in Malta under the laws of his or her country of residence and certainly has no motivation to seek divorce in a foreign court under the laws of Malta. The democratic tragedy is that such backdoor divorce is available only to the rich and mighty who can afford to take up residence in a foreign country.

Of course Malta does not need divorce through the back door. Who wants a solution only for the rich whilst the poor and the not so rich have to continue living with their human problems of failed marriages and families formed out of wedlock? What we need is divorce through the front door, divorce as matter of right available through the courts of our own country to all, rich or poor, who merit it and meet rigid criteria to qualify for it.

I am not proposing a free for all divorce but if super catholic Ireland and a double super catholic Poland has felt the need to give its citizens the right to divorce subject to rigid conditions, why are we denying our citizens such civil liberty? Divorce like marriage is not for everyone. It is a facility to be used only by individual choice and subject to strict conditions. Those who wish to continue following the church teachings on divorce are free to do so but cannot impose their will on all the rest in Hizbollah style.

Even the Catholic Church, perhaps a few Popes down the line, will have to consider its position on divorce unless it wants to loose an ever growing minority from its fold. Otherwise the minority will keep increasing until it becomes a majority, relegating the Church to the minority. The Church cannot remain eternally insensitive to the plight of people of good faith whose marriage has irrevocable broken down and want a second chance in life.

Theology is a strange subject to me but I would be surprised if there are not already scholars musing whether ‘till death do us part’ could also mean till death of the love that binds us. What is marriage without love? Should a parent of children born in a new family out of wedlock following breakdown of first marriage go back to live out of love with his estranged wife and abandon his children? Would not he or she be committing a bigger sin if he or she were to do so?

Georg Sapiano the new PN candidate has broken new grounds in declaring he would vote for divorce if his party were to allow a free vote in parliament on the matter. We are probably years away from such a possibility but at least he showed the courage to state where he stands. It is time that others do the same and for civil society to start demanding the civil liberties that most others take for granted and to insist on disengagement of Maltese politics from religious fundamentalism.

Friday, 14 July 2006

Exit While on Top

14th July 2006

The Malta Independent - Friday Wisdom


Marcello Lippi gave us a perfect example of what it means to exit while on top. Just when he had the whole country at his feet heaping glory for the unexpected victory at the 2006 World Cup against many odds, Lippi wisely declared that his mission had been accomplished and that he needed to move on to different challenges.

He no doubt reasoned out that when at the top one can only go down.

It is a lesson that ought to be heeded by many leaders in different spheres, politics and business included. It applies in two particular situations.

Leading is a tiring job. If one tries to do it for an overlong period of time in the same job, there comes a point when personal objectives will start to over-ride the corporate goals of the organisation one leads.

Extended time in the hot seat inevitably allows over-confidence to seep into the decision-making process.

Blinded by familiarity which impedes an objective view of the organisation’s strengths and weaknesses, even the best leaders will start taking decisions subjectively.

“Let’s do this because I say so and I am usually right” starts to become the rational for charting the organisation’s way forward. Little heed is taken that past successes were sourced from objective decision making and that in the absence of such objectivity one can hardly expect future decisions, based on over-confidence verging on arrogance, to have the same success as past decisions based on objective analysis.

Margaret Thatcher has suffered a bruising exit during her third term when she should have exited just after scoring the third consecutive electoral victory.

Tony Blair is risking a similar fate. In business we have the contrasting examples between the leaders at Microsoft and Nokia. Bill Gates was the brains behind Microsoft in the eighties creating an operating computer system which stole market share from under the nose of more resourceful and established players until it practically formed an international monopoly with its Windows operating system and related office software.

Success easily breeds inertia. Microsoft has been getting slower in issuing updated versions and has been wasting more energy in packaging its products to protect its dominant market position rather than to keep refreshing its product lines. In the process, it has allowed newcomers to take leading positions in electronic advertising and search engines while Microsoft kept guarding its cash piles. Microsoft share price in fact now trades on multiples resembling a fatigued low-growth giant rather than an agile high growth new era winner, a business mantle now carried by Google and Yahoo. Bill Gates should have left earlier.

Jorma Ollila joined Nokia in 1985 when it was still basically a tyre factory. He became CEO in 1992, chairman and CEO in 1999 and in 2006 he left his CEO role and stayed on as non-executive chairman whilst making it clear that his energies will now be mostly devoted to his new chairmanship of Royal Dutch Shell.

He left while Nokia is on top having protected market share in sale of mobile phones and continually refreshing its product line taking the breadth away from competitors, possibly with the exception of Motorola.

