Wednesday, 30 November 2011

Finding oil - losing a fortune!

Oil Exploration - promise of electoral riches?

According to local media reports,  Foreign Minister Tonio Borg has made a proposal to Libya and Italy as a possible solution to the continental shelf issue, which has been pending for years,   An agreement is needed so that oil exploration can take place.

This really sends a shiver down my spine!

Unless oil is found in mega Norwegian style quantities sufficient to guarantee our well being for the long term on a totally oil-dependant economy ( with risks of obsolesecnce in case of green technology advancements) I fear that oil expoloration could be an economic displacement rather than additonal value added.  As an example I doubt if tourism can co-exist with an oil economy.

Take Britain!   When they explored the North Sea oil their manufacturing base was wiped out.   When oil exploration waned Britain's economy developed in an unbalanced manner with over-concentration on financial services.     The result is that when the financial crisis came,  Britain has hit harder than other countries like Germany where the manufacturing base was protected.

I tend to get over-suspicious when the oil carrot starts being dangled in the final year of the legislature.   We have come a long way without exploiting any natural resources.   Our best resource is the human capital which could lose the incentive to develop if we think we can strike it rich through oil exploration. We should be careful what we wish for!

Tuesday, 29 November 2011

Merkel just does not get it!

I never thought it possible that a Polish Foreign Minister would one day state:

" I fear German power less than I am beginning to fear its inactivity"

Photo Gallery:Merkel Against the World - (4 Photos)But he said it!    Radoslaw Sikorski, the Polish Foreign Minister said so in a speech in Berlin last Monday and wrote it again in the Financial Times on Tuesday.

And he is perfectly right, because Chancellor Merkel simply does not get it.

When the Euro architecture was agreed principally between Chancellor Kohl and French President Mitterrand it was clear that its architecture was flawed.   So much so that the German Central Bank, the Deutsche Bundesbank  (BUBA), was totally against the Euro project as proposed.    BUBA maintained that a monetary union ought to be the end result of political integration rather than a catalyst leading to it.

And technically BUBA was right.   But the politicians base their decisions on visions not cold mathematical calculations.   And Kohl and Miterrand forced ahead over-riding all objections in launching the Euro project knowing that all things being equal, in the fullness of time, when the flaws in the Euro architecture lead to an economic crisis, European leaders with the right vision for deeper European integration would cash in on the crisis to force deeper economic and fiscal union which can only become acceptable as a choice of the lesser evil when the cost of the crisis would justify the shedding of national sovereignty to centrally shared pooling of such policies.

We are now right in the heart of the crisis.    This is the time to cash it in through promotion of deeper integration as part of the rescue arrangements.   Visionaries turn crisis into opportunities.  But Chancellor Merkel has no European vision.    She goes by the calculator rather than by the grand political vision of her predecessor and mentor Chancellor Kohl.   She has done nothing, absolutely nothing, to prepare her people for the big changes they must swallow in order to protect the 60 years of peace and prosperity following the atrocities the German Nation inflicted on humanity in the first half of the 20th century.

And worse than that Chancellor Merkel acts as if Germany is suffering the crisis because of others and therefore should let others suffer whatever the consequences.  Perhaps somebody has to remind the Madame that:

  • Germany was the first to break the Euro Stability and Growth Pact and set a bad example for the others and removed the moral authority of the Commission to discipline subsequent offenders.
  • Germany is the biggest beneficiary of the current arrangements of the Euro as it has kept the foreign value of the currency much lower than the Deutsche Mark would have been thus keeping German exports competitive
  • Germany is also enjoying low interest rate at the expense of other Euro states who have to pay unsustainable rates
  • The ECB accommodated Germany in keeping rates low to help the integration of East Germany and this has been a prime source of the property bubble in Spain and Ireland which caused so much misery to these states.
If Germany wastes this crisis and fail to show the visionary leadership to save the Euro and force deeper European integration we will all burn in hell.   Probably hell is like a depression 1930's style followed by military conflagration.   But perhaps someone should remind Frau Merkel that the most to suffer would be Germany itself

Chancellor Merkel in particular would do well to read a research published  by UBS top economists where they estimate that the cost of bailing out Greece, Ireland and Portugal together would amount to a little over €1,000 per person in a single hit, whereas the break-up of the euro will cost a single hit of between €9,500 to €11,500 per person and an annual hit of between €3,000 to €4,000 per person.

