Mario, Mario and Mariano

September will be a month dominated by Central Bank activity and monetary policy decisions that could rock or rocket the financial markets.

Just look at the calendar that awaits us in Central Banking terms:

August 31st:

• Central Bankers informal Meeting at Jackson Hole Wyoming where Fed Chairman Bernanke is expected to deliver a landmark speech identifying the prospects for further monetary easing in the US.

September 6th:

 

• ECB decision where Draghi is expected to announce conditional bond buying programmes to keep bond spreads for Italy and Spain within reasonable range.

 

• Bank of England decision where they are expected to announce further targeted monetary accommodation to stimulate bank lending to private sector.

September 12th:

• German Constitutional Court delivers decision of the constitutionality of German participation in Euro rescue operations.

• Dutch elections

September 13th:

• US Federal Reserve meets to decide about further monetary accommodation

September 14th:

• Meeting of ECOFIN - EU finance ministers to take measures complementary to the conditionality of the ECB's bond buying programme to keep the spread within range.

The main actors will be Mario, Mario and Mariano. Obviously Bernanke on the western side of the Atlantic will be a main actor too in deciding whether to do the unusual and stimulate the economy by monetary easing in a fully blown presidential campaign.  But as the problems are well and truly in Europe, Bernanke risks being (unusually) eclipsed, though he might be thankful for it as Europe will give him cover for acting in an election campaign.

The star performance is expected from ECB President Mario Draghi. He has to deliver on his promise to do whatever it takes within the ECB mandate to save the Euro.   He seems to have received political backing from France and Germany to overrule the objections of the German Central Bank (BuBa) to consider bond buying on the secondary markets as outside the ECB mandate.  

Draghi and his fellows, other than BuBa's Weidmann, have decided it is within the ECB's mandate to intervene to keep a lid on interest rates on borrowing by countries that are successfully undergoing restructuring programmes, most notably Spain and Italy.   Failure to do so will block all channels through which the ECB can execute their monetary policy decisions.  Failure to do so could make such countries tempted to give up trying to restructure within the Euro as they see the savings from harsh austerity programmes being wasted on higher interest costs.

Mario Monti - Italian PM; and Mariano Rajoy - Spanish PM; have to ensure that they do not let Mario Draghi down.   They should reinforce Mario Draghi's sticking his neck out by ensuring that the easing of pressure on the financial markets does not lead to any relaxation by Spain and Italy in continuing with their restructuring programmes to render their economies internationally competitive again.

Mario, Mario and Mariano,  show us this September that you are working with a singularity of purpose that you are prepared to take complimentary action that bring synergy benefits to your individual roles.    The future of the Euro and the EU depends on it.

 

No one like Dom

 

This article was published in The Malta Independent on Sunday 26 08 2012

Men’s greatness is not measured by the length of their obituaries, nor by the intensity of the hatred of those who rejoice at their death.

Men’s greatness is best measured by the positive and lasting change they bring to society around them.   By such measure no one stands taller than Dom Mintoff who this week passed away aged 96.  

Mintoff’s unforgiving critics make false judgement by using the wrong compass of where history starts.   Often such criticism is based on events that happened late in the second Mintoff’s legislature of the seventies and his performance after that.   That is wrong.   Mintoff’s history should start from the post war period when Mintoff practically took into his hands the physical reconstruction after the devastation of war and pledged to dedicate his political career to redeem Malta from the chains of colonialism.

Those who have not lived through the misery of the fifties and the sixties can never appreciate the dimension of change that Mintoff brought about.  Before he imbued the nation with self-confidence to believe that we can stand on our own as a sovereign state, the general thinking was that we were too small to dream beyond the confines of colonialism or neo-colonialism, with theoretical political statehood but inevitable economic submissiveness.    We were conditioned to think that Malta had no economies of scale to keep itself economically sustainable so we should be eternally grateful to our colonisers or neo-colonisers for taking us under their patronage.   We were forced to believe that the imbalance between the supply of labour and work opportunities could only be addressed through mass emigration rather than home grown economic development.

We were trained to think that it was a privilege to live in a confessional state where the Church decided whom we should choose as our civil leaders and how much education we should have  access to, in small doses,  as excess of it, like Shakespeare’s  Twelfth Night, could surfeit the appetite for materialism and kill the spiritual fervour of the soul.    

