A New Pastor

26^th January 2006

The Malta Independent - Friday Wisdom

Today a new Archbishop takes over from incumbent Mgr Joseph Mercieca, who has had been guarding our spiritual well-being for nearly 30 years and has been forced to continue his watch beyond the normal age of 75.

For many, the search for a new Archbishop was prolonged more than they wished for. However I think I would be expressing a widely-held opinion in stating that the final choice was well worth waiting for. Mgr Cremona has been impressing by his smile and simplicity and although from the outside it does not look that he was perceived as one of the likely contenders, his appointment forced many to exclaim why he was not thought of before.

I understand that his choice is the result of a very wide exercise of consultation and counter-consultation, which in the end seems to have eliminated heavier contenders and focused on an unlikely candidate who quickly gained acceptance in the nation’s heart. I doubt if a democratic exercise in civil political terms would have worked as well as the Church’s non-democratic system.

I can think of no other job where it is harder to deliver what is expected of the incumbent than that of an Archbishop. Mgr Cremona needs all his faith, leadership skills and celestial assistance in order to deliver the impossible. He needs to work out his miracle slowly but resolutely.

He takes over the custody of Malta’s spiritual flock as society is finally starting to discuss openly whether the Church’s resistance to the introduction of divorce should leave society complacent to the social consequences of the breakdown of family units which is happening, with or without divorce, at an alarmingly increasing rate.

With or without divorce, families are breaking down, separations are in double-digit growth, unmarried family units are on every street of every town and village and birth of children out of wedlock will in the not-too-distant future match and exceed those born from normal married families.

The argument of those who argue that the introduction of divorce will bring about the breakdown of family values is getting thinner by the hour. The breakdown of family values has already happened and is continuing to happen proving the case of the pro-divorce camp that divorce is the consequence and not the cause of such breakdown. After all, no one I know is arguing for the Las Vegas type of easy divorce but only for conditional divorce in cases where long-term de facto separation proves irrefutably that marriage has irretrievably broken down.

How can Mgr Cremona bring back into the fold an increasing section of his flock that is deserting regular practice of basic religious rituals as they find the Church insensitive to the reality of the problems of their daily life?

How can the new pastor stick to the Church’s rigid anti-divorce mentality, as surely he is obliged to do, and at the same time keep the Church relevant not only to those who partake the Holy Sacraments, but especially to those whose life realities and the Church rules allow them to be only passive members of the flock. Such passivity, if prolonged, tends to evolve into non-practising Catholics which census after census of Sunday church attendance unmistakably show to be an increasing segment of the overall baptised flock.

And the divorce issue is not the only or even the biggest dilemma that Mgr Cremona will need to come to terms with during his terms as our spiritual guardian. Other issues like social injustices, discrimination against minorities including immigrants, drug abuse, alcoholism, gambling and the alarming increase in suicide rates are all issues that the Church need to champion and ensure that the nation’s conscience remains sensitive to such issues and not adopt the I-am-alright-Bob’s-your-uncle-Jack mentality.

Ultimately the issues that the new Archbishop has to confront are not related to whether or for how long this country can continue to deny its citizens the right to divorce that is accorded by almost all other countries in the world and that is already available to fellow Maltese who marry foreigners. Politicians will surely take care of this when their political calculators start showing that there are more votes to be gained than lost through the introduction of civil divorce.

What the new pastor will no doubt focus upon is the need to rebuild the values which will ensure that even when eventually divorce is introduced in our civil law, it is availed of by as few as possible through persuasion not prohibition.

May God bless you and be with you Archbishop Cremona.

False Market

19^th January 2007

The Malta Independent - Friday Wisdom

How can one explain the conundrum that prevails on the local property market where prices keep crawling up notwithstanding supply outstripping demand, resulting in a rapid build-up of unsold housing stock?

Some economic commentators and influential organisations have suggested that there is a false market in our property market. A false market arises when weighty operators intervene to corner the market in order to disrupt the normal flow of supply and/or demand, leading to artificial prices which would change dramatically the moment the artificial blockage is removed.

Governments are the principal operators which regularly enter the market to render it false in order to achieve fiscal and social policies. Take the public water supply service. If water supply prices were to be left to the free mechanisms of the market, prices would be much higher denying some of the lower strata of society from reasonable access to such an essential supply. The government’s social policy force it to intervene in the market by rendering it false through subsidies which make a reasonable quota of water per capita accessible at substantially sub-market prices.

The private sector is also known to have attempted to falsify markets by cornering supplies thus causing prices to rise especially where demand is inflexible to price rises. OPEC did it in 1973 and 1979 by reducing the supply of oil to the international markets, which led to two sharp price explosions in energy prices. The Australian Hunt brothers tried to corner the international silver market to speculate on its resultant artificial high price.

Given that the government is not itself a major operator in the real estate market and given that, if anything, the market is suffering from excess supply rather than shortage due to cornering by any cartel or monopoly, there is nothing to suggest that there are any of the ingredients which are normally associated with false markets.