Frau Merkel, if you still don't get it than get ready for hell!

Monday, 28 November 2011

Malta's cross: the EFSF

I can't understand why Malta, Slovenia and Slovakia have agreed to contribute a pro-rata share to the EFSF

Closing the AAA Ranks? Berlin Denies Rumors of Plans for Joint 'Elite Bond'as founder countries like Germany France and the Netherlands.   

Our leaders probably have no idea of what exactly they have committed our taxpayers to and why.  Committing EUR 700 million to the EFSF by way of direct loans and/or guarantees is no tea party.  It could ruin us.

To make matters worse it is clear to any one who has eyes to see that the EFSF will be totally ineffective to solve the Euro crisis and that the Germans, to stick to their non-sensical strictly monetarist doctrine, are bent on high leveraging the EFSF so that the risk we are exposed to will be miltiplied hundred fold.  That's how high leverage works.   It was the main source of the financial crisis of 2008.   Bear Stearns went down because it was highly leveraged.   Lehman Brothers went down because it was highly leveraged.  Citibank, Dexia, Fortis and Royal Bank of Scotland had to be rescued by their respective governments because they were highly leveraged.   Now the German are proposing to leverage the EFSF even though they know, or should know, that such high leverage ( and very high leverage is required if it is to cater from the bail-out of Italy) will sink the EFSF and will drive a big hole through the financials of the contributing countries.

Why do we have to contribute pro-rata like the Germans, the French and the Dutch?    These founder members have allowed Greece to runaway with its debts.  They looked the other way just as Greece was feasting on the cheap loans that Euro membership allowed it to raise, to finance its corruption, and the living beyond its means which was a boom for German and French exporters.   We joined in 2008 and Slovakia joined even later.  We were not at the party financed by Greek debt.   So why should we pay like those who were at the party and rather than stop it lent more money to the Greeks so they could serve the best French champagne and drive around in luxurious Mercs and BMW's?

If you are wondering why I am not including Cyprus in our Group even though they joined in 2008 with us the reason is simple.  Cyprus may soon need a bail-out so they have a vested interest to particpate to get the EFSF off the ground.

Now that there is a grave risk of the Euro falling apart and now that everybody seems to be agreeing that the EFSF mechanism is too little too late,  are we going to keep our commitment till we sink with the Euro?  It is time to retract!!!!

It is time to tell the German that their can be solution to the Euro crisis unless they agree that the ECB is allowed to act as a normal Central Bank for all Euro countries by acting as a lender of last resort and by ensuring that government bond yield of all Euro members bear a fair relationship to the official interest rate of the Central Bank.

This will not be a final solution.   But without putting out the fire of the crisis there can be no agreement for a final solution including a common Treasury or a common debt agency and better fiscal discipline.

Only the ECB can put out the fire and the EFSF is superfluous and involves us in totally unfair and unnecessary risk.

Wake up Malta before it is too late.    Don't let the Germans destroy Europe and the Euro through their false creed in narrow monetarism.

Saturday, 26 November 2011

Who's Laughing Now?

Can you believe that I had asked the question everyone is asking today more than two years and 9 months ago when Greece was still borrowing as if it had no problems?  At the time many criticised me that I was trying to spread panic by making unrealistic, even unthinkable assumptions.  Now see the front cover of the ECONOMIST this week:

I stand today by every word I wrote on 13th February 2009 including that the only solution to save the Euro is, amongst other measure but certainly the very first one, having the ECB following a 'reckless' monetary policy by flooding the money supply to bring down the value of the Euro to levels that reflect the southerners economic reality.


Will The Euro Survive?

13th February 2009
The Malta Independent - Friday Wisdom
Alfred Mifsud

I suppose this is a question which should not be asked and if it is asked those who are in charge of protecting the integrity of the euro can only answer in the most absolute way that the euro will most definitely survive and even prosper.

But such absolute assurances should not bar thinkers and realists from asking the question. The very act of posing such question implies the existence of doubt about the euro’s long-term staying power.

The euro has just celebrated its first very successful decade and doubters could easily be dabbed as spoilers. But 10 years is a very short time to prove the longevity of a monetary union. History is riddled with similar monetary unions between separate sovereign states which blew up after several decades of initial success. In fact if one looks around it is clear that the major currencies of the world apart from the euro, are the currencies underpinned by individual sovereign states.