Before Mintoff showed us that there is another way if we truly believed in ourselves, it was considered  the natural order of things that most of us were poor, that a very select few had a God given right for untaxed riches that can last several lifetimes, and that the interest of the Church and the privileged were the only things that the coloniser needed to bother themselves about,  as these would take care to ensure that the general population would remain happy with the few crumbs that fall off the table without any 1919 Sette Giugnio type of insurrections.
It takes baby-boomers like me to recall how I had to drop out from 6^th form in 1969 to take the first job that was offered to me at age 17 as my family could not support me with the expenses of pursuing a university degree. Don’t I remember my father and elder brother being  persistently chastised within the family  to the point of persecution for daring to use their brains and back Mintoff’s ‘sitt punti’ rather than blindly accept that Archbishop Gonzi knew best as he was in a direct link with the Almighty who was giving him the inspiration to impose mortal sin on whoever gave Mintoff’s views a fair chance?

Mintoff changed all that by the sheer force of his character, bringing about lasting change against all odds and against the stiff resistance of those who were well-served by the status quo. He eradicated material and intellectual poverty and changed us from a confessional state to a democracy where the Church has freedom to teach but not to impose its ways on those who voluntarily have moved away from its teachings.

So how is it that even in his death there are those who see Mintoff as a villain rather than as a political giant?     There are three reasons for this.

Firstly Mintoff’s character was honed by the stiff resistance to change that he had to overcome in his struggles.  He was rough at edges, though for those who really took time to get to know him, he remained always sweet and genuine at the core.  His negotiating tactics were hard and possibly vicious.  He created or bluffed alternatives even when he had none.   He was a brinkman to the extreme willing to stick to his principles rather than settle for patched-up  easy compromises.  His losing two elections rather than seek any compromise with the Curia bear witness. Such roughness often rubs people the wrong way and they never gained enough time to taste the sweetness at Mintoff’s core.

Secondly the change process even when perfectly successful leaves behind a few losers.   Those who were well-served by the status quo, those who had to give up their privileges and those who were exposed to competition based on competencies rather than birth rights, tend to carry persecutory grudges verging on the thirst for revenge,  rather than see change as a worthwhile process for achieving broad based development leading to social cohesion and true moral values.

Lastly it is true that after the military base closure in March 1979, Mintoff has achieved all he had worked for in his political struggle since 1945.   Following a struggle spanning 34 years Mintoff had a very common problem that missionary type leaders often face.   Once the mission has been accomplished such leaders should logically ask themselves what’s next,  what are the leadership skills needed to achieve the next objectives and do they have the skills necessary to reach the new objectives?

Even if they manage to define new objective ( which is difficult in itself as often they tend to presume that protection of the accomplished mission should remain a sufficient and permanent objective) such missionary leaders rarely have command of the skills necessary to face new challenges.   The skills needed to achieve change are different from the skills needed to prosper in the stability that follows it.

Having achieved all that he worked for by March 1979, and this refers not only to closure of the base, but also to economic progress which eradicated poverty, to building a robust social services structure, to gaining nearly full-employment and dismantling obsolete structures like war ration of basic foodstuffs, Mintoff became a sort of rebel without a cause.   It is not without reason that many criticise the Mintoff era between 1979  and 1987 ( he had resigned leadership and Prime Ministership in 1984) without giving credit to the first thirty four years of Mintoff’s political  career.

One could argue that the end did justify the means.   The end for Mintoff was protecting his major achievements by  entrenching neutrality and freedom from military bases  in the Constitution.   He sacrificed everything else that stood in the way, and achieved the entrenchment just before dissolution of parliament in 1987.   Was it worthwile?   Though I thought differently at the time, now with the benefit of hindsight I think it probably was.   It avoided the risk of Labour falling into a post-Mintoff leadership struggle while still in executive power and offered a smooth alternation of power in 1987 which was not quite possible in 1981 based on the Constitution as it then was.

