Sunday, 31 May 2009

Controlling Private Monopolies

31st May 2009
The Malta Independent on Sunday

One should not underestimate the seriousness of this report that was featured in the media this week:

“Ryanair accused Malta International Airport of holding the country’s tourism industry to ransom, being only interested in lining the pockets of its shareholders by imposing high charges.

“The low-cost airline said the airport was misleading the public by claiming its airport charges were within the EU’s average. It said MIA’s cost per passenger was more than three times its average.

“An airline spokesman said that if MIA, which he called a private monopolist company, was genuinely interested in the economy it would cut airport charges by offering a discount scheme to all airlines. This would stimulate passenger traffic, which would directly impact the tourism and leisure industries while also improving the business prospects for the country.

“The comments come as Malta, like other tourist destinations, is struggling with the effects the global financial crisis is having on tourism. Tourism spending has declined by 10.7 per cent compared to 2008.”

Let’s establish some facts. Firstly, MIA is a private monopoly de facto and there is no need for Ryanair or anyone else to claim it. It is an undisputed, evident fact.

Secondly, I have no brief from Ryanair or any other airline. All things being equal I prefer travelling Air Malta as a matter of national pride and have great admiration for the organisation, its management and staff.

Recently, I travelled by Ryanair to a destination not serviced by Air Malta. I was impressed. It is a no frills airline but utterly efficient. What you see is what you get. We left on time and arrived at destination ahead of time. We got off the plane very expeditiously and the baggage was delivered in record time. What else do you want when the trip is just around two hours?

In this case I certainly agree with Ryanair that MIA should not compare their charges with the European average, which takes into account business airport hubs in the main European business centres. We are no Heathrow, Frankfurt or CDG! We should compare ourselves with airports that primarily service tourist traffic, with airports in tourist resorts. If our airport charges are not competitive with such airports then we are putting ourselves at a disadvantage.

This brings into serious question the wisdom of privatising monopolies like MIA or strategic assets like Air Malta. From a macro-economic point of view, it is unquestionably dangerous to privatise monopolies. Monopolies have power that could be translated into economic fortunes, and whoever has power uses it for his own benefit with little or no regard for the interest of others.

It is hardly surprising therefore that MIA uses its monopoly power to keep airport charges higher than the macro-economic interests of the country demand. MIA is not tasked to look after the country’s economic interest. As a commercial company that paid a price upon privatisation reflecting its monopoly status, it is hardly surprising that it seeks to cash in on its monopoly power.

The problem is the way the privatisation of MIA was structured. Where is the economic sense in leaving such a strategic monopoly in private sector hands and create a situation where the narrow interest of the private monopolist could be in conflict with the wider interest of the country?

When, in 1998, the then Labour government was planning to conduct part-privatisation of MIA, which until then was 100 per cent government owned, the intention was for the government to keep a 60 per cent majority stake and to engage a technical partner at minority level in the equity, even if the technical partner could be given a greater say at operational level to drive though efficiencies and guard the company against undue political interference. But the government was then not prepared to lose boardroom control of the company, which could be forced at times to sacrifice its short-term narrow interest for the wider national good.

The PN government somehow thought it fit to privatise this monopoly in toto. Now we have a crisis in tourism and the government does not have the proper tools to respond to it.

Our airport is predominantly a resort airport. In these competitive days, the tourist’s choice of destination is highly influenced by the availability of cheap direct flights operating from an airport closer to home rather than from a business hub mega airport. Cheaper flights mean that tourists will have more spending power during their stay. With a tendency to take more frequent but shorter vacations, flight frequency is also an important factor. Two or three flights a week mean that a tourist can structure two, four or seven day holidays with flexibility. This fits in perfectly with our strength as a destination, whose message should be that what you can see in Malta in a few days would take several weeks in many other destinations.

MIA privatisation was badly structured. What has been done cannot be undone and we have to keep to the commitments given in the privatisation process. But this does not mean the government should not use whatever influence it has to nudge MIA to sacrifice its margins in order to build volume, which is so important for other operators in the crucially important tourism sector.

Such flexibility on the part of MIA could make a difference between a disastrous season and a downturn, which is painful but not fatal. In the longer term, MIA cannot thrive if Malta’s economy stalls. Outward travel, from which MIA derives much commercial benefit, is a discretionary type of expenditure that is totally aligned to the strength or otherwise of the country’s economy.