In 1998, when the euro was launched, Milton Friedman famously warned that the euro would be truly tested by the first major global economic recession. He issued this warning in the belief that, lacking labour and product market flexibility, Europe was not an optimum currency area in the sense that was the case of the US economy.

We are now at the point that the late Milton Friedman had perceived. The euro is being tested by a fierce global recession and developments going on within the individual component states of the monetary system do not suggest much optimism that the system has the necessary resilience to come out of this challenge unscathed.

We are seeing the euro area economy being dragged into a deep recession at an astonishing speed. In this context we are bearing witness not only to external measures of protectionism but we are also seeing measures of protectionism even between members of the EU and the euro area.

The euro and single market rule book has been shelved. Faced with the primary responsibility to the electorate of the sovereign state that elected them, governments have to put taxpayers’ money at risk to try to stabilise the financial system and to cushion their sovereign economy from the possibility that the recession will deteriorate into a depression. And it is obvious that once taxpayers’ money is put at risk, governments have to take narrow sovereign circumscribed measures to ensure that the benefits of such extraordinary fiscal measures will be enjoyed by the sovereign taxpayers and not by the general members of the Union. The we-are-all-in-this-together syndrome rarely goes beyond lip service.

So we are seeing France bailing out its car industry but making conditions to ensure that jobs are kept in France and if redundancies are needed these are squeezed out of plants in other EU states. We are seeing Ireland nationalising its banking industry, guaranteeing all bank deposits, and making conditions on its now state-owned banks to give preference to local borrowers in their normal operations across the whole EU.

It is evident that under the stress of an acute recession, potentially a depression, a monetary system that does not have the benefit of a federal government that can draw up a federal budget to support monetary measures with fiscal measures, is unlikely to withstand within its boundary the tremendous pressures that are building up within it.

So what could happen if the internal stress of the euro monetary system becomes too much for the system too bear?

The first thing that will happen is that further expansion of the monetary union will be frozen till the financial markets get back to a state of normality. One could argue that the fact that countries like Denmark, Hungary and Iceland are clamouring to join the monetary union (even though Iceland is not yet an EU member and would have to become one before being accepted in the monetary union) is a sign of strength resulting from the attractiveness of the union. I doubt it! A system which has de facto suspended its rules cannot bring in new members before it re-establishes discipline. And, frankly, bringing in members motivated by their economic weakness rather than their economic strength is not conducive to stabilising what is an already fragile structure.

The next thing which could happen is that some of the existent members could find the conditions, legal or de facto, of the monetary union tough going in order to protect their sovereign national interest or indeed to protect the popularity of their own government with the national electorate. It is tempting to think that I am referring here to the weakest links in the system, countries like Italy, Greece, Ireland and Spain either because of their huge national debts (Italy and Greece) or because they are suffering more than others in the recession from exposure to a burst national property bubble (Spain and Ireland). Wrong! These countries would be hurt most if they leave the system and would suffer substantial downgrade of their national debt and consequently an explosive increase in the cost of servicing it.

I am referring to the strong countries that can leave without suffering such consequences. It is countries like Germany, France, Netherlands and Austria, among others, who can afford to leave the system with little damage. If the recession worsens to an extent that weak link countries could risk default on their sovereign debt or would need support from the stronger members, we will have to see whether the fraternity bonds are strong enough for the healthy to bear the cost of bailing out the weak.

In practical political terms it is inconceivable that taxpayers of the strong countries would accept to carry such hardship. So the only way it could be done outside the fiscal structures is by adopting more liberal (more reckless if you wish) monetary policy leading to a downward floatation of the Euro against other major currencies in order to give on a supranational basis what individual euro countries can no longer do on a national level.

Is it not strange that I am arguing that only reckless monetary policy can save the current composition of the monetary union?

Alfred Mifsud

Wednesday, 23 November 2011

So the PN want Labour to explain exactly how they will fund the promised cuts to utility bill!!

Fair enough.  Promises have to be realistic and any party expected to be elected to Government must support its electoral pledges by credible estimates.

Labour said they will do this nearer to the elections not 15 months before.   A lot of things can change in much shorter time so any estimates Labour can give here and now would not be credible.   Nearer to the elections the pledge has to be considred in the context of the overall electoral manifesto.  After all this will be only one of several measures, so Labour would expect to be voted in or out on the basis of the whole manifesto not on a single measure.