And in the end, knowingly or unknowingly, Mintoff more than anyone else shaped up Malta’s entry into the EU in 2004.    Without his revolt against his own government in 1998 Malta would have never made it to join the EU in 2004.   In spite of his contrarian pronouncements Mintoff would have liked nothing better than being a Prime Minister attending EU country leaders’ summits where decisions needed majority approval.   If Mintoff was in favour of integration with few seats at Westminster and equality in social services, how could he have been against EU membership giving disproportionate rights to small countries and preparing a clear road map for achieving economic harmonisation throughout the EU.

For me there is no one like Dom.    Rest in Peace,  Leader.

Euro crisis: Fix it or Fixit

I liked the feature in today's The Economist which explains why Finland might start finding the cost of staying in the Euro as unbearable and will be constrained to choose between a Fix it ( Fix the Euro system) or Fixit  (Finland Exit from the Euro).

The infinite billion Euro question is:   how do you fix it?  

It is now fairly obvious to anyone with eyes to see and brains to think that Greece can never restructure within the Euro.   Without an external devaluation that is impossible within a monetary union, Greece's adjustment will spread continuous pain over too a long a period for any democracy to tolerate.    Too many resources are being wasted as they are poured into a Hellenic black hole and it is time to accept that no matter how painful,  Grexit is inevitable.  Resources should be saved to build a firewall around the other countries that are successfully restructuring within the Euro ( Spain, Italy, Portugal and Ireland) as a Grexit without such a firewall will cause very damaging contagion.

If it comes to choosing between Grexit and Fixit, then surely we should go for Grexit and then set out to 'fix it' rather than choose Fixit.

I sense a new realism among EU political leaders.  The summer lull seems to have sharpened their thinking.    They know that the  Euro can never be stable with Greece trapped in a harrowing deflation and they are preparing for the inevitable consequences of Grexit.   Only this explains Merkel warming up to the initiative of monetary easing being orchestrated by ECB President Draghi in spite of the fundamentalist objections of the German Central Bank.   Merkel has decided to overrule her own Central Bank and back Draghi.   And this with good reason.

No other institution but the ECB can save the Euro.   No other institution has the autonomy to move with speed and resources that can shock and awe the market and bring back stability in the borrowing costs of the countries successfully restructuring their economies, especially Spain and Italy whose economy is simply too big to save through bailouts.

We should soon see the ECB applying unlimited resources to achieve three things:

• Provide limitless liquidity to build a firewall against contagion from Grexit
• Monetise whatever is necessary to capitalise back to health Euro area banks that have to write off the bad assets on their books, being irrecoverable property loans or doubtful loans to sovereigns.
• Intervene directly in the secondary market to put a cap on the maximum spread tolerance Euro sovereigns have to pay to borrow on the markets.  Otherwise the sacrifices Italy and Spain are doing to achieve restructuring will be wasted in higher funding costs.

A monetary solution from the ECB would avoid the messy approval by 17 parliaments for funding which would put their own budgets, already under recession stress, further under pressure.    It would avoid issues regarding the consistency of such funding in terms of the German Constitution.   And importantly it would break the depressive spiral between the fragility of the banks' balance sheet  and the worrying deficits of their sovereigns.   If as a result we see a devaluation in the exchange value of the Euro than that would be part of the restructuring cure as a lower Euro will lead to increased competitiveness.  

EU leaders must use the time which the ECB will offer through its extraordinary monetary initiatives to restructure the Euro system to health by underpinning it with a banking union, a Euro-wide banking regulatory system, and plans for a fiscal union leading to common Eurobond funding under strict conditionality.

Mintoff - the great nationalist

After 96 years and 14 days lived to the full, Malta's greatest nationalist (with a small n) is no more.

The greatest politician Malta has ever had passed into history.  

As Machiavelli teaches, those who bring about great changes are despised by those who benefit from the status quo and are only lukewarmly accepted by those who may benefit from the changes about which they continue to harbour doubts.

Mintoff's greatest achievement was his determination to bring about a social revolution by creating a kinder society that does not tolerate poverty while allowing space for private initiative.    He made people believe in his ability to deliver change and infected them with enthusiasm to believe in change even when the chances for success seemed to defy the odds.

His battlecry 'Malta l-Ewwel u Qabel Kollox' symbolises his heroic love for his country that had served foreigners for millenia and never really aspired for statehood before Mintoff injected it with nationalistic fervour and self-confidence.