Private monopolies should not exist; if unfortunately they do as a result of past policy error, they should be pressed to look beyond this year’s profit and loss account.

Friday, 29 May 2009

Business as Usual - Business Unusual

 29th May 2009
The Malta Independent - Friday Wisdom

It is unusual for a bank to make “business as usual” the theme for its promotion campaign. Bank of Valletta’s “business as usual” campaign is unorthodox, ill-advised and counter-productive. It also betrays the defensive mode that its management seem to be trapped in, following the disappointing performance results reported in the financial year 2008 and the first half of the financial year 2009.

Business as usual is like the air that we breathe. It should not make headlines much less be part of a promotion campaign. The very fact of having to promote and stress “business as usual”, shows it is anything but.

Bank of Valletta is a fine bank. Compared to the stresses suffered by other international banks its performance is more than acceptable. Many of their reported losses on foreign investments, Lehman brothers excluded, will in due time flow back once the underlying investments approach their maturity without default. Unlike many other foreign banks it had no need to seek support from government or regulator. It is generously capitalised and highly liquid.

Of course it is business as usual and the bank’s management ought not stress it, just do it.

Look at our political parties. They don’t stress it is business as usual but they certainly go about it that way, hitting out at each other as we enter the last stretch of the electoral campaign for the EP and local elections. What is unusual this time is that roles have reversed. This time it is Labour setting the agenda and the PN re-acting to it. So within business as usual there are some unusual features. Unlike previous campaigns this time we are at least not discussing the lack of credibility of Labour’s alternatives. We are discussing government’s performance where Labour claim the PN is responsible for the economic crisis and the PN claiming that they have created and saved jobs.

What irks me is that both political parties keep trying to defy the laws of economic gravity. This is nowhere more evident than in the policies for universally free health services.

What should be clear without any room for doubt is that no matter who is in government, this country cannot afford to pursue universally free health services. The Central Bank has been spelling it out in its quest for government to pursue more prudent fiscal policies. Economists know it and it would be highly improbable that the politicians do not, in their heart of heart, know it too.

Yet what do we get? We have Labour accusing government that it is planning to introduce fees for the provision of health services and pledging that its own policies are to keep health services universally free, which is easier said when in opposition than done when in government. The government, rather than take people into its confidence and explain that tax money would be better spent if some contributory fee is levied from health service users that can socially afford it, continues to distance itself from the inevitable, postponing judgement day without providing realistic solutions.

Look at it objectively. Is the present system of universally free health services socially correct? God forbids you would need emergency services from Mater Dei on a weekend. Unless it’s a case of life or death, it is not unlikely that you will spend more hours than you can count on your fingers in the waiting room until, if you can afford it, you frustratingly decide to seek paid services from a private hospital rather than wait what looks like eternity for free services.

The same can be said for unduly long waiting lists for non-life threatening surgery; or in case of sub-standard service in over-crowded wards. What’s the use of having the right for free services if such right cannot be exercised without undue hardship? Would you rather have free but inaccessible health services or would you rather pay a moderate contribution to have fair access to efficient health services when needed?

And this question of free health services is illusory. There is no such thing as a free lunch! Someone somewhere is paying for it. Most members in the upper half of the social strata are in fact paying twice for having peace of mind about accessible health services. Through general taxation (direct taxes as well as VAT which had gone up from 15 per cent to 18 per cent specifically to finance free public health services, or so we were told at the time) we are paying for government’s funding of our universally free health services. And because we cannot rely on free but inaccessible health services, we pay again for private health services.

We would all be damn stupid if we pay for private health services, directly or through insurance arrangements, if such services were to be freely available and accessible. If this were so there would not be private hospitals and private health insurers. Yet reality is that these private sector providers are flourishing and multiplying. The more they do the more it is evident that public health services are not living up to their purpose.

