Sunday, 31 July 2011

Belgian Roulette

The Malta Independent on Sunday

“In Russian roulette there is one bullet in the cylinder. In Belgian roulette the whole cylinder is loaded with bullets.”

Playing Belgian roulette is not a game of chance. It is a disastrous certainty to a tragic end. One consequently marvels why the political leaders on both sides of the Atlantic seem hell bent on playing Belgian roulette with the destiny of their citizens – indeed with the global economy.

Last week, with the Euro system being held together by a thread amid a crisis of confidence about the ability of European leaders to come together and find a political solution to the fiscal and debt problems of periphery countries, the Euro leaders delivered a lot of verbal reassurances, many belated measures that gave tangible help to the problem countries but fell short on one absolutely necessary measure: a measure without which the markets will continue to doubt the EU’s resolve and will come back from time to time to test whether the European leaders really mean what they say.

Small wonder that the euphoria was short lived and that, in the space of a week, the markets are already demanding higher rates for funding Italy’s sovereign debt – proof that that the contagion will not stop with the periphery countries but, if left unchecked, will engulf core countries such as Spain and Italy. When (not if) this happens, the amount of funding that will be required to calm down the markets will be much greater than the amount that was needed last week to resolve the crisis once and for all.

The market was expecting a ‘shock and awe’ increase in the funding of the EFSF, the emergency fund for Euro countries under stress, to add credibility not only about the willingness but especially on the capacity to deliver the support as and when needed. Instead, no increase in the size of the EFSF was announced, in spite of agreement on additional applications that it can employ to resolve the crisis. While the new applications per se sent a strong signal about the willingness to deliver a political solution to the crisis, the failure to increase the size of the EFSF increased doubt about the ability to do so. Soon, very soon, under severe stress, EFSF funding will have to be increased to shock and awe dimensions, possibly with contributions from the US, China and other oil-exporting surplus countries.

If EU leaders are suffering from sclerosis that is forcing the EU to chase rather than lead the markets, on the US side a dirty and destructive political game is being played, in which compromise has given way to hate.

The Republican Party, in control of the US House of Representatives, is demanding impossible conditions to approve an increase in the debt limit without which the US government will run out of money next week and will have to default on its obligations to pay social security, pensions, interest and capital repayments of maturing debt.

Normally this is a simple non-contentious legislative measure. The debt limit was raised 18 times under President Reagan and seven times under the last President Bush. President Obama has already raised it three times, but this was when the Congress was controlled by the Democrats. This is the first time that the debt limit has to be increased since Republicans regained charge of the House following the elections last November.

The conditions the Republicans are making to raise the debt ceiling are silly, undemocratic and economic nonsense. They expect the President to commit himself to balance the budget without any rise in taxes so that the whole burden for the fiscal adjustment would fall on spending cuts, which would hurt mostly the poor and the lower classes. They seem to think that their mandate to control a majority in the House is superior to the mandate of the President who was elected for four years up to January 2013. If these mandates clash, the parties normally compromise and President Obama has indeed tried to compromise by offering a balanced solution involving both spending cuts and revenue raising through higher taxation on the extremely rich and removal of tax breaks for sectors that should be able to afford to do without such tax incentives, especially the oil companies.

The Republicans, who are at the mercy of the extreme right Tea Party wing, are insisting on their way or the highway. Incredibly, the US economic powerhouse, that can comfortably raise 30-year money at 4 per cent on world markets, is heading towards a default that would hurt one and all.

What is surprising is how feebly President Obama is defending himself from the accusations that he is a tax-and-spend President. On taking office in January 2009 he inherited an economy under severe stress, with financial markets falling precipitously, unemployment increasing by some 700,000 per month, the financial sector tethering on the edge of bankruptcy and consumers shocked by the prospect of a 1930s-type recession.

In such extreme circumstances, only strong fiscal deficit can save the economy from the spectre of a depression. Was Obama expected to let the economy inherited from Bush sink` With a balanced budget approach to such circumstances, we can just as well revert to the gold standard. Where was the Tea Party when President Bush, during his eight-year term, was converting a strong surplus left by President Clinton in 2000 into a horrendous deficit through financing two wars and awarding tax breaks to the rich in a clear unsustainable mixture of guns and butter` Logic says it has to be guns or butter, never both. And what dogma is this that tax increases would destroy economic growth` The US had much higher taxes than now under President Clinton, when economic growth and financial markets performance were at stellar levels.

The US must accept that their tax system is unsustainable. While direct taxes are at the higher end compared to other developed countries, indirect taxes are pitifully low. They buy petrol at $3 per gallon whereas we buy it at triple that. Their sales tax, at five per cent, is a quarter to a third of what we pay in Europe. The US needs to revolutionise its tax system to reduce taxes on earnings (real earnings, not unearned income) and increase taxes on consumption. In so doing they will reduce their dependence on imported oil, give a boost to green technology, regain manoeuvrability in dealing with mighty oil exporters and adjust the strong macro-economic imbalances presently plaguing it.

No serious US President can commit himself to legally enforced balanced budgets and a policy of no increases in taxes. The President must commit himself to promoting economic growth, to generating employment and to rendering America more economically competitive on the international markets.

This cannot be done if the Republicans continue to play Belgium Roulette on the brink of Capitol Hill in what is clearly a political hate game that cannot accept a coloured President winning another term in the White House. Shame on them!

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If you believe that the police investigations on Cyrus Engerer and his family have nothing to do with his decision to cross over from PN to Labour, well, you probably believe in the tooth fairy. How convenient to have police action to undermine his credibility now that he belongs to the other side!

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Arriva were not up to it upon launch. I said as much in my last contribution two weeks ago. In all fairness, I must state that in the two weeks since then I have seen a major improvement in their operations. Clearly, they have thrown a more appropriate dose of resources to get their service moving. To those amongst us who are well served by the redesigned routes we can almost say thank God for Arriva. Obviously those areas that have been badly affected by the new routes still consider the new service as retrograde. But Arriva’s disclosure that route changes are being accelerated and will be rolled out in phases over the next three months will hopefully mean that soon they too can sing praises to Arriva!

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