Sunday, 28 June 2009

Bullying Should be Ignored

28th June 2009
The Malta Independent on Sunday

There is much to criticise on the state of Malta’s public finances chief amongst which is that the progress achieved in 2005 – 2007 as part of the Euro project, in bringing the deficit to within 3% of GDP was undone in 2008 when government did what governments often do in an election year, ergo, spend their way to fiscal irresponsibility in order to get re-elected.

But the EU warning given to Malta by Commissioner Almunia that it has to come back within 3% of GDP by end of 2010 smacks of bullying. It is a clear case where the Commission, totally impotent in its discipline upon the big EU members like France, Germany and the UK, pushes around the smaller member states to give the impressions that it is in control of a situation which has clearly escaped its grasp.

The fiscal situation of most European governments in 2009 is in a state of flux. Faced with a the sudden onset of a global financial crisis which quickly spread into a global recession, governments had to intervene to protect their economies from falling into a depression.

To keep the level of demand high enough to avoid mass unemployment, governments had to replace the shrinkage of demand by the private and the export sectors, by increasing their spend through the launch economic stimulus plans which greatly increases government spending. This increased expenditure in the context as falling ordinary tax revenues has led to many countries running huge budget deficits, well in excess of 3% of GDP, in fiscal 2009. When it would be possible to restore budget discipline and bring these deficits down again and heading towards the neutral point can only be a medium term prospect.

Regularisation depends upon withdrawal of special government stimulus programmes as much as, if not more, upon restoration of growth to the economy. The prospect for this is unclear at its best. The world economy is probably hitting the bottom of the recession at around this time. Some countries that entered the recession first, especially the US and UK, are speculating about the appearance of economic green shoots. However in reality these are more statistics of the second derivative, i.e. things are getting worse at a slower rate rather than of the first derivative i.e. things are starting to get better.

Few economists can sincerely expect a strong recovery. Hopes of a V shaped bounce are based on hope rather than logic. Growth has to follow restoration of confidence in the financial system with credit flowing freely to lubricate business investments. The financial sector is still very fragile and the main players will have to spend the next few years repairing their balance sheets rather than following new initiatives. We are seeing banks enjoying very low interest funding through Central Bank lending and ordinary deposit rates but still charging high lending rates leading to record interest margins meant to address the losses still being registered in writing down their property assets.

At best the global economic recovery will have an ascending W shape, an escalator type of gradual recovery which could take at least until 2012 to get the major economies back to their normal long term growth trend. And this depends upon the success of international co-ordination to facilitate growth by putting in the driving seat of the growth train those countries that can stimulate domestic demand without exasperating their already fragile fiscal and balance of payments positions.

Countries like China, Japan and Germany, who among them have about 50% of the international trade surpluses, need to reflate their economies to stimulate domestic demand, run down their balance of payments surpluses, and permit debtor and deficit nations, especially the US, to exit the recession through export led demand rather than stimulation of more credit-based unsustainable consumer demand.

This is easier said than done as it involves massive culture changes and launching of programmes totally and diametrically opposed to those which were delivering economic success in the past. China, Japan and Germany owe their comfortable balance of payments positions through high domestic thrift culture where consumer save rather than borrow to spend. They also owe it to their strong export economic platform. Convincing their consumers that in the midst of this recession they should spend rather than save and changing their exporting industries to outfits producing for internal demand is like teaching an elephant how to dance.

But unless this international co-ordination is achieved and the world is forced to resort to the old habits of making the western consumers, indebted they already are, as the main platform of future growth based on imports from surplus countries, the recovery will be fragile with grave risks of recurrence as the US dollar will have to bend under the weight of its own deficits causing havoc to international trade and back into a grave recession.

Against this uncertain background there are no countries that are planning their exit strategies from their fiscal stimuli programmes and restoration of fiscal sanity by end 2010. In our case the EU is right in stating that the deficit growth in 2008 is not related to the international recession. But entering the recession in 2009 with a bad fiscal position will make it harder to achieve restoration by 2010.