The question of such services being provided free of charge is a recipe for waste and inefficiency. Apart from education and law and order, which are in a class of their own as by their very nature they cannot be abused or overused, no other public service is completely free of charge. We pay for water and electricity, for the roof on our head and we pay for our daily bread, and these are no luxuries. Even in insurance when we claim we have to pay for a small excess. So would it be out of this world if we start paying a small, small fee, if necessary on a means tested basis, to deliver the message that nothing is free, to cut waste and to ensure that the services are not demanded capriciously but strictly on a needs basis?

For Bank of Valletta it is business as usual without need to stress it. For health services politics it must stop being business as usual and our politicians on both sides of the fence must sit together and devise a fair system how to make our health services sustainable and accessible. This can only be done if we shift gracefully from a universally free system to some sort of co-financing arrangements or to a national health insurance scheme with contributions being means tested to ensure that the social aspect is maintained, but not beyond the point of creating waste which benefits no one.

Friday, 22 May 2009

St Rita on Overtime

22nd May 2009
The Malta Independent - Friday Wisdom

Today is the feast of St Rita to whom many faithful refer with prayers for needs or wishes which appear quite impossible to realise. St Rita is thus known as the saint of the impossible.

Something many considered impossible has happened this week in the world largest democracy. The results of the general elections held in India over a time period spanning more than one month, left many observers dumbfounded, capable of simply whispering awesomely: Incredible India (which is indeed the motto of their tourism sales pitch).

Indian voters have delivered a humbling lesson in democratic wisdom that could be just what their barely governable country essentially needs. Faced with the fall-out from the financial crisis, a massive backlog of structural reforms which were impeded by fractionalised government coalitions that left little room for manoeuvring without destroying itself, a string of home-grown insurgencies, a tense stand-off with arch-rival Pakistan, and bruised by a terrorist attack from Pakistani based forces on its main commercial centre in Mumbai last October, the country badly needed a strong government to manoeuvre these challenges. Yet there was more hope than conviction that this could come from such a complicated democratic process involving 420 million voters.

The Indian electorate has chosen decisively in giving a strong mandate to incumbent Prime Minister Manmohan Singh beyond the wildest expectations of his Congress Party – the Party of Nehru, Indira Ghandi and Rajiv Ghandi. To replace the outgoing coalition of 13 parties Mr Singh now has a more concentrated manageable majority that can drive the restructuring needed to make India more competitive, a respected international player, a strong economic force which addresses its internal poverty and a balancing force to China’s ascension.

India’s democracy is a lesson of maturity overriding strong forces such as caste-based populism, sectarian Hindu revivalism, and regional parties with a habit of holding national interest hostage. It is not yet clear whether the Indian electorate also managed to cleanse its parliament from its hitherto criminal dabs. In the last parliament 128 out of 543 members had faced criminal charges or investigations, including 83 cases related to murders. In a poor society, gangsters can and do use their muscle and money to get elected.

It is incredible how such a large and relatively poor country can manage such a peaceful democratic transition. Presumably poverty is a relative value. The fact that many Indians are today less poor than they used to be, even though still very poor in comparative terms, prodded the electorate to elect a strong government that can persist on the road to development.

China would do well to look at the Indian experience and mull whether it is better to embark on a process leading to democratisation; otherwise, the process will have a tendency to snap itself into being with one devastating sharp effect.

I don’t know if St Rita has had anything to do with the Indian miracle but it would be nice if she were to put in her bit in the Middle East peace process which started in earnest this week when the new Israeli Prime Minister Benjamin Netanyahu made his first call on President Obama.

It is clear that if progress has to be made on this long festering issue, Obama has to maintain and enhance his role as an honest broker and distance himself from the role of protégé of the status quo in favour of Israel as adopted by past US presidents.

Obama has committed himself to pursuing a peace package that is based on a two state solution and curtailment of further expansion of Israeli settlements on Palestinian territory. Prime Minister Netanyahu has been elected to government in a fragile coalition which negates both these conditions. In Netanyahu’s first term as Prime Minister during the Clinton presidency, he had tried to force the hand of the US president by using the Israeli lobby in Congress, an act which practically rendered Netanyahu a persona non grata in the White House and kept him for a decade out of Israel’s government.

One has to see whether Netanyahu mark 2 is more pragmatic and has the political capital to bring his coalition along with him to do the necessary compromises to reach peace or whether such flexibility would effectively cause his government coalition to disintegrate, forcing Israel back to the polling booths.