The conundrum can hardly therefore be explained by the pretence of a false market. I think it has to be explained by the fact that the property market has three characteristics which are quite particular and which slow down the normal working of market mechanisms.

Firstly, property is an asset with a very long-term economic value and in case of its principal value component, land, it is practically eternal. The ingrained perception is that property will continue to appreciate. Consequently buyers are prepared to pay high prices in expectations of continued capital appreciation while sellers tend to hold out for higher prices which if not obtainable today will be achievable tomorrow.

A second particular characteristic of the property market is that it suffers from long lead times. Supplies hitting the market today are the result of decisions taken some two years before. Once a decision is taken and put in course of implementation, the works in progress are not easy to stall even if in the meantime market conditions change enough to render the original decision of questionable economic sense. Consequently supply only reacts to demand or the lack of it with a considerable time lag. Consequently there is risk for the creation of substantial mismatches between the supply and demand leading to either shortage or excess supply.

This tendency to under or over shoot the demand should in normal circumstances lead to substantial fluctuations in property prices. The absence of such price fluctuations leads to the third particular characteristic of the property market. Prices are not only sensitive to supply and demand but are particularly sensitive to the level and changes in the general level of interest rates prevailing in the economy.

Low interest rates stimulate demand. Home buyers find it easier to raise mortgages whereas investors, dissatisfied with the low earnings from traditional investment assets like bonds or straight bank deposits, shift their investments to real estate in the prospect that its long-term appreciation in additional to rental income will exceed the returns obtainable from other investments.

Low interest also makes it more affordable for property vendors to hold out for higher prices. If the interest carrying costs are smaller than the prospected gains that can be realised by holding out for a higher price, the increase in the unsold housing stock will not work to bring down prices.

In the United States where interest rates went up from one per cent to 5.25 per cent in the space of two years between June 2004 to June 2006, the housing boom is slowly deflating itself. House prices are coming down as vendors find the interest carrying costs too stiff in face of reducing property prices.

Interest rates in Malta are also on an upward crawl. At what point will they start hurting enough to force vendors to cut prices in order to offload their excess stock is difficult to tell. But one should not forget that this is the first experience. since removal of exchange controls, which had permitted stable interest rates at a rather low level, that interest rates are on an upward swing. It is a new experience leading into uncharted territory.

If the supply of new property on the market will continue at the prospected rates over the next few years, sectors of the property market will find that the excess supply will reach a dimension where vendors will have to discount in order to offload. This prospect will be substantially accelerated if interest rates continue to increase beyond the foreseeable increases of at least another half percentage point which seem well predictable for the next six months.

Rather than claim false markets perhaps it is more a case that markets need more time to work. But work they will.

Effective Branding

12^th January 2007

The Malta Independent - Friday Wisdom

Hats off to Birkirkara FC for organising the AC Milan training camp in Malta during the Christmas break from competitive football. It has been a great success from its many dimensions. Presumably, given the enthusiasm of local supporters who paid premium prices to see and meet with their idols, it was also a financially rewarding venture.

Certainly Milan supporters had a bonanza. At the airport they could see their team come or go four times. During the training sessions Milan players made themselves reasonably accessible. Obviously the match against Birkirkara was very well attended even though it was transmitted direct on TV. At organised events there was a fair degree of accessibility and whoever was purposely mindful enough to get an autograph or take a photo probably found a way to do it.

AC Milan themselves seem to have had their expectations fully met. Their official statements during press conferences and their website communications are quite full of eulogies for the organisation and effectiveness of their Malta training camp. Coach Ancelotti went as far as to indicate that they might be seriously tempted to repeat the experience in future whenever his team needs to find the serenity leading to effectiveness on the pitch during competitive matches.

Birkirkara FC have gained a special relationship with AC Milan which permitted some of their players to rub shoulders during training sessions with some top-class world players. The friendly match will be for the memory albums. The final result of 5-0 is quite unkind to Birkirkara, who until the middle of the second half, before they suffered the second goal and before their team got dismembered by many substitutions to give a piece of the action to everyone, they were still very much in the game.

However, probably the major beneficiary of this venture is Malta’s brand as a warm tourism destination. Without hard-sell branding billboards and glossy publications, the venture must have produced a significant contribution to the enhancement of our tourism brand where it matters i.e. among foreign potential future consumers of our tourism product.

If Malta is up to scratch for a top-rated team like AC Milan to hold their Christmas training camp in, it should be equally attractive to the many other professional sports clubs who might not have the strength of the Milan brand but who certainly can provide us with a regular flow of lucrative business. The success of Milan’s training camp should be commercially exploited to lure others to do the same at different times of the year.

Birkirkara FC will no doubt use the experience gained to exploit commercially the opportunities opened up by this success. The national Football Association could consider emulating such initiatives giving their efforts the status of a national association that could lure peer national teams to hold training camps here before major international tournaments.