Another scenario when leaders should exit is when they set themselves very clear and specific targets at the start of their tenure. Once these targets are achieved, continuing to lead an organisation which is itself transformed by the achievement of the objective could be a recipe for disaster as the leader could lack the skills needed to lead the company post-goal achievement.

Mintoff post-1979 is a typical example of someone who achieved the very specific objective he set himself at the start of his 1971 tenure but continued to lead in the old manner when in fact the country needed new skills to win its way through a competitive global economy. Post-1979 Mintoff became a rebel without a cause.

Lippi set himself the target of making a very good show in the 2006 World Cup. This was never specifically defined but every one understood that the minimum would be the quarter-finals and the probable maximum would be the semi-finals. With Totti coming from a serious injury and with most of his players serving with Clubs involved in Calciopoli, it would take a strong charismatic leader to keep the team focussed. Luck helped.
France failing to win its group meant that Italy could reach the semi-final before clashing with a football giant. Compare that with France that had to clash with Brazil, Germany who matched Argentina and Portugal who had to overcome England before making it to the semi-final.

But luck on its own will not win you a World Cup. Beating
Germany at home in the semis was a feat largely attributable to Lippi’s daring changes to play four attackers during extra time hoping to avoid a decision by penalty shoot-outs. Containing the brilliance of Zidane at its very best in the final needed skills and determination, even provocatory ones that eventually led to Zidane’s dismissal.

Pity Zidane did not understand the absolute need to exit on top. He was within minutes of it but ruined it by his senseless reaction in head-butting an adversary. Whatever Materazzi might have told him to cause such provocation it was between them. The head-but was shared with the rest of the world.

Clearly
Italy’s success at the World Cup is in no small measure due to a proven leader who consolidated his fame by exiting while on top.

Sunday, 9 July 2006

The Blues are a Safe Bet

9th July 2006
The Malta Independent on Sunday


If there is a safe bet around it is that tonight the blues will win the World Cup. What remains to be seen is whether it will be Gli Azzurri or Les Bleus.

Your guess is probably as good as mine. While my heart tells me that the Azzurri should be home and dry following their stellar performance in the semi-finals against Germany, my head tells me that the way they achieved that win by scoring two goals in the last minutes of extra time, when all seemed destined for the penalty shoot out, means the Italians have probably peaked a step prematurely.

The French on the other hand had a much quieter passage through the semi-finals, where they rode on the back of a generous penalty award to coast home without undue risks, even though the Portuguese actually gave as much as they took.

An undeniably clear statistic emerging from this tournament is that those teams, which went through in extra time or on penalties, were defeated in the following round. It happened to
Argentina, which went to extra time to knock out Mexico in the last sixteen round and were knocked out by Germany in the quarterfinals. The Germans were knocked out in the semi-finals after they had to go through on penalties against Argentina in the quarters. Portugal beat England on penalties in the quarterfinals but was knocked out in the semi-finals by the French.

The French reached the finals without having the half hour added time as they beat
Spain, Brazil and Portugal in the knock out rounds during the normal 90-minute game. This is ominous for the Azzurri who had to toil an extra 30 minutes against the Germans in the semis. And what 30 minutes they were! It is semi-tragic that if the statistical trend persists, their greatest time achievement so far could be their downfall in the last match when it really matters. Did this not happen already in 1970 when the Italians went through a memorable semi-final with extra-time 4-3 against Germany only to be outplayed by Brazil in the final, who were clearly fresher and had more oxygen in the second half to beat the Italians 4 -1 after a score-line of 1-1 at half time.

There is still a ray of hope for the Azzurri. This time they had an extra day of rest compared to the French. Will this be enough to neutralise the disadvantage of having played an extra 30 minutes? I certainly hope so.

The blues however are no safe bet on
Malta’s political scene. Not just because they have been losing all their friendly matches (local and EP elections) but because they are having to make good for their past budgetary excesses just when the consumer is already demoralised by the fuel surcharge.

These are handicaps enough on their own but the local blues seem bent to tilt even steeper their uphill climb for the general election. The changes to the development boundaries are a high stakes game that is bound to earn government many more enemies than friends.

Government obsession to proceed with such a project against very wide public opinion gives me the distinct impression, which probably is wrong and unreal, that the government’s objective in conducting this exercise is to please its friends before its time runs out. But if this is not so then the alternative is that the government is politically na├»ve. This is equally hard to accept.

Arguments that this is being done for social reasons do not impress and indicate that the government is searching high and low for excuses to justify what cannot be justified. Equally laughable is the argument that this is done to honour an electoral pledge in the 1998 manifesto. Of all electoral pledges that have been allowed to fall by the wayside without the slightest compunction, is this the one that the Blues’ heart is bleeding for? Why not for example the family law to provide for a fair legislative framework for families living out of wedlock?