We are in a situation where government itself has no clear idea what its fiscal situation will be at the end of this year. Revenues from income tax and VAT are depressed as economic growth turns negative and consumption drops at the discretionary margin. Inevitable people pull back on major investments like property purchase which is a great revenue generator for the state with most deals generating instant revenue of 17% - 5% from the purchaser and 12% from the vendor.

My best guess is that the fiscal position this year will worsen further to around 5% - 6% of the GDP. How we can bring this back to 3% by 2010 if we are still in crisis mode managing a very fragile recovery from the recession is anybody’s guess.

The EU should base its efforts for fiscal sanity on the big countries who like France take pleasure in ignoring it. In any event fiscal sanity has to be framed over a medium term programme spread at least until 2012.

Friday, 26 June 2009

What Role for the Opposition

26th June 2009

The Malta Independent - Friday Wisdom

It is no news to anyone that The Times carries an anti-Labour editorial policy which by default becomes an automatic pro-PN policy. But an editorial as that featured last Tuesday titled Time to call Labour leader’s bluff goes beyond all limits and exposes the extreme bias and total lack of objectivity in the paper’s opinion of Labour in general and its leader in particular.

The said editorial could just as well have been penned by the government minister concerned as it could hardly have been more unfair and subjective.

The question at issue is whether four years away from the next general election the Opposition has any duty to offer its own solutions to the problems facing the country or should limit itself to pointing out government’s deficiencies in handling these problems.

The Times editorial team thinks that Labour should not only criticise government’s handling of the energy issue, including matters of strategy regarding energy procurement as much as social issues involved in utility tariffs, but should assume the government’s executive role and offer their own “solution”.

Indeed it appeals to government “to call their bluff and challenge them in no uncertain manner to spill out their solution”.

What’s next? Are we going to expect the Opposition to take over the government’s role so that government ministers will have more time to entertain themselves and devote their energies to the lighter side of being in government? Maybe The Times expects Labour to organise street collections for the Finance Ministry to supplement its revenues and address the gaping hole developing in 2009 government finances which will be far greater than that projected in the Budget of last November!

An Opposition role is to oppose the government where it feels that the government is under-performing or following the wrong policies. No government should seriously attempt to excuse itself for its under-performance purely by suggesting that the Opposition is not proposing alternatives. This is especially true when the election is so far away and the Opposition has no realistic prospects of having an early opportunity to implement its alternatives.

Obviously things will get progressively different as elections approach and especially in an election campaign when the Opposition would be presenting itself as an alternative government and would stand a fair chance of gaining the opportunity to implement its policies. But expecting the Opposition to “spill out their solutions” four years ahead of an election is not much different from pretending the weatherman to supply a weather forecast for 2013. Who knows how the oil markets would be in 2013? Who knows in what shape government finances will be when Labour takes over, if it happens in 2013?

The Times could have been fairer if it stuck to the argument that Labour’s criticism of government policies in energy matters is unfair as this problem has an international dimension beyond the control of any government. This is an argument which could be made with a certain amount of validity.

But it would still have very little justification. This is a government which has been in power for more than 22 years apart from a very short interruption between 1996-1998. They cannot blame others for inherited problems.

The government’s claim that inadequate resources to meet peak demand reflects economic development at far greater pace than anticipated is laughable. To objective observers it looks more a case of mismanaging and under-investing in the energy productive capacity. If anything our rate of development has until 2008 been below that of our peers who joined the EU with us in membership in 2004.

To objective observers it looks more a case of wilfully living with huge inefficiencies at Enemalta for purpose of political convenience. It looks more like a case of deep inertia in developing utility tariffs to bring them gradually reflecting market realities without causing sudden shocks to the economy. It looks more like lack of imagination in providing the right incentives for the private sector to spread its use of energy across all time scales in order to reduce peak demand.

It looks more like government sleeping for too long on the need to diversify our sources of energy supply and introducing incentives to nudge consumers to generate their own electricity through alternative means and to sell back extra electricity to the main grid at the same marginal rate they are charged for using energy from the grid.

The government and its accolades should focus their energy on doing the job for which they are responsible rather than to attempt to hide their failure behind unfair expectations from the Opposition. Leave it to the electorate to decide if the Opposition offers better prospects and that it is not a decision the electorate has to make before 2013. This is not 1998, Sant is no longer Prime Minister and Mintoff is no longer an MP. Or is government still living in the past?