Obama has a great hand to play. Strangely this hand comes from a most unlikely source: Iran. Obama and Netanyahu both agree that Iran’s nuclear ambitions present an existential threat to Israel and the whole Middle East. But whilst Netanyahu seems to favour a pre-emptive military solution, Obama maintains that the solution to the problem of Tehran passes through Jerusalem.

Obama maintains that Iran’s intransigence could be broken by forming strong alliances with Arab neighbours in the region rather than by consolidating Arab support for Iran through military strikes, pre-emptive or otherwise. Iran’s isolation by its Arab neighbours is only possible through effective compromises for a permanent solution to the Palestinian issue.

Obama has a lot of political capital to spend and in spite of the horrendous economic problems on the domestic front, he seems determined to tackle the Middle East issue in full force at a time when he has strong moral authority to kick bottoms and knock heads.

St Rita needs to work overtime.

Sunday, 17 May 2009

Angels and Demons

17th May 2009
The Malta Independent on Sunday

This is no critical appraisal of the film sequel to Dan Brown’s Da Vinci Code with versatile Tom Hanks starring, opening this weekend in international box offices after a major promotion campaign.

It is the impression that comes to mind after the first political billboards sprang up last weekend as the campaign for the European Parliament elections gets under way.

The PN found nothing positive to say about themselves and instead launched a negative campaign against Labour on the pretext that if their opponent is projected in bad light, than the PN, warts and all, must be a safer bet. But their message is more than a bit stretched. Arguing that former leaders Mintoff, Mifsud Bonnici and Sant are still bedfellows who produced Muscat as their offspring while the 12 candidates fielded by Labour are all from the same fabric as the ex-leaders is extremely economic with the truth. How would one expect to be credible maintaining that Louis Grech, Edward Scicluna and Marlene Mizzi break bread regularly with Mintoff, Mifsud Bonnici and Sant?

This message is now hackneyed to the extreme and the PN seem to have run out of ideas if they cannot come up with something fresher and more positive. A group of eight gentlemen in white shirts and monochrome ties flanked by two smiling ladies in trouser suits provide little persuasion that they will be working to bring investment, employment and economic growth. Assertion is no proof.

Much more persuasive is the booklet that Simon Busuttil slipped in my letter box as part of his bid to get re-elected as MEP, probably before moving on to something bigger. Without even stating the obvious, that he is running on a PN ticket, Busuttil focuses on his achievements during his first term as MEP.

This is how it should be. Unfortunately we have rendered the MEP elections as some sort of vote of confidence in our main political parties. This has nothing to do with reality. Even if Labour were to carry all five seats it would not make any difference to local political realities. Government would still be in government and the opposition would still be in opposition and the next general elections would still be due in 2013.

We have had a pattern between 2003 and 2008 where Labour would win MEP and local elections but then failed where it mattered in the general election of 2008. In a way the PN tend to acknowledge their imperfections and allow space for their followers to vent their anger in these subsidiary elections only to regroup in the elections which preserve their long tenure of executive power at national level.

As far as I am concerned the MEP elections are a non event in so far as the local political scene is concerned and what matters is more the individual competences and abilities of the candidates rather than the party platform on which the person is running. Coming to the end of the first term experience of our MEP’s we have seen that we had some, from both parties, who performed well and made a difference to local realities, whilst others, again from both parties, who were totally out of their breadth in the Brussels bureaucracy.

Labour’s campaign billboard seems less focussed on the European Parliament elections and instead seems focussed on the local elections. Tackling such themes as high utility bills and the generally falling standard of living, Labour’s billboards pin these faults squarely on the Gonzi administration, that distressed as it is with an grave economic recession which snapped suddenly last autumn, is unable to deliver on many of the promises it made in the run up to the general elections earlier in the year.

As this will be the first electoral test under the new leadership of Joseph Muscat, for Labour these elections have a particular meaning beyond their intrinsic value. It is the first opportunity for Muscat to show that his leadership is working. A clean and emphatic win in the MEP and local elections would permit Muscat to impose his character and vision on the Party with more authority, overcoming the internal resistance which is still resisting change.