But there is someone else who should be spelling out here and now much more crucial measures.   It is the government who on our behalf has guaranteed nothing less than Eur 600 million loans borrowed by Enemalta and Water Services Corporation from local and foreign banks.  This is a 2009 figures and for all I know the figure presently is much larger but we still do not have the 2010 figure let alone the figure for 2011.  The 2010 figure normally would be in the Auditor General Report for 2010 which comes out about this time, but so far not yet available.

Government should explain here and now how these borrowings are going to be repaid without incurring liability on its guarantees and without further rises in utility bills.

Government is governing now and should give us the information here and now not expect less important information from the Opposition who will not be in executive office for at least another 15 months (unless early elections are called).

Sunday, 20 November 2011

Memories of 1996

20th November 2011
The Malta Independent on Sunday

I remember as if it were yesterday.    Going through the Budget for 2012 brought back memories of the Budget for 1996. 

The situation is uncannily similar.    The legislature was due to expire in mid-1997 and the 2nd Fenech Adami administration, elected in February 1992 could have presented another budget for 1997 before facing the electorate for a refreshed mandate.

The Budget for 1996 was however presented with a strong pre-election flavour giving substantial across the board tax rebates and keeping the budget deficit within respectable limits simply by projecting a spectacular increase in VAT revenues.   VAT was introduced in 1995 and the Finance Ministry projected it could really get into revenue generating gear in 1996 following the teething problems of the first year.

Reality proved otherwise.   VAT revenues were coming in nowhere near expectations.   Expectations were probably unrealistic in the first place but in addition government could not really press hard on the enforcement pedal with an election on the horizon.    By summer 1996 the Finance Minister informed Cabinet of a substantial deficit gap developing in the  Consolidated Fund with obvious connotations of dimming prospects for an upbeat budget for 1997 as a prelude for elections  when due.

The serious financial situation was kept under wraps and an early election was called for 26th October 1996 without presenting a budget for 1997 and without giving any hint of the financial hole that was well known to the inner circle.    The rest, as they say, is history.

The Budget for 2012 has many parallels with the budget for 1996.     Government has tried to square a circle by prospecting fiscal consolidation, tax reductions and social payments increases by a mixture of two potentially explosive assumptions.   A bold assumption that the economy will continue to grow at 2.3% in real terms and some 4.4% in nominal terms and this when many of our trading partners are suffering from economic stagnation if not downright contraction;  and a series of extremely bold revenue assumptions which are detached from economic reality or from reasonable expectations or from both of them.

In addition to this the Government continues to ignore the explosive debt situation that is building up outside but in parallel to the Consolidated Fund where the government continues to finance several publicly owned companies or corporations through guarantees or similar commitments,  even though it is, or should be,  clear to one and all, that such companies or corporations can never repay such debts, and sooner or later the contingent guarantees will be converted into hard cash expense for the tax payer.

The table below charts the level of debt guaranteed by government sitting outside the Consolidated Fund which till last June exceed one billion Euro ( one thousand million Euro).

Note the downward trend between 2001 and 2006 when the then finance minister John Dalli had announced in the Budget for 2003 that Government will not be issuing further guarantees and would run them down, partly through the process of privatisation.    Note the complete reversal since 2006 when government found it convenient to keep the fiscal deficit looking respectable by resorting to contingent financing.    To give an example as at end 2009 Enemalta Corporation had Euro 449 million of such financing and Water Services Corporation had a further EUR 85 million.  

Can anyone believe that these Corporations, with massive investment plans yet to finance ahead of them and with utility rates already transgressing socially acceptable limits, can in any way generate cash flow to repay these loans?   If you believe that than you can also believe that next year Air Malta will repay the loan of Eur 52 million advanced to them last year and on top up that with Eur 6 million interest.   You would also probably believe in the tooth fairy.

Reality is that electricity and water supply in Malta, with our sort of social structure, can never be economically feasible as a commercial venture.   In the bad old days profits from petroleum sales used to subsidise electricity and water generation.    In the modern good days government takes such petroleum profits as normal revenues through VAT and Excise Duties and then finance electricity and water generation losses through guaranteed bank loans outside the main Budget.

And in the process the government pretends that the deficit is coming within the 3% GDP in according with Euro rules.   Wrong!    If one takes the deficit that is financed through government guarantees the situation is different and still way out of the rules as shown in the following table.