As he had to fight for every inch of progress against the forces that were well served by the status quo, Mintoff tended to be rough at the edges but sweet and gentle at the core.    For what he did until he achieved Freedom from foreign bases in 1979 he can never be over-praised.  The mistakes he did after 1979,  when he tended to be a rebel without a cause, we can easily overlook as they are nothing next to his achievements.

Now that you went to the Creator he will ask you:  did you feed the hungry? did you give water to those in thirst? did you visit prisoners? did you console the distressed? did you help the sick?

To these and many other acts of kindness questions you can proudly answer yes and the doors of heavens will be opened wide for you.

May our Leaders love Malta as much as Mintoff did.

Messages and messengers

The oldest political game in town is that when you have no reply to the message, you attack the messenger.
Here is a typical example:
___________________________________________________________
Wednesday, August 15, 2012 by

Austin Sammut, Mosta

Dinosaurs and democracy

What a shame for Alex Sceberras Trigona to write about democracy (August 8)! He never knew where democracy started. How dare he preach to us about it?

We who knew him at the University in the days he was president of the Students’ Representative Council and beyond clearly understand what slime and hypocrisy is all about. As Minister of Foreign Affairs he courted the two most dangerous people in the world on our behalf and this under Malta’s most despotic government ever (is it to be repeated?).

Dinosaurs should be in museums not running around with supposedly progressive and moderate movements (sic). I rest my case and will say no more.

___________________________________________________________________________

Irrespective of AST's credentials in democracy  and the study of dinosaurs, his original contribution raised interesting points which need to be debated by constitutional experts.   To a legal layman the issue is not straightforward.   If the Constitution provides for granting additional seats so that the party that obtained an absolute or relative majority in a two-party parliament can govern, what should happen when that government loses its absolute or relative majority when one of its members resigns from the party and keeps his seat as an independent?  In such an event, as presently,  government no longer holds a relative majority of votes and parliament is no longer a two party affair.

Perhaps at this late stage of the legislature this is a moot point but it still ought to be discussed by constitutional experts.  Dr Austin Sammut could have contributed to it better than by trying to kill the messenger.

Hagar Qim as it was

 The achievement of Ph. D. student Suzanne Psaila in researching and building a virtual model of how Hagar Qim  (HQ) conceptually looked like when it was built by the first inhabitants of the Maltese Island more than five thousand years ago,  fills a huge gap in our history and culture.  It also offers a great opportunity for enhancing  the quality and appeal of cultural tourism to Malta.

See the report in the Sunday Times of 12th August 2012:

Hagar Qim virtual recreation- ST 12 08 2012

Equipped with this knowledge we should now take on a national project, ideal for a public private partnership, for the recreation of a replica of the original HQ somewhere near the neolithic temple itself.   Coupled with professional visual presentations of how the Temple was built and how it was used it would enrich the experience of visitors and would build an aura around the Temple remains which would then be generally off limits to visitors except for a quota which is in line with its long term sustainability and care.

This is an opportunity staring us in the face,  thanks to Ms. Psaila, who will no doubt be rewarded for the commercialisation of her research.    Well done!!

Defining 'whatever it takes'

This article was published in the The Malta Independent on Sunday 12th August 2012

Time to really decide whether to save the Euro

No one can be sure that when Merkel  and Hollande issue a joint statement that Germany and France will do whatever it takes to save the Euro, they actually mean the same thing.

Merkel could very well be meaning that through austerity, all the irresponsible Med countries will be forced to start working hard like the Germans. France could be meaning that Germans ought to let go a bit and start enjoying life a bit more.

The European Monetary System can be likened to a group of seventeen runners who have agreed to run together a race that can only be won if they finish it together as a group. So they pledged to train and keep fit so that they could as a group move fast but together.

Things did not work out that way. One particular runner (Germany) worked so hard and gained so much fitness that it is effectively sprinting ahead of the group. Another one (Greece) cheated, over-ate, under-trained, put on weight and simply can't keep up the pace with the rest of the Group, let alone with Germany. The remaining fifteen are running in the middle a bit disjointed but with prospects that with some effort the Group of 15 can continue running together.

What needs to be done to get the 17 running sustainably together again?