Friday, 19 June 2009

Rapped on the Knuckles

19th June 2009
The Malta Independent - Friday Wisdom

One of my readers rapped me on the knuckles for joining the band wagon in saying (last week’s column) that the PN lost this latest election miserably because “the way they handled the utilities bills saga has all the hallmarks of a perfect recipe for mismanagement.”.

He went on to say:

1) Why was not the rampant corruption mentioned?

2) The general absence of government with only two ministers doing something (right or wrong).

3) Why has not the rampant nepotism in government boards and government institutions mentioned?

4) Why was not the proliferation of boards, authorities, foundations etc with huge amounts of money going down the drain to keep directors, CEOs, drivers, nice cars running?

5) The proven corruption at ADT, Malta Martime and now fraud at VAT department?

6) The immigration problem, which seems to have calmed down now with the efforts of Maroni and not the Maltese Government.

7) MEPA and the environmental disaster it is chairing;

8) The Mater Dei disaster, with a new hospital taking 19 years to build and as soon as it is opened we find out that it is too small for its purpose;

9) The waste on money on direct orders – Mater Dei parking and Security contracts – against all basic government procurement regulations.

11) Energy generation --- where we have fallen backwards on targets set to generate clean energy.

My reader signed off as follows: “I can continue forever – but everybody seems to mention only one thing the W & E bills. These had to be raised and they were raised. People cannot take it for granted that these are practically free. Just visit one of the social housing estates and you will hear air conditioners operating day and night and this in a social housing estate. After all this was the same necessity when Alfred Sant raised the W & E bills in 1999. If certain things need to be done then they should be done no matter if the Prime Minister is Gonzi or Sant.”

My reader is right. This week, after he wrote me the above, the whole country lost nearly one whole productive day due to power outage which stalled all economic activity last Tuesday. Yet again we have tangible proof of a government in crisis with a power station at Marsa which should have been sealed up years ago still critical to meet peak demand on a hot summer day. Someone who has inside knowledge of the extremely tight criticality of the power generation capacity has suggested to me that government’s main reason for the sharp increase in utility rates has more to do with the need to calm down demand until resources get increased through new investments rather than due to commercial need to recover costs and return a fair profit for Enemalta. This week this thesis started to look more credible.

As to my reader’s criticism I believe that in my past writings I was realist enough to admit that consumer energy prices have to reflect their procurement cost on international markets and that structural subsidies will only delay the needed adjustment to consumption patterns. My criticism was mostly related to keeping utility rates low in the period October 2007 to June 2008 purely for electoral convenience purposes considering the general election came in March 2008. Consumers had to pay for the pre-election illusion when it became politically convenient to face reality.

In my article “Nauseatingly familiar” published on 17th October 2008 I had suggested that government should “consider a price smoothening mechanism similar to the Price Stabilisation Fund operated by Labour government in the 1980s. Price smoothening over the economic cycle is not a subsidy. It simply accepts the reality that over an economic cycle the price of oil will normally move from peak to trough within a spread of say USD50. Let’s take the price range as USD50 at the trough and USD100 at the peak with USD75 being the basic average.

The government should base its tariff on a cost of USD75 at a notional rate of USD1.30 to the EUR which is somewhere close to the purchasing power parity rate. Energy prices, including utility bills and fuel at the pump will be based on the actual cost of procurement within this channel and adjusted frequently to ensure consumer sensitivity to the prevailing international prices.

But there must be a policy that if the price of oil gets higher than USD100 or lower than USD50 these are not reflected in the price mechanism with USD100 being the cap and USD50 being the floor for fixing energy and utility prices for domestic consumption (i.e. excluding bunkering and airline fuel oil which are essentially for international consumption). If the price of energy goes beyond the USD100 mark, the difference is funded by the price smoothening mechanism and this funding is carried forward to be recovered at some future point in time when as normal cycles go, oil will fall below USD50. Any outstanding amounts which remain uncovered or undistributed within five years from origin will have to be reflected for recovery or rebating in future price mechanism by shifting the band higher or lower as may be necessary.”