The best piece of advice I can give on the issue is that once the government is in a hole it should stop digging. Digging will only push it deeper into the hole when it should use its energy to get out of it.

The only logical way forward is to abandon the project and re-propose it in due time within a framework that carries sufficient checks and balances to convince the majority that all is being done for a good cause.

I still need to be convinced.

Friday, 7 July 2006

Swapping Deficits

7th July 2006
The Malta Independent on Sunday


Are we in the process of swapping a deficit in government’s fiscal position for a structural deficit in the balance of payment of the whole country?

Let’s establish the statistical facts. Between 2003 and 2006 the fiscal deficit has been coming down from the near double figures it was since 1996 to an expected outturn of under 3% of the GDP in the current fiscal year, nicely slipping below the Maastricht criteria for eventual Euro entry.
However during the same period the deficit in the current account of the country’s balance of payments has deteriorated from 4.53% of the GDP in 2003 to 7.58% in 2004 to 11.02% in 2005 and 14.95% in the first quarter of 2006.

Normally the fiscal deficit moves quite in tune with the balance of payments deficits. Structural fiscal deficits generally contribute to the development of structural balance of payments deficits. Fiscal deficits by their own nature increase purchasing power in the hands of the private sector as the government spends more than it takes in through taxes. This enables consumers to increase consumption which in open economies easily leaks externally through increased import consumption thus leading to development of balance of payment deficits.
Why is it then that in Malta we are seeing an inverse relationship of rapidly deteriorating balance of payments position in the context of steadily improving budget position of the public sector? Should not the improving budgetary position actually reduce consumption spending thus contributing to an improving balance of payments position?

I can think of two reasons why we seem to be going against the conventional trend. The first one relates to the way the budget deficit gets financed. Given that public sector budgetary deficits are financed internally through local borrowing without any resort to external borrowing means that the extra spending power caused by the deficits in the first place is generally neutralised by the borrowing function. Consequently when budget deficit start reducing it does not really impinge on consumption patterns as the need to borrow less internally would leave a compensatory amount of spending power in the hands of the consumers.

Another evident reason for this inverse relationship is that the improvement in government’s fiscal position is happening in the background of a substantial deterioration in Malta’s terms of trade with its trading partners particularly due to the increased cost of energy, the demand for which seems to be pretty inelastic i.e. not quite sensitive to price movements given that energy consumption is quite often a necessity without much discretion regarding its use.

Consequently we are having to pay much more for importing the same volume of energy and there is no compensating increase in the prices we charge for our exports of goods and services.

You can hear the painful moans of factories and hotels because they cannot pass on to their clients energy price hikes, causing deterioration in profitability unless they can extract better productivity from their work-force and their investments. Indeed making such investments will place further strain on the current account position of the balance of payments as imports of capital goods is a direct charge as normal merchandise imports whereas the productivity gains from such investments can only accrue over an extended future period.
So coming down to brass tacks is the burgeoning imbalances in the country’s external payments position worrisome? Is it sustainable and could it lead to unpleasantries as often experienced by countries that endure extended periods of such balance of payments deficits?

The answer to these questions depends on many factors that cannot be clearly foreseen. A few years of balance of payments deficits can be tolerated if they are followed by period of compensatory surpluses. The balance of payments current account deficits could be carried without developing into a crisis for quite an extended period provided they get compensated by surpluses on the capital account. The capital account is the funds flows regarding investment rather than trade payments and surpluses on the capital account means that deficit of the current account can be carried without loss of official external reserves which are indispensable in a comfortable measure to deliver a stable rate of exchange policy.

If the surplus on the capital account reflects long term investments into the country than the situation gets much more comfortable than if it reflects short term hot money seeking some temporary advantage. The latter could easily reverse at the slightest hint of macro-economic instability and could by themselves make a small macro-economic problems balloon into a full blown crisis as happened in 1997 to Asian economies, as happened to Iceland earlier this year and as is happening in developing European economies of Turkey and Hungary right at this very moment.

Whilst not alarming, three years of sharply deteriorating balance of payments position can only be neglected at our own peril. A problem does not just go away by pretending it does not exist. The monetary authorities ought to inform us whether they are concerned and what measures they counsel to return to a healthy balance of payments position in the shortest time possible.


The monetary authorities should also express an opinion whether they see any link between the surpluses on the capital account and asset price inflation in real estate and equity values experienced during these last three years. If there is, as I indeed maintain, then the monetary authorities have to explain whether control of assets prices to avoid asset price bubbles, which could cause financial instability when they unavoidably burst, is within the scope of their price stability mandate or whether they see such mandate limited to consumption prices.