Merkel the schemer

The German elections went exactly as I had predicted.   Here is what I wrote in The Malta Independent on Sunday:

In the last weeks of the electoral campaign I perceived a stance on the part of Mrs Merkel where she sent discrete signals to push the last coalition partners FDP below the 5% threshold.  This would deny them parliamentary representation, and leave the grand coalition as the inevitable solution for a stable government.  This will strengthen Merkel’s hand to overcome internal resistance towards a more benign approach towards the Euro problem.   It would also help to bridge the conceptual differences between Germany and France and augur well for a rapprochement of the twin motor that is necessary to drive European integration forward to the next level.

It is no co-incidence that her partners in the last government, the right wing FDP, went below 5% and lost parliamentary representation.   Merkel could have worked for tactical voting to preserve the FDP parliamentary representation, but she did not.    Merkel schemed a grand coalition and she got it even though she knows she would have to pay a high price in concessions to the SPD to persuade them to participate in the coalition.

Why was Merkel prepared to open up so much to the SPD?

Simply because in her third and last term as Chancellor Merkel wants to be remembered as the Chancellor who saved the Euro not the one who broke it.  She knows that to save the Euro Germany has to pursue growth policies in tandem with restructuring.  Austerity as an economic tool would be abolished from Merkel's dictionary and this would not be possible if she continues to have Schauble as her Finance Minister.

Merkel also knows that she cannot have a successful third term unless she patches her relationship with French President Hollande.    With the SPD as a coalition partner she stands a better chance of developing a good working relationship with Hollande especially at a time when the British seem to have lost interest in taking any leading role in Europe.

Negotiations for forming a grand coalition will be long and hard.   The SPD have been burnt by their participation in the first Merkel government 2005 - 2009.  But in the end they have to give substance to the people's mandate and provided they get two basic concessions they will have to participate.

The concessions that will force the SPD to join in the grand coalition will be, two strong ministries, possibly finance and foreign affairs and an assurance that Merkel will not seek a fourth term in 2017.

We might have a grand coalition before Christmas but only after going through the motions of the SPD role playing as uninterested in the marriage unless the dominating bride makes grand concessions to the bruised groom.

Fitch downgrade just a catch up to Moody's and S&P

Fitch last week downgraded Malta sovereign rating from A+ to A.

The PN is trying to fault government for this downgrade.  That's a joke.

Firstly there is pretty little any government can do in the first six months in so far as ratings are concerned for which it should seek credit or suffer fault.    A rating event does not happen overnight.  It reflects past events often with a considerable time lag.

Secondly Fitch's decison is a partial catch up to decisons taken by Moody's and S & P under previous government.

An A rating by Fitch is equivalent to an A rating by S & P and A2 by Moody's.   But Moody's downgraded Malta's rating to A3 ( one notch lower than  A2) as far back as 13.02.2012.   S & P downgraded Malta to BBB+ two grades below A) since 16.01.2013.

So Fitch's downgrade to A is still one grade above Moodys' and two grade above S&P and both Moody's and S & P ratings were earned under a PN government.

So what are the PN talking about?

For those who want to understand the comparative table of ratings :

Credit rating tier

 

Moody's		S&P		Fitch		DBRS		Descriptions
Long-term	Short-term	Long-term	Short-term	Long-term	Short-term	Long-term	Short-term
Aaa	P-1	AAA	A-1+	AAA	F1+	AAA	R-1H	Prime	Investment grade
Aa1		AA+		AA+		AA(high)		High grade
Aa2		AA		AA		AA	R-1M
Aa3		AA-		AA-		AA(low)
A1		A+	A-1	A+	F1	A(high)	R-1L	Upper medium grade
A2		A		A		A
A3	P-2	A-	A-2	A-	F2	A(low)
Baa1		BBB+		BBB+		BBB(high)	R-2H	Lower medium grade
Baa2	P-3	BBB	A-3	BBB	F3	BBB	R-2M
Baa3		BBB-		BBB-		BBB(low)	R-2L, R-3
Ba1	Not prime	BB+	B	BB+	B	BB(high)	R-4	Non-investment grade speculative	High yield (junk)
Ba2		BB		BB		BB
Ba3		BB-		BB-		BB(low)
B1		B+		B+		B(high)		Highly speculative
B2		B		B		B	R-5
B3		B-		B-		B(low)
Caa1		CCC+	C	CCC	C	CCC(high)		Substantial risks
Caa2		CCC				CCC
Caa3		CCC-				CCC(low)
Ca		CC				CC(high)		Extremely speculative
						CC
						CC(low)
		C				C(high)
						C
						C(low)
C		D	/	DDD	/	D	D	In default
				DD
				D

Time for Germany to show solidarity over austerity plan

  This was published in the FT - 21st September 2013

Sir,

 

Politicians must think positively. When facing a weekend election politicians must be doubly positive. So while there is truth in Wolfgang Schäuble’s assertion “Ignore the doom-mongers – Europe is being fixed” (Comment, September 17) the truth does not go far enough.

 

What matters is not whether Europe is being fixed. Time will fix anything if you can afford it. The question is whether the speed at which Europe is being fixed is something that countries in distress can bear for long enough to stay the course till redemption, or whether democratic systems under stress in deficit countries will abort the process before completion. Under extreme pain of austerity without growth, electorates may turn to extreme populists that offer easy solutions. This almost happened in Italy just last February.

The comparison that the German minister makes between Europe and his own country’s experience since 2003 is comparing apples with pears.

Germany was endowed with the strong legacy of an export-oriented industrial base, which could produce exports as the country regained competitiveness through socially-fair burden-sharing adjustment. It had the benefit of strong demand from the current crisis-stricken EU countries as it turned a self-serving blind eye to their breaking of the single currency monetary rules. On the contrary, the crisis-stricken EU countries are today facing a global recession in which even countries that, like Germany, can afford to loosen up to stimulate consumption, insist on the false virtues of balanced budgets.

Next week, Mr Schäuble may have to work harder to match his pre-election positive outbursts. With the next elections far over the horizon he may finally accept that surplus countries have to do their part to restore internal equilibrium within the EU and in a timely manner that protects the solidarity that Europe stands for.

 

Alfred Mifsud,

Balzan, Malta

Germany decides

This article was published in The Malta Independent on Sunday - 22 09 2013

_______________________________________________________________

In today’s German elections the electorate is not simply deciding who will occupy the Chancellery for the next term and the shape of the coalition that will form Germany’s next government.   They are by and large deciding the future of the EU and the Euro.

Germany is a big part of the solution to the Euro problem.   Failure to acknowledge this renders resolution of the problem far more challenging and complex.

This was nowhere more evident than in an opinion piece written this week by German Finance Minister Wolfgang Schauble, a prominent member of Chancellor Merkel’s CDU.   Under the title “Ignore the doom-mongers- Europe is being fixed” published in the Financial Times ( Sept 17^th) Mr Schauble