I didn’t just criticise. I make practical suggestions. And yes we have a tendency to overweight criticism on utility tariffs and energy management but then in these last 12 years utility rates have achieved a special meaning in Malta’s political scene, and became a symbol of what else is wrong with the administration. But my reader is right. We should not forget the rest of the pastiche.




Sunday, 14 June 2009

First Signs of Crumbling

14th June 2009
The Malta Independent on Sunday

Discussing the MEP election results with an experienced journalist and mature political commentator, we touched on the obvious argument regarding the extent to which this result could possibly be reflective of a general election result due in 2013.

I was taken aback when my colleague said he would not be surprised if the general election came much earlier than that as, he said, the government is crumbling with an evident revolt amongst backbenchers who are speaking openly in disapproval of Gonzi’s way of governing.

When I argued that a Labour 1998 fracas is unthinkable in the PN stables, my colleague said nothing is unthinkable these days and we sort of left it at that, moving on to other arguments.

However when I read DCG’s page in last Thursday’s sister edition of this newspaper, my colleague’s views started to look a bit more credible. Entitled Bring back the real Lawrence Gonzi, her main argument was that Dr Gonzi has lost his exuding confidence which was so visible before the general election because he has to deal with rebellious MPs on “government benches (who) appear to be going out of their way to undermine their boss. Indeed, they appear to have forgotten that yes, he is their boss. They are throwing their weight around and behaving in the most appalling fashion.”

There was another very interesting comment in DCG’s page. Read this:

“By not pulling the same rope as Lawrence Gonzi, by failing to cooperate with him because you’re ‘hurt’ or because your colleague got something that you didn’t, you are undermining the government.

In undermining the government, you are betraying your constituents, who elected you because they expressly do NOT want Labour in government.

If you don’t wish to carry on representing your constituents – who didn’t elect you personally but as a representative of the Nationalist Party – then do the decent and honourable thing and leave. Make way for somebody who is capable of putting the interests of the government, and of the constituents who voted him in to work for that government, before his own egocentric concerns.”

I must say I have great sympathy with this reasoning. What I found interesting, however, is that when Mintoff brought down a democratically elected Labour government that had a majority much more substantial than the one-seat majority that it had in parliament, these arguments found no favour in PN circles. Supportive PN columnists then opined that it was Mintoff’s democratic right to bring down his government if it no longer commanded his confidence.

My suspicion that this government is showing curious signs of crumbling were strengthened when I visited DCG’s blog and found her reply to a blogger’s comment about an MP who sulks all the time and is doing his best to undermine the Prime Minister:

“The trouble with these people is that they think their votes are personally theirs. Somebody should remind them that people were voting for the Nationalist Party and not for, say, Robert Arrigo. They chose him over somebody else because they liked him or he worked hard, but if he hadn’t been there, they would have voted for another PN candidate, and not for Labour. One of his advisers should tell him that if he carries on this way, he’s not exactly going to have a rush of votes in 2013 – people don’t like trouble-makers who are more interested in a cabinet position than in doing what they were elected to do: look after their constituents and be loyal political party on whose ticket they stood. If they think their votes are personal they should try standing as independents and see how far it gets them.”

You can see that things have been aggravated to the extent that pro-PN columnists like DCG feel compelled to pass from the generic to the specific. At least one MP has been identified and “shamed” even if his name is guardedly conditioned by “say” as if this were an example purely for argument’s sake.

Exploring DCG’s blog really added flesh to the bones of the argument that the Nationalist government’s structure has started to crumble A certain lawyer, traditionally a staunch Nationalist and partner in a leading firm of advocates that benefits from substantial government custom, openly campaigned for Labour in the MEP elections.

For DCG this is an unforgivable sin. Read what a direct appeal she addressed to him in her blog:

“Be a man and if you wish to carry on campaigning for Labour, then have the decency to sever your connections with the government and take your money from Joseph Muscat. If you don’t sever those connections, then I trust the government has the good sense to sever them itself. You deserve no more. If you receive because of your connections, then you also lose because of your connections. That’s the way it goes. To continue feeding at the government trough while undermining the government is so far beyond the pale that I cannot even find the words to describe it.”