Governments take undue credit when the economic tempo is vibrant spreading the feel good factor even though this is sourced from causes well beyond their control. Especially with a small open economy like ours our economic fortunes are influenced much more by what is happening in our main export markets rather than by what the government is doing domestically. It is therefore rough justice that when the economic tempo worsens, even if for reasons well outside their control, governments can hardly complain if they get punished by the electorate who even if unfairly, blame governments for the unpleasantness of the dire consequences of a deep international recession.

All in all my vote will be mostly influenced by the need for the country to have a strong opposition which can be moulded into a true alternative come next general elections. My vote rather than on the particular issues, will be meant to strengthen the leadership of Joseph Muscat at this fragile time when he is trying to impose his youthful determination on an old animal which refuses to bring itself in contact with reality. Within that context I will vote on the perceived merit of the individual candidates to make a good job of the Brussels bureaucracy and to deliver true service at granular level within their local community.

For me there are no angels and demons on our political scene. There is a government which has got too much used to executive power and an opposition that is still trying to become a real alternative.

Friday, 15 May 2009

Redoing the Budget


15th May 2009

The Malta Independent - Friday Wisdom

Government has pooh-poohed calls made for presenting a mini-budget to take new measures to address the economic downturn. My opinion is that rather than a mini-budget government should present to parliament a fresh budget for 2009 based on current realities even if it does not consider it necessary to take any new measures.

The Budget for 2009 presented last November is dead in the water and the projected deficit of ninety eight million euro for 2009 is totally unrealistic.

Let me make my case with the aid of some basic figures.

Table 1
Government Finances 2008
Budget Day
€ 000's
recurrent revenue
recurrent expenditure
interest payments
capital expenditure
fiscal deficit

Table 1 compares the actual outturn of the fiscal deficit for 2008 to the result projected by the Minister of Finance when he presented the Budget for 2009 in parliament on 3rd November 2008.

The deficit projected at two hundred million euro on budget day finished 16% higher. This however is not the real story. The real story is that there is a shortfall of eighty two million euro in revenue and the bottom line difference was not impacted much harder by this revenue shortfall only because payments for capital expenditure were postponed and probably shifted to the current fiscal year.
In normal circumstances these variance in such a short period of time would be unacceptable and would force one to question the technical competence of the Minister running our public finance. However these are not normal circumstances. The Minister presented the Budget in the middle of an international economic freefall and visibility about actual revenue from taxes suddenly disappeared. This is not to say that the Minister was not unduly optimistic when presenting his budget, but no one really could preview accurately how the economic problems would compound into a crisis compromising the basis of government revenues throughout the world.

Table 2 shows the outturn of public finance for the first quarter January to March for the years 2007 -2009.

Notice that the deficit for the quarter has this year more than doubled from where it was two years back.

Table 2
Goverment finances
€ 000's
fiscal deficit Jan -March
fiscal deficit Jan - Dec
performance Apr - Dec

*result required to meet current budget target

Notice also that that for the government to hit the 98 million euro deficit projected last November for the whole of 2009 it would have to generate a fiscal surplus of one hundred and sixty seven million Euro in the 9 months April to December 2009. This would be impossible even in normal circumstances, so much so that the performance April to December 2008 was negative twenty three million and 2007 was positive twenty one million. Hitting a positive one hundred and sixty seven million in the nine months April – December 2009 when the economic slowdown is brutally impacting government revenues is as likely as Christmas next July.

Government cannot continue to operate our finances using a totally irrelevant benchmark. Given current realities the final deficit is likely to finish between double and treble the level projected in the Budget for 2009.

It is time to look reality straight in the eye and present a totally new budget after making a line by line review of discretionary expenditure to see what economies could be driven to cushion the impact of the international recession on public finance.

Friday, 8 May 2009

Stress Tests

8th May 2009

The Malta Independent - Friday Wisdom

Bank regulators and monetary authorities around the world, bruised by the experience of the financial turmoil following the Lehman collapse last September, are intensifying their stress testing mechanisms for significantly important banks under their purview, to ensure that for the future they are well cushioned with sufficient capital to withstand further turmoil.