The middle fifteen still reasonably packed together can turn on the two at different extreme ends and ask them to leave the group so the fifteen will continue the race together. But the rules will not allow this.  They have to approach it in another way. Firstly they have to ask the fast runner Germany to slow down a bit, to stop running and have a couple of cold beers to give time to the fifteen to catch up. And then the sixteen as reformed will have to do whatever it takes to help poor Greece to learn how to run better so that they can keep the pace with the Group.

Can this be done? It can in theory,  but it will take a long time and with the way democracy works, I doubt if such time can be found before some demagogue of the extreme left or right will rise to power and decides to slow down the rest of the Group by shooting them in the foot. Democracy would not allow serial rounds of austerity to serve so much continuous pain in double doses of austerity and economic contraction.

So the politicians proclaiming they are willing to do whatever it takes to save the Euro had better come to terms with reality and accept that Greece can never reform within the Euro. They should stop the slow grind of putting the most exposed in the Greek population through the sausage machine and accept that it would be in Greece’s and the Euro's mutual interest for Greece to leave the Euro and revert to their Drachma.

This would involve a substantial devaluation of the Drachma, outright default of Greece on its debt denominated in Euro ( default either through non-payment or through forced conversion in a devalued Drachma) and re-instatement of capital and import controls. Basically Greece would have not only to cancel its Euro membership but also to suspend its EU membership as it breaks the basic concepts of free trade and capital movement.

The Greek population will receive a big sharp shock of pain as salaries and pensions would lose the real value but the country's economy would start growing again pretty soon as the external competitiveness would be instantly restored. If the Greek population learns a lesson from this debacle and understands that they have to live within their means, then they will follow the successful Icelandic recovery model.

The EU would then have to stand ready to support Greece to restore itself to health and work its way back to honouring its EU membership obligation by direct aid from its regional funds as Greece becomes increasingly entitled to once its per capita GDP falls well below the EU average.

The story does not end there however. Germany is causing as much instability to the Euro system from the virtuous side as much as Greece from the vicious side. Germany has to accept that Euro countries cannot become all like Germany even if they try until hell freezes. If all countries run a surplus like Germany where will the counter-value deficits be? So as Greece has to undergo a devaluation, Germany has to undergo a revaluation. Here again they have a choice of whether to do it internally or externally.

An external revaluation for Germany would mean their temporary departure from the Euro and reversion to their beloved Deutsche Mark (DM). The DM will revalue robustly against all major currencies including the Euro and Germany will thus lose their excessive competitiveness forcing industry to relocate and consumers to spend at least part of the increased real value of their salaries and pensions ( how about going for a very inexpensive holiday to Greece which will be priced in cheap Drachmas?).

Or they can do an internal revaluation by staying within the Euro but adopting much looser fiscal policy going into structural deficits to boost consumption just as the chronic deficit countries would be shifting into surplus.

Germany has to choose between one or the other if they really mean what they say when their Chancellor proclaims that they will do whatever it takes to save the Euro. Germany knows this and has been avoiding being forced to make a choice and instead has been unfairly using their economic and political power to put all the pain of adjustment on the deficit countries. Meanwhile Germany has been enjoying the crisis by paying zero real interest on their debt and gaining competitiveness on external markets as the crisis weakens the Euro. The crisis is making the strong stronger and the weak weaker.  It is good while it lasts but it cannot last.

What happens if Germany continues to avoid the hard decision? As Italy and Spain will get enfeebled by serial rounds of austerity without light at the end of the tunnel their democratic model will also get broken ( in Italy elections are due in 2013, Monti will disappear and can one imagine Beppe Grillo or Berlusconi again as Prime Minister?) and the Euro will break up irreparably. Germany then will have no choice but to revert to their DM with the difference that the break-up of the Euro will probably lead to the breakup of the EU and God only knows what else. Remember the 1930's?

So at some point in the very near future Germany will have to decide whether they want the Euro to survive and if they really mean it when they say they are prepared to do whatever it takes, then they have to choose what sort of revaluation they prefer.

If external devaluation is too much for Germany they must immediately fast track the internal revaluation route, reversing their atrocious decision for legislatively enforced neutral budgets and give substantial tax rebates to the German consumers so that they can spend Germany's surplus on increased consumption stimulating increased demand for imports from other EU countries.