But the branding benefits will go much beyond that. The many thousands of viewers of Milan Channel and visitors to AC Milan’s official website have been bombarded with positive views about Malta which has no doubt helped to warm their heart with the prospect of a Malta tourist visit at some time in the near future.

This is real branding. Not billboards, pamphlets or assertive advertising. Real branding comes from delivering the real thing at the right price and quality, and then let the product speak for itself while encouraging the independent media to spot the value we deliver and to go and tell the whole world about it.

In comparison with the CHOGM venture I get the impression that as a nation we have reaped much more value from the Milan’s visit with a much smaller investment.

Well done to all. Obviously mistakes were made as well. Playing the national anthem when the players had already dispersed all over the pitch was wrong. Indeed this not being a national event there was no scope for playing the national anthem before the match.

But the biggest mistake was not inviting FC Internazionale. They would have been a better choice.

The Challenge Comes After

5^th January 2007

The Malta Independent - Friday Wisdom

Saving unforeseen events, this time next year we should all have crisp euro notes in our pockets. Assuming there will be no surprises on the inflation front, Malta should together with Cyprus become the 14th and 15th member country of the eurozone as from 1 January 2008.

Member countries have had different fortunes with the euro. While the Irish thank their good sense of joining the euro, the Italians doubt till this very day whether the 1999 decision to join the euro made sense in their circumstances. The Germans on the other hand had a very hard time adjusting to the switch from the deutsche mark to the euro, but are now roaring ahead confidently.

These different experiences by countries in different circumstances make it pretty evident that joining the euro on it own is no panacea. The competitiveness of a country does not depend on joining the euro. It depends more than anything on having a flexible and efficient economy capable of competing on price and quality to win on world markets. If then a country that has reasonable competitiveness in its base economy decides to join a monetary bloc sharing its monetary sovereignty with other countries with whom it has a free trade agreement or an economic union, then the success also depends on joining the monetary bloc a rate which preserves and enhances its competitiveness.

Ireland fared best as it joined at a competitive rate and restructured its economic base well following the ordeal of 1992 when the Irish punt was thrown by the markets along with the pound sterling and the Italian lira out of the then European Monetary System. When Ireland delivered the efficiency gains and attracted waves of FDI, its membership in the euro protected its competitiveness. Out of the euro, Ireland would have seen the punt soar in value against other currencies to reflect its economic advancement and thus tamper its competitiveness.

Germany on the other hand joined the euro system at a rather uncompetitive rate which did not take into account the continued high cost of integrating the Eastern part of the country following its nearly fifty years of communist economics. Germany thus needed time to regain its competitiveness by restructuring its economy at the base. This process was given further impetus by the challenge of new members since 2004 which forced the German Unions to make concessions for labour flexibility which were unthinkable till a few years before, in order to prevent factories from relocating to less expensive new EU members on Germany’s doorstep.

Both Chancellor Schroeder and Chancellor Merkel forced the economic restructuring at the base and this has currently rendered the German economy an export powerhouse. It is leading to a fall in German unemployment levels which until recently were stubbornly at double digits levels.
Italy on the other hand joined the euro ill-prepared. It window-dressed its economic performance to come technically but not substantially in line with the Maastricht criteria. Worse still, after joining it did pretty little to re-structure its economy.

With a cost base running higher than that of its competitors, the Italian economy found the euro system quite suffocating as it did not permit recourse to old habits of occasional devaluations to restore competitiveness lost due to inflexibility of its base economy.

What experience awaits us after the pomp of the changeover gets replaced by the challenge to preserve and enhance our competitiveness under the new rules of monetary union? Will we emulate the Irish, the Germans or the Italians?

The true challenge for making success of the euro will not be 2007. It will have to be a few years down the road when we can draw some conclusion about the success or otherwise of our euro project. Unlike what many might think the euro challenge is not the preparations for smooth changeover, which will be largely forgotten a few weeks after the event. It is the process of the unfolding years after the event that will decide whether the euro has enabled us to accelerate the restructuring in order to preserve our competitiveness.

2007 is pretty much a transitory year. Being the last full year before the latest date for holding fresh elections, governments tend to go soft on the restructuring process. Such issues like restructuring of the health services and a thorough overhaul of our fiscal system will have to wait till after the next election.

The government has no tools to manage the economy in 2007. Fiscal policy needs to remain restrictive to pass the ultimate euro test. Monetary policy has effectively already been ceded to the ECB who cannot be expected to fine-tune its monetary stance with Malta in mind. Exchange rate policy has never been used to manage the economy since 1992. It has been rather meant to deliver an anchor of stability to our external trade.

All in all therefore 2007 will be a cruising along year. The real challenge comes after. Making success of our joining the euro depends on our determination to continue restructuring to avoid waste, as is currently inherent in our public services, and accepting that there is no such thing as a free lunch. The euro is certainly no free lunch. It is a veritable challenge.