Lax banking supervision and insufficiently rigorous past stress testing forced governments to intervene to avert further crisis, re-capitalising some of the significantly important banks. Strong banking brands such as Citigroup, Royal Bank of Scotland, Lloyds Bank, Halifax Bank of Scotland, Fortis Bank, Commerzbank and Hypo Real Estate are still on their feet only thanks to crisis support from their governments. Other well known investment banks, like Bear Stearns and Merryl Lynch had to be absorbed by larger outfits in distressed conditions.

In a bid for transparency meant to increase confidence in the banking system, such stress tests have started being published. There are some who doubt if this will in fact not have the contra-effect if they reveal inadequate capitalisation. Their publication is awaited with trepidation.

In Malta, the Central Bank has just published its first Financial Stability Report 2008 dealing with the entire system. It has, with good reason, not published the individual results of the respective institutions.

The conclusions of the report are written in very guarded language and in some parts it is even contradictory. For example, it is difficult to see how a statement like “stress tests undertaken by the Bank (Central Bank of Malta) confirm that, on average, the banks have sufficient capital buffers to withstand extreme yet plausible shocks” can co-exist with an earlier statement that “Banks in Malta remain for the most part adequately capitalised ... however ... additional capital may be required to meet risks ... if the existing resilience of banks to extreme but plausible shocks is to be maintained”.

Apart from the conflicting nature of these conclusions the reference to “on average” and “for the most part” indicate that the Central Bank has reservations about the capital adequacy of some individual institutions. Individual institutions, if significantly important, may be crucial for the overall stability of the whole system and therefore such inferences should not be disregarded lightly.

While the Central Bank does not report separately on each institution, it is only logical to conclude that it may have reservations on the capital adequacy of one of the significantly important banks. As an objective and independent analyst I tried to explore whether Bank of Valletta, as a significantly important bank that has so far reported the highest turmoil related losses, has adequate capital to withstand “extreme but plausible shocks” that may be in store for the future.

Bank of Valletta has just published its interim financial statements for the six months to March 2009 where it reported a net profit of e6.3 million down from e25 million in the same period prior year. The results show that the Bank had to make further provisions on the “fair value” of its investments brining the total such provisions since the turmoil started to e84 million. The Bank made a statement it expects to claw back “much but not all” of these provisions over time as it holds such instruments through the period till final redemption.

The crux is that that reported losses are theoretical resulting from much criticised “mark to market” accountancy rules which force Banks to write-down the value of their investments to the last market price even if such price results from an inefficient, distressed and highly illiquid market. Possibly Bank of Valletta has reported higher losses than its peers for two reasons. One is that such investments were held in its trading book forcing it to recognise valuation losses through the profit and loss whereas peers held such investments in the available-for-sale or held-to-maturity categories which permits technically for valuation losses to be passed through the balance sheet reserves or amortised to maturity.

It is truly a case where Bank of Valletta is being punished for its prudency. Having a loan to deposit ratio of just 67 per cent the Bank has been forced to keep a significant part of its assets in what it describes as securities issued by “quality, credit rated, sovereign, supranational, corporate and financial institutions”. It is these securities that have contributed to the booked losses. The local loan book has remained sound and impairment charges on the loan exposure it is still extremely low.

Future stress is unlikely to come directly from the financial turmoil as happened these last 18 months. Future losses are more likely to result from the lagged effects of the general economic recession which reduces the loan book quality and will necessitate higher recovery provisions. This applies as much to Bank of Valletta as to its peers. Going forward it seems that Bank of Valletta, unlike other banks, will be able to cushion such increased provisions on their loan book by the recovery of provisions on investments as international financial markets stabilise and bonds approach their maturity date.

With a Tier 1 capital ratio of 10.50 per cent Bank of Valletta appears well capitalised and there is no risk that it may have to be forced to make a rights issue even if the local economic situations worsens beyond expectations.

What Bank of Valletta should have done in these circumstances, is cancel their interim dividend. Paying out an interim dividend, which even if reduced, still exceeds the profits of the first six months of the financial year, erodes capital when prudency demand capital should be protected.