In the context of all this the ECB has to stand ready with whatever-it-takes programmes to monetise whatever needs to be monetised to avoid the Euro area falling into a depression. The first thing they have to monetise is a substantial fund to recapitalise the EU banks as they write off their bad assets or bad debts and avoid a Japanese style prolonged depression caused by domestic zombie banks.

Defining ‘whatever it takes’ involves measures bordering on the unthinkable but less unthinkable than the consequences of the Euro break-up.  The menu is served: a  selection of unthinkables.

Who's not working?

What's the difference between the PN's campaign billboard

LABOUR WON'T WORK

and the one that inspired it from the Conservative Party election campaign of 1979

                                                      LABOUR ISN'T WORKING?

What's the difference between LABOUR WON'T WORK and LABOUR ISN'T WORKING?

The difference is that between opinion and fact.

The Conservatives could justifiably make a factual claim that Labour was not working.   The UK election was held in May 1979 following a harsh winter of discontent where basically every sector went on strike.   Coal miners struck. Grave diggers went on strike. Rubbish collectors called it a day. Britain was a dreadful place with the Labour government under James Callaghan tearing itself apart fighting with its traditional allies in the TUC.

Basically the British Labour party was disintegrating and in fact it had to wait until 1997, 4 elections and 4 new leaders later for Tony Blair to make Labour electable again.   This state of affairs is more representative of the PN's current situation rather that the situation of the current PL which is more like UK's Labour on the eve of the 1997 election.

If anybody is not working it is the PN, and this is  fact not opinion.   A fact corroborated by the resignation of JPO, the threats and rebel votes of Franco Debono, the dissatisfaction of others in the back bench, and the forced resignations of Mifsud Bonnici and Cachia Caruana.

The claim that Labour if elected to government won't work is an opinion, a biased opinion at that.    But even if one were to hypothetically accept it as a valid expectation, that does not mean that the PN has to stay in government in perpetuity.  

If I were to be forced to choose between having a perpetual government and a fresh government which may not work I would blindly choose the latter.

Experience shows that third term governments never work.   The third conservative government under John Major was a disaster.  The third conservative Labour government under Blair/Brown failed miserably, especially after Blair left.   Mintoff's third term between 1981-1987 was an aberration.

Even if Labour may not work, and that is an opinion, it does not change the factual reality that the PN is not working. Their third consecutive term is fulfilling the same pattern of third term governments.   A fourth term for the PN would be suicidal.

There is every good reason why Joseph Muscat need not promise much to get elected.  He needs to preserve maximum flexibility because it is not clear what state of finances he will be inheriting.  Better to under-promise and over -deliver.   Muscat does not need to promise too much.  The people will not be voting him in.   It is more likely they will be voting the PN out.  The PN is not working.

They don't have residual energy for some originality in their billboards.

Who said that an election will come before the Budget?

PM promises better income for the Police

http://www.timesofmalta.com/articles/view/20120808/local/pm-promises-better-pay-for-the-police.432061

Interest subsidy scheme for home buyers announced

http://www.timesofmalta.com/articles/view/20120808/local/interest-subsidy-scheme-for-home-buyers-announced.432060

Both events in one day!!

Anyone who can count to ten would conclude that such measures would normally be reserved for the Budget and their release through a political good-feel drip irrigation system in August shows we will have elections before the Budget.

Whatever it takes (3)

At last, I find the time to define what the political 'whatever it takes' to save the Euro should mean.   I use the conditional purposely, as I am not sure that when Merkel and Hollande issue a joint statement stating the Germany and France will do whatever it takes to save the Euro, they actually mean the same thing.

Actually I think they do not mean the same thing and Merkel could very well be meaning that through austerity we will make all the irresponsible Med countries to start working hard like the Germans whereas France could be meaning that Germans ought to let go a bit and start enjoying life a bit more.

I will try to avoid technicalities and speak more in figurative terms hoping that it would be easier for my readers to follow.   The European Monetary System can be likened to a group of seventeen runners who have agreed to run together a race that can only be won if they finish it together as a group.  So they pledged to train and keep fit so that they could as a group move fast but together.

what does her
Whatever-it takes mean?