A 2010 Consolidated Fund deficit of 3.60% grows to 5.30% if the deficit financed through Bank guarantees is loaded on.   2011 figures for Bank guarantee financing is not yet available.

What conclusions can one draw from all this?   The main conclusion is that just as in 1996 the government is keeping its options open that if the economic scenario continues to worsen, as it is likely to do given the increasing aggravation of the Euro crisis, the government will go for early general elections without having to be judged on the bold assumptions made in the 2012 Budget .
The other conclusion is that when financial problems are left to fester over long years without being addressed, once an inflexion point is reached the reality bill tends to come in like an avalanche as is happening presently in Greece and Italy.    In both countries politicians have been sent packing and technicians called in to clear the mess left behind by politicians playing for the gallery.

We are no yet there, mostly thanks to our strong thrift culture, but no one should assume that if we continue travelling along this road we will not get there, probably sooner than anyone thinks.   In 1996 the situation was recoverable because the world entered a period of substantial growth from 1998 ( after the Russian default crisis) till 2007 ( start of the financial crisis) and because we still had low level of overall debt.    If we replay 1996 again recovery this time could be unachievable given the high level of debts since accumulated and the frightening international economic scenario which seems to be getting worse from week to week.  The ‘apr├Ęs moi le deluge’ attitude built into the 2012 budget is condemnable!

Alfred Mifsud

Friday, 11 November 2011

Saving the Euro – Flood it or Leave it!

11th November 2011
The Malta Independent

Not many choices are left to save the euro. It has brought down the Prime Ministers of all troubled countries, in Ireland, Portugal and probably Spain through fresh elections and in Greece and Italy (work-in-progress) through bond market pressure for the formation of a wide-based national government that can be trusted to take the tough measures needed for proper economic restructuring without the interference of re-election prospects coming into the equation

Yet the fate of the euro is hanging on a thread. It takes one missed debt auction by a government like Italy or France to set the euro house on fire. It takes depositors loss of confidence in Italian banks, just as the Greeks have lost confidence in their own banks, to damage the system beyond repair.

That we have a grave problem on our hands is best exhibited by the likely booting out of Berlusconi from the Prime Ministerial seat in Italy. The bond market will succeed where sex scandals, financials impropriety, tax evasion and unbecoming behaviour failed. But when yields on 10-year Italian government bonds exceeded 6.77% and the margin between Italian bonds and German bonds widened to more than 5% that was it! Even his closest allies could not avoid reading the writing on the wall that no one, not even a political survivor like Berlusconi, can challenge the bond market.

The grave problems plaguing the euro system have to be sorted out in one of three ways. And none of these three possible solutions needs to come from any meeting of the 17 EU member states or Ecofin meetings of the respective finance ministers. Such meetings have become an utter waste of time producing complicated and half-backed decisions concocted by the Merkozy tandem to address last year’s problems. EU governments remain hopelessly behind the curve and have lost all market confidence they have or can get things under control.

The most obvious solution is for the ECB to take the lead and do what central banks are meant to do when facing a financial crisis of this magnitude. I have been repeating this ad nauseum in my recent writings. In a monetary union that is not under-pinned by a common fiscal policy and a common treasury, monetary policy has to be much more forceful and flexible. Forceful in setting and implementing discipline during the good times, by taking the punchbowl away before the party gets too hot; by using its moral suasion powers over governments of countries that find the common euro interest rate unsuitable for their particular requirements, to take supplementary local measures, both fiscal and direct, which make up for the inadequacy of the common interest rate policy. Flexible during times of crisis to take measures that procure financial stability that only a Central Bank operating autonomously, without need to get the complicated approval of 17 national parliaments can do.

The ECB is doing nothing of the sort. Probably it feels that this goes beyond its mandate but in such case it should seek a change of its mandate rather than preside over the euro disintegration. After all it is the ECB President’s signature that goes on the euro notes and not the signature of Merkel or Sarkozy.

When the going was good, the ECB was blind to the asset price inflation happening in Ireland and Spain as real estate prices soared, fuelled by inappropriately low interest for their domestic conditions. These low interest rates were tailored to suit Germany’s economic fatigue of integrating the East with the West. The ECB could and should have used its moral suasion authority to calm down such asset price inflation in Ireland and Spain through direct controls over private credit growth. Asset price increases move hand in hand with private credit growth and control of credit growth would have avoided the speculative boom that blew up the Irish and Spanish economies.