DCG is usually well on the inside about these matters and therefore we now have authoritative confirmation of what was well suspected but hard to prove, ie that government feeds through its contracts only those who sustain the PN to retain power.

Small wonder that I have always had to work hard for my money.

Friday, 12 June 2009

The Kahuna and the Brain

12th June 2009
The Malta Independent - Friday Wisdom

The result of the MEP elections is known. The result of local elections, which votes will be counted over next weekend, is not expected to change materially the verdict’s orientation, although some shades reflecting realities at the local level should be expected.

Analysing the result can be both simple and complicated, depending on whether one stays at the superficial layer or drills down to the core. I propose to do both.

At the superficial level Labour had an impressive outright majority win with a margin which augurs well for future electoral challenges under Muscat’s leadership. Wide as this margin may be, however, it does not in any way mean that Labour will have an easy ride to victory at the next general elections whenever they come by 2013. Those that voted PN at last year’s general election but this time decided to show disapproval by staying at home, could well exhaust their urge for disapproval through local and MEP elections but feel obliged to tow the party line when national executive power gets decided at general elections.

What is clear however is that Labour has recovered the fringes it had lost under Sant’s leadership. The extreme left that abandoned Sant following the Mintoff saga and the EU membership u-turn, as well as the moderate centre that had left due to Sant’s anti-EU policies, quickly reverted to their natural Labour home under Muscat’s leadership. Anyone who still doubts that Sant was the PN’s best asset should now doubt no more.

Under Muscat, Labour’s campaign machine is much more sleek and efficient. The message was focused and with a multi-channel campaign which was focused and reinforcing the main message that the Gonzi administration has failed to deliver what it promised. The PN campaign by contrast, having lost the easy target of capitalising on Sant’s unpopularity, was all over the place delivering a multitude of messages which contradicted the hardship voters were experiencing in their everyday life. The PN naively failed to explain that there are international developments that no government or prospective government has any control upon.

Muscat was gracious in tempering euphoria within Labour’s ranks. While scoring a victory beyond his best expectations, Muscat knows that peaking too early will make it harder to keep growing consistently till the big prize is secured. He showed wisdom in playing down expectations, which in Labour’s camp quickly take root as they are sought just like water in a scorched desert.

In the PN camp there was clear shock not so much for the defeat as for its dimension. While extrapolation of this result to a general elections environment is irrelevant if not impossible, a gap of 35,000 votes equivalent to 15 per cent is unprecedented and forms a gap which can only be bridged with hard work and a lot of luck from a turnaround in the harsh international economic environment by the time the general elections are due.

Beyond this superficial analysis what other messages emerge from the MEP election result? For the PN this result could be a very important wake-up call delivering four important messages.

The first message is that Labour under Muscat is a much more formidable opponent and a much stronger force to be reckoned with.

The second message is that their internal administration which practically worked a near miracle in the 2008 election campaign, is malfunctioning under the inexperienced hands of the new General Secretary Paul Borg Olivier.

The third important message is that Simon Busuttil is shaping up in public opinion as the evident choice for the next leader to take over from Lawrence Gonzi, before or soon after the next general elections.

The last message is that the PN should stop taking the electorate for granted. The way they handled the utilities bills saga has all the hallmarks of a perfect recipe for mismanagement. People cannot be expected to switch effortlessly from a rose tinted view of the world before general elections to a very threatening environment as soon as the mandate is secured. The electorate intelligence must be respected as manipulation is no substitute.

The big question going forward is whether the PN will understand these messages and build their future strategy around them. Their immediate reaction to the election result offers scant confidence that they truly understand these messages. My impression from the PN’s reaction is that they think it is okay to suffer such defeats so far away from the next general elections as there remains ample time to engineer a turnaround and manipulate public opinion in the last 12 months or so of the legislature.

Labour could take heart not just from their win, but more so from the PN’s misplaced reaction to the result. The PN cannot rely solely on the kahuna.
They need to bring back the brain.

Friday, 5 June 2009

Whither the Single Market

5th June 2009

The Malta Independent - Friday Wisdom

The depth and suddenness of the economic recession which is hitting the EU is putting under severe strain the basic concept that underpins the Union’s foundation. That it is a single market for products and services where capital and people can move freely.