Things did not work out that way however.   One particular runner (Germany) worked so hard and gained so much fitness that it is effectively sprinting ahead of the group.   Another one (Greece) cheated, over-ate, under-trained, put on weight and simply can't keep up the pace with the rest of the Group, let alone with Germany. To complicate matters this runner called Greece is tied through cultural linkages to another runner who has stopped running with the group (Cyprus) in order to help Greece.   The remaining fourteen are running in the middle a bit disjointed but with prospects that with some effort the Group of 14 can continue running together.

So if one were to say that whatever it takes will be done to keep the Group of seventeen together, what exactly needs to be done?

The more obvious solution could be that the fourteen still reasonably packed together will turn on the remaining three and ask them to leave the group so the fourteen will continue the race together.    But the rules will not allow this so the fourteen have to approach it in another way.   Firstly they have to ask the fast runner Germany to slow down a bit, to stop running and have a couple of cold beers to give time to the fourteen to catch up.    And then the fifteen as reformed will have to do whatever it takes to help poor Greece and Cyprus learn how to run better so that they can keep the pace with the Group.

Can this be done?   It can but it will take a long time and with the way democracy works, I doubt of such time can be found before some demagogue of the extreme left or right will rise to power and order Greece and Cyprus to slow down the rest of the Group by shooting them in the foot.   Democracy would not allow serial rounds of austerity, crushing the economy as it attempts to reform, to serve so much continuous pain  in double doses of austerity and economic contraction.

To get into shape so that it can run with rest Greece will have to fire half of the public sector workforce through privatisation or redundancy, and make further cuts in entitlements which would typically hurt the most poor and vulnerable.   Democracy can't live with this.   Democracy can take adjustment pain either in one big shot so that green shoots can be seen before the electoral test needs to be faced again or in serial small doses which at worst will alternate parties in government without actually ditching the democratic framework.   Sharp pain in continuous doses will risk throwing the baby away with the bath water.

So the politicians proclaiming they are willing to do whatever it takes to save the Euro had better come to terms with reality and accept that Greece, and possibly Cyprus, can never reform within the Euro.  They should stop the slow grind of putting the most exposed in the Greek population through the sausage machine and accept that it would be in Greece and the Euro's mutual interest for Greece to leave the Euro and revert to their Drachma.

This would involve a substantial devaluation of the Drachma, outright default of Greece on its debt denominated in Euro ( default either through non-payment or through forced conversion in a devalued Drachma) and re-instatement of capital and import controls.   Basically Greece would have not only to cancel its Euro membership but also to suspend its EU membership as it breaks the basic concepts of free trade and capital movement.

The Greek population will receive a big sharp shock of pain as salaries and pensions would lose the real value but the country's economy would start growing again pretty soon as the external competitiveness would be instantly restored.   If the Greek population learns a lesson from this debacle and understands that they have to live within their means, based on real earnings not borrowed funds for excess consumption, then they will follow the successful Icelandic recovery model.  Iceland has just gone through a similar bitter experience and is coming out of it with considerable success.

The EU would then have to stand ready to support Greece to restore itself to health and work its way back to honouring its EU membership obligation by direct aid from its regional funds as Greece becomes increasingly entitled when its per capita GDP falls well below the EU average.

Cyprus would have to take its own decision whether its wants to keep Greece company in this mis-adventure and accompany it out of the Euro, or else move along on its own and restore their economy within the Euro given that Cyprus has a flexible economy and can use its strategic geographic location to get help from outside the EU structures, including Russia and China.

The story does not end there however.   Germany is causing as much instability to the Euro system from the virtuous side as much as Greece from the vicious side.   Germany has to accept that Euro countries cannot become all like Germany even if they try until their faces turn blue.  If all countries run a surplus like Germany where will the counter-value deficits be?   Or does Germany think that the EU can run an eternal structural surplus with the rest of the world?  Some hope!

So as Greece has to undergo a devaluation, which as explained above can in democratic terms only happen if they leave the Euro as internal devaluation within the Euro will break the democratic system, Germany has to undergo a revaluation.   Here again they have a choice of whether they do it internally or externally.  

An external revaluation for Germany would mean their temporary departure from the Euro and reversion to their beloved Deutsche Mark (DM).   The DM will substantial revalue against all major currencies including the Euro and Germany will thus loose their excessive competitiveness forcing industry to relocate and consumers to spend at least part of the increased real value of their salaries and pensions ( how about going for a very inexpensive holiday to Greece which will be priced in cheap Drachmas?).  