In the current circumstances Bank of Valletta’s management should be less sensitive to its equity price and focus more on the long term stability of the bank which is the most important element that protects shareholder value for the longer term

Sunday, 3 May 2009

Resurrecting the Social Pact

3rd May 2009

The Malta Independent on Sunday

Ten years ago I published a book about the then raging debate on Malta’s membership to the EU, which eventually materialized five years later. Let me quote a synopsis of the conclusions from that publication:

“It would be highly irresponsible to avoid the membership option purely on the expectation that we can keep the present status quo and avoid altogether the pain of re-structuring. The choice of enhanced relationship option (as an alternative to membership) demands a measure of leadership, consistency and faith in the ability of the Maltese nation to do what’s best for them, much bigger than that necessary under the membership option. In the enhanced relationship option we have to do what we have to do without the discipline of an external agent to keep us on track.

“Should we come to miss the necessary leadership, vision, consistency and discipline so indispensable to re-structure outside the membership option, then we might be risking the total collapse of our economy and the involvement of discipline from another sort of external agent like the International Monetary Fund.”

Ten years later there is solid proof that the conclusion was well based. EU membership imposed on us the discipline to re-structure, however inadequately, to address our fiscal extravagance and to raise our standards to attract foreign direct investment. Our economy, pressed as it is by the international financial turmoil, has remained stable and hopefully we can get through this rough patch without structural damage. Compare that to Iceland, which went for the enhanced relationship option and did not find the internal discipline to keep its economy on track. When the winds of recession came the Icelandic economy was literally wiped out. It was forced to go cap in hand to the IMF to ask for a financial bailout and accept conditions that imposed great hardship on their society, which is experiencing a brutal re-appointment with reality after years of excesses. Iceland last week elected a new left wing government with a clear mandate to seek EU membership leading to their joining the euro.

Quoting further from my publication of 10 years ago:

“If we cannot find the inner strength to re-structure for ourselves and for our future generations then the choice we have is whether we are forced to do it by the EU within a membership framework or by the IMF outside the membership framework. This would be an unpalatable choice. Doing it for the IMF would be much more painful and sharp.

“In this respect much depends on the attitude of the unions and their readiness to participate in a national plan to re-structure our economy… to promote the concept of life-long employability and life-long training and employees multi-skilling. Unrealistic clinging to the status quo could make EU membership as quickly as possible, whatever the cost, whatever the consequences, a choice of the lesser evil.”

Five years into membership there is broad consensus that it was the right decision, but in no way can we claim that EU membership has solved all our problems or that we do not need more discipline and commitment to continue with the re-structuring process.

We are living in difficult, but at the same time, very instructive times. We are witnessing two countries that had become the symbol of success of EU membership, Ireland and Spain, being severely beaten by the international recession. It would be wrong not to realise that EU membership does not offer protection against economic morass in all circumstances.

Ireland and Spain are in fact paying the price of their own success. Their economy benefited from efficiency gains and foreign investment, giving them economic growth and low unemployment. Their euro membership did not permit such gains to be reflected in their rate of exchange, as would have happened if Spain still had the peseta and Ireland still had the punt. Such exchange revaluation would have calmed down excesses and made growth more sustainable. Instead, operating under a monetary policy decided by the ECB on a euro-wide basis (and certainly unsuitable for Ireland’s and Spain’s particular circumstances, thus keeping interest rates much lower than demanded by the tempo of their national economy), Spain and Ireland inevitably experienced real estate price bubbles of dangerous proportions.

The bubbles have now burst, putting their banking system under strain and their economy in deep recession. Both economies now need painful restructuring to achieve growth in a more balanced way. Their respective monetary authorities have to realise that they must devise supplementary monetary tools to address domestic imbalances, which cannot be addressed by interest rate policy set on a euro-wide basis.

Iceland’s shattering outside the EU, and Ireland and Spain’s crisis inside the euro area, amply show that the judicious and continuing economic re-structuring, seeking efficiency gains and eliminating waste, challenging dogmas and taking a long-term view of economic policy, is now, more than ever, necessary. Such restructuring would be much more effective if it is carried out within the context of a social pact where burden sharing becomes the guiding rule for progress. Yes, it is time to resurrect efforts for a social pact.

Friday, 1 May 2009

May Day`s Significance in a Post-Turmoil World

1st May 2009

The Malta Independent - Friday Wisdom

Today, workers round the world will down their tools, their pens or their keyboards to celebrate their achievements since the industrial revolution.