The recession has exposed the contradiction embedded in the EU structures where the responsibility for the preservation of the single market is vested in the Commission but the budget to sustain (or offend) such single market is the sovereign preserve of each individual member country.

Nowhere is this more evident than in the European car industry. It is quite natural that the uncertainty brought about by the recession has forced the European car market to shrink abruptly. Whilst basic needs of food, drink, clothing, shelter and entertainment have to be attended to irrespective of the state of the economic cycle, acquiring or replacing a car is generally a purchase decision that can wait better times.

Governments have tried to ease the pain by stimulating demand through subsidies to buyers of new cars that replace inefficient old ones. Still the overall car market has shrunk causing financial stress to most car manufacturers who had to resort to their governments seeking urgent bailout funding.

Inexplicably the single market rule book and the regulations prohibiting state aid that distorts fair competition were thrown out of the window by the major EU countries, basically France and Germany, who seem to think that the rules are meant for the others to observe and for them to break at will and with impunity.

France was the first to intervene with state financial support for its car manufacturers with barely hidden obligations that any restructuring necessary to reduce production capacity to bring it in line with the contracted market conditions, should not come from factories located in France. Germany could not resist the temptation when Opel, the European subsidiary being sold by General Motors, which is itself undergoing restructuring through state support in the US, would have been compelled to shut down its production factories mostly located in Germany without state intervention, including finance subsidies to the chosen acquirer and cash flow funding in the period while the deal is being executed. Coming so close to the June European election, Chancellor Merkel was forced to do what many in her own party, including her economic minister, strongly objected to.

Those who object to such flagrant state bail outs argue that such intervention erodes the very foundation of the single market which has generated so much efficiency and economic wealth. Technically the process is referred to as ‘creative destruction’.

By allowing those who are not strong enough to withstand the economic downturn to fail, the economy gets weeded from its weakest components making space for the stronger units to grow and for new entrants to sprout with more updated technologies and without the legacy costs of those that have been rendered uncompetitive.

In simple language, by giving state aid to Opel, the German government is discriminating against FIAT who have survived well this financial turmoil and who could have bought out the Opel outfits at a cheap price in bankruptcy if the German government kept a hands off approach. So in the end the German government, through its intervention, has obstructed an EU supplier with an automatic right to invest and sell on the single market, and instead offered illegal state aid to new investors from Canada and Russia to keep the old plants running with the least possible disruption, at least until the national elections due in September get out of the way.

One should be little surprised that very soon after the Russian/Canadian team was chosen as the preferred bidder, Russian president Medvedev lost little time to express satisfaction about this success by a Russian private organisation and expressed hope that the Russian car manufacturing industry will be strengthened through this acquisition. Could this lead to the transfer of production facilities out of the EU to Russia?

With our first hand experience of the rigidity with which the Commission has imposed restrictions on state aid for our shipyards, we are entitled to wonder how the Competition Commissioner is allowing these flagrant breaches of the single market regulations to proceed with impunity.

These subsidies are not only dangerous because they undermine the very basic concept of the single market, but they are a perilous slippery slope to internal protectionism. It is glaringly obvious that once a sovereign government hands out taxpayers money to bail out those that cannot withstand free competition, the taxpayers rightly demand that conditions protecting the narrow sovereign interest of the country are attached to such financing if even such conditions break the wider EU single market rules.

Creative destruction is an essential part of a healthy restructuring and it must be allowed to take its course in most but the most exceptional cases where only temporary assistance may be considered. We must not perpetuate the current practice of being international in life and turning national in death or in case of acute problems. Even fiscally and morally this does not make sense. If this is allowed we create a crazy system where profits are privatised and problems and losses are socialised!

This inbuilt contradiction between the narrow sovereign interests of a fiscal policy determined separately by each member state and the wider obligation to run an efficient market economy without barriers in the whole EU area, can only be addressed through the European Parliament which is the only organ that gets its mandate though direct democratic pan- European elections.

A higher voter turnout is desirable if the European Parliament is to carry its weight to fight against creeping protectionism which will make us all poorer and make it harder to come to grips with the recession.