Now that we are in crisis the ECB is not being bold enough to put out the fire ignited by the politicians’ mishandling of the situation. The ECB is reluctantly supporting sovereign bond markets of Italy and Spain when it should be really making it clear that it has no limits how much bonds it would buy to keep yield spreads sustainable provided governments of countries in distress do what needs to be done to render their fiscal position sustainable in the long term.

The ECB is the only institution that can match the power of bond markets. It has unlimited resources as it can monetise its bond purchases and can provide whatever funding is needed by the EFSF without raising taxes anywhere, without forcing countries to take on undue leverage risks and without humiliating Europe having to go cap in hand to seek financial support from China and the like.

To be fair the change of leadership at the ECB effective 1 November, 2011 bodes well. Since Draghi has assumed the role of President there are all his fingerprints over the manoeuvre to force Berlusconi out of his position. When the ECB slowed supporting Italian spreads by slowing its bond purchases, Berlusconi had to come to terms with the force of the Bond market that had lost all confidence in his ability to re-invigorate the Italian economy.

Some might validly argue that it is undemocratic for the ECB to have such powers over sovereign elected governments. Democracy is never perfect and checks and balances are needed when democratically elected politicians start putting their personal and narrow self-preservation interest before the interest of the country and the people they were elected to serve. Pressure by other countries could be perceived as imperialism and foreign interference. Consequently, subtle action by a technocrat board of 22 central bankers from all euro area countries is the least democratically offensive solution for the greater good of the nation and the Union.

Failure by the ECB to do what needs to be done will mean the break-up of the euro in the not too distant future. And this comes in two choices. Either the weak links have to leave permanently, or the strong links have to exit at least temporarily.

The biggest disaster for the soul of Europe is if the weak are forced to leave. If Greece is forced to leave the euro, the rapacious oligarchs that through their corruption have broken the Greek economy, will have the biggest laugh at the expense of the decent Greeks who earn relatively little, but unlike the corrupt super rich, actually pay their taxes. These oligarchs control large parts of the Greek business, the financial sector, the media and indeed politicians. These oligarchs have been exporting cash from undeclared profits out of the Greek economy so much so that the London property market is reported to have received a boost from Greek buyers. If Greece is forced out of the EU and revert to the Drachma which will have to be grossly devalued, these oligarchs would make huge gains from their foreign assets and will be able to buy on the cheap public assets priced in devalued drachma that will have to be privatised under duress to enable the Greek government to find the funds that will no longer be available from bailout EU sources.

On the contrary if the strong countries exit the euro the domestic currencies they will temporarily revert to will strengthen and will make imports from Greece and other countries that stay in the euro cheaper and more attractive. It will also stimulate direct investment flows from north to south so that the Greek restructuring is based on a dimension of growth not solely on austerity. In the process Greece will be helped to sharpen its institutional arrangements to bring the tax evasion and corruption under control and offenders to the book.

Germany has a choice! Let the ECB act as a true Central Bank, or bring misery and total disorder to the southern flank of Europe, or temporarily exit the euro to permit an orderly recovery of competitiveness across the whole euro area and eventual re-merge into a single euro under new rules and at realistic conversion rates reflecting current realities. Search for other solutions is a waste of precious time and resources.

Alfred Mifsud

Sunday, 6 November 2011

What a Fudge

6th October 2011
The Malta Independent on Sunday

The supposedly comprehensive solution negotiated at the EU / EURO summit on 26 October is a hopeless, useless, dangerous and patched-up fudge which offers no solution to the problem of the euro debt sovereign crisis. On the contrary, it puts the whole system more and more at risk.

This is no comprehensive agreement at all. Before you know it, we will have the EU leaders convening again for urgent crisis discussions, trying to put together the fourth, fifth or nth version of the supposedly definitive agreement. The EU political leaders are as usual behind the curve and hopelessly falling further behind. The supposedly EU leadership tandem of Chancellor Merkel and President Sarkozy have no idea, I repeat no idea, of what the problem is and consequently cannot even come close to defining a real solution which could convince the markets that they have things under control.

If Berlusconi is a buffoon, at least he lives up to his reputation and never pretends that he can lead the EU out of this crisis. If anything, Berlusconi has shown he is a political fox excelling in the art of survival. He uses the business acumen that turned him from a cruise-ship singer into a multi-billionaire businessman that sought refuge in politics to protect his private wealth, and outfoxed politicians with better credentials to have three Italians on the Board of the ECB while the Germans only have two and the French have only one − just like tiny Malta! This is no small matter as the ECB is the only institution standing between survival and the total economic disaster being cooked up by EU politicians.