It is an opportune time to reflect whether May Day is just an occasion to celebrate past achievements or, in addition to this purely historical perspective, it has significance to understand current challenges which could be gradually and unobtrusively eroding past achievements. Workers must muse today how in future they can sustain their share of the national income.

The financial turmoil experienced in 2008 makes it doubly opportune to consider May Day well beyond its purely celebratory perspective.

Workers in developed countries have been rapidly losing share of their country’s national income. This was a process that actually started thirty years ago this week when Margaret Thatcher was elected as British Prime Minister in May 1979. Thatcher economic liberalism soon found support from Ronald Reagan who was elected to the US Presidency 18 months later. Together they pushed through Thatcherism or Reaganomics involving privatisation, deregulation, tax cutting, assault on the power of trade unions, and focus on wealth creation rather than wealth redistribution.

Their economic policies proved successful as developed economies overcame the chronic inflation problems and generated efficiency gains which brought about a long period of stable and high economic growth in the last two decades.

Labour movements found themselves without much power to defend their share of the national income at industrial level, as with the advent of globalisation competition increased exponentially. The level of wages was dictated not only by unemployment in the workers’ own country but more generally by wages payable in far less developed countries that joined in the globalisation game. A worker’s competitor for the preservation of his job and its conditions was no longer merely the unemployed guy living next door, but the Chinese peasant who decides to try his luck seeking an industrial job in one of China’s newly burgeoning cities.

Yet things remained pretty settled and peaceful. Workers did not make much issue of receiving a lower share of the national income. This might look strange considering labour’s traditional militancy. Thatcherism had removed the effectiveness of the most potent weapon that unions traditionally used to press their claims with i.e. the strike. After Thatcher taking on and crushing the British coal-miners, after Reagan’s victorious battle with the US air traffic controllers, and on the local front after the fiascos of the strikes at Phoenicia and Sea Malta, unions worldwide found that with much increased mobility of capital the strike instrument became blunt and ineffective.

But this apart, workers found their standard of living increasing satisfactorily even in the context of a reduced share of the national income, and this for two reasons. Firstly because the national income was increasing at an accelerated rate compared to the stagnation of the seventies so that a reduced share was still bigger in absolute terms. Secondly because what workers were not doing in better wages they were in fact doing in appreciating values of their assets. In accounting terms what they were not doing in the profit and loss account they were doing through revaluations in their balance sheets.

In places like the US, workers were in fact getting into the habit of augmenting their regular income by cashing out the increasing value of their primary residences through drawing second and third mortgages to settle bills accrued through consumption expenditures on their credit cards.

Suddenly in 2008 this model, which had been working well for several years, got broken. Property prices collapsed and many workers have seen the value of their residences dive below the value of their mortgages (negative equity). At the same time workers are facing increased unemployment and those that are still in jobs have no leverage to demand better conditions. On the contrary in countries with severe economic problems like Iceland, Baltic States, Hungary and to some extent even the US, UK and the EU, workers are having to accept pay cuts to preserve their jobs. In Malta we have seen workers having to hang on to their jobs by accepting shorter work weeks and correspondingly lesser earnings.

Suddenly Thatcherism and Reaganomics have been shattered. From strict monetarism we have switched to quantitative easing (essentially central banks printing money). From privatisation we have been forced back to nationalisation, de facto or official, of wide swathes of the financial sector as governments had to intervene with liquidity and fresh capital to save insolvent banks from folding up. From firm believers in free markets’ ability to regulate themselves through competition, we are reverting to strict regulation.

Clearly the pendulum of blind belief in the effectiveness of free markets had swung itself to the extreme of self-destruction. Thatcher’s doctrine that the market should not give something for nothing has been ridiculed by the markets’ total disregard of traditional value in rewarding with multi-million bonuses and munificent pensions bank executives who drove their organisations into near bankruptcy.

Workers are positioning themselves for this challenge in a very interesting way. Without the tools to defend their case in the industrial arena workers are defending themselves in the political arena by electing political leaders who are prepared to roll back the excesses of Thatcherism and Reaganomics without challenging the underlying strength of free markets.

Workers should particularly celebrate this year the election of the most socially oriented US President and should re-evaluate their model by looking at reality in the face and accept that their strength is best expressed through the election of social friendly governments rather attempting to vainly re-acquire power at the industrial level.