Or they can do an internal revaluation by staying within the Euro but adopt much looser fiscal policy going into structural deficits to boost consumption just as the chronic deficit countries would be shifting into surplus.

Germany has to choose between one or the other if they really mean what they say when their Chancellor proclaims that they will do whatever it takes to save the Euro.   Germany knows this and has been avoiding being forced to make a choice and instead has been unfairly using their economic and political power to put all the pain of adjustment on the deficit countries.  Meanwhile Germany has been enjoying the crisis by paying zero real interest on their debt and gaining competitiveness on external markets as the crisis weakens the Euro.  The crisis is making the strong stronger and the weak weaker.   It can't go on like this.  Germany has to choose.

What happens if Germany continues to avoid the hard decision?   As Italy and Spain will get enfeebled by serial rounds of austerity without light at the end of the tunnel their democratic model will also get broken ( in Italy elections are due in 2013, Monti will disappear and can you imagine Beppe Grillo or Berlusconi again as Prime Minister) and the Euro will break up irreparably.  Germany then will have no choice but to revert to their DM with the difference that the break up of the Euro will probably lead to the breakup of the EU and God only knows what else.  Remember the 1930's?

So at some point in the very near future Germany will have to decide whether they want the Euro to survive and if they really mean it when they say they are prepared to do whatever it takes, then they have to choose what sort of revaluation they prefer.  Leaving the Euro at the original rate of 1.95 and then let the DM float will be the most practical and effective solution and would require no changes to the German constitution or any reference to German courts.  Germany could then work its way back to rejoin at a more realistic rate, probably between 1.30 and 1.60, but only after the Euro rules are changed to enforce fiscal integration of the constituents members, common borrowing through a central debt agency and a clear process leading to converting the EU into a political federation respecting the rules of democracy possibly on the US constitutional model.

If this is too much for Germany they must immediately fast track the internal revaluation route, reversing their atrocious decision for legislatively enforced surplus or neutral budgets and give substantial tax rebates to the German consumers so that they can spend Germany's surplus on increased consumption stimulating increased demand for imports from other EU countries.

In the context of all this the ECB has to stand ready with whatever it takes programmes to monetise whatever needs to be monetised to avoid the Euro area falling into a depression.  The first thing they have to monetise is a substantial fund to recapitalise the EU banks as they write off their bad assets or bad debts and avoid a Japanese style prolonged depression caused by domestic zombie banks.

Believe me, there is no time to lose and something must be done soon.

Whatever it takes! (2)

Before I keep my promise to explain in detail what political measures are needed to give substance to the 'Whatever it takes!' commitment to keep the Euro together, I would wish to comment on a 'Whatever it takes!' with a local flavour.

L'Etat c'est moi!

In Malta there is strong uncertainty about the governability of the country.  Government has lost its one seat majority in parliament when a back-bencher broke off with government ranks and declared himself independent.   Furthermore another rebel back-bencher with a record of voting out of line with government, has openly declared he will not back government in parliament unless a senior Minister is removed from cabinet.

Parliament is closed for summer recess and is due to re-convene on 1st October 2012.  So the crisis is not immediate.  But October will come in less than two months and meantime there is instability as no one knows if government can continue with its legislative mandate until its normal expiry date  i.e. till this time next year.

So all sensible advice in the media, civil society and of course from the Opposition is that the issue should be settled sooner rather than later by holding fresh general elections this autumn and dissolve parliament before it has to re-convene in October.

There is one problem with such sensible advice for government.   Opinion polls shows that it is far behind Labour and that there is every likelihood that if general elections would be held this autumn Labour would have a clear victory with quite a margin and the government will have to cross parliament's floor and sit on the opposition benches in the next legislature.

So whilst there is a chorus of opinion that the national interest demands a political resolution through holding early fresh elections, government continues to argue that the national interest demands that it stays in executive power in spite of the instability it is suffering in parliament. 

Conclusion:  the government, like most politicians who are likely to lose their post will do whatever it takes to stay and hold on to it for as long as it can.  And to hell with the national interest!!

Probably their reasoning is that it is in the national interest for the government to stay in perpetuity and for the opposition to become a perpetual opposition.  Who  had said ' L'Etat c'est moi!' ??