This is no small matter for Malta. We have committed ourselves to financial obligations exceeding seven hundred million euro as part of our contribution to the European Financial Stability Fund (EFSF). These are no peanuts. This is more than 11 per cent of our GDP and 16 per cent of our existent national debt. It is equivalent to a commitment of €1,750 for every resident. If it were to offer a realistic hope of a solution to the euro sovereign debt crisis then one could say that the benefits of inherent stability essential for economic growth will make the sacrifice worthwhile and will make the actual drawdown on our commitment less likely. But it is nothing of the sort.

It has become insulting the way Germany is treating peer countries like us who are trying to save the euro, let alone the way they are treating debtor countries that need to be saved. Many examples show it is time for us to stand up and protest that this is not the EU we decided to join and that it is time for the EU to move back to the collegiality of its leaders and the Commission, and not to the bilateral Merkozy meetings.

Germany expected all euro member Parliaments to rubber stamp the definitive agreement reached on 21 July and showed impatience with Slovakia, which was rightfully dithering about approving the agreement to the point of bringing down a government coalition recently elected.

Germany insisted that all euro countries contribute proportionately, irrespective of whether they are founder members (and therefore have enjoyed benefits from the excesses of countries in distress) or recent entrants (who have not so benefited).

Germany is objecting to sensible proposals for the ECB to fund through defensive monetisation the bazooka needed to shock and awe the market with its preparedness to insulate illiquid economies like Italy, Spain, Portugal and Ireland from the solvency problems of Greece. Instead, Germany has forced peer governments to agree that their commitments to the EFSF could be dangerously leveraged up four times magnifying risks hundredfold. Germany has chosen the irresponsible leverage model that brought the world to its knees in the financial crisis of 2008 to avoid defensive monetisation, which in the current environment causes no risk of inflation the Germans still fear like the plague. Through their obstinacy and rigidity the Germans have chosen the larger, much larger of the evils on the menu.

Germany is obliging the EFSF to humiliatingly go cap in hand to the IMF and China begging for financial support when Europe is rich enough to self-help.
In a diabolic effort to avoid an unavoidable Greek default but still cut down Greek debt through ‘voluntary arrangements’, Germany has created a moral hazard that other countries cannot disregard without invalidating their democratic legitimacy. What arguments can governments of countries like Italy, Spain, Portugal and Ireland make to their electorates for choosing austerity rather than the Greek route of debt forgiveness?

There was a much more sensible and effective approach to find an effective solution to the sovereign debt problem. The solution does not involve any country putting in any money to help another, which goes against the very Treaty of Maastricht setting the euro rules. The solution was for the ECB to monetise a shock and awe fund to recapitalise EU banks that would be hit by allowing Greece to go bankrupt and negotiate down its debt as is quite normal to do in bankruptcy.

Bank recapitalisation would have happened instantly not on if-you-need-it basis. Banks would have had to take on fresh capital to protect their stability in these uncertain times where extra capital is much preferable to just enough. Banks should not be allowed time to shrink themselves down to the available capital as this works against economic growth so necessary for a truly lasting solution to the crisis.

The pity in all this is that the Germans are putting our money at risk by devising hopeless, defective and totally out-of-touch-with-the-market solutions. Our government and opposition should wake up and stop rubber-stamping whatever the Germans send us through the EU structures. It is our money, it is our future, and it is our survival that is at stake.

The Germans, after the summit of 23 October, called another meeting for 26 October as they wanted to run the deal through their Parliament for specific approval. The Germans are not the only democracy with a Parliament, as Luxembourg Prime Minister Junker so eloquently put it. The Greeks have now responded that they want the deal to be approved by the electorate in a referendum.

How about our politicians treating us with respect and subject further involvement that exposes us financially to specific parliamentary approval or indeed to a referendum? We have nothing less than the Germans and certainly nothing less than the Greeks.

Only if people from other EU countries like us, who like the Germans are putting their neck on line to save the euro, get involved in such decision-making, will the Germans finally shed their arrogance and intransigence and let the ECB do what Central Banks are supposed to do when facing a financial crisis. And if this would need a change to the ECB or German Constitution so be it; much better than putting our hard-earned money on the roulette table.

Alfred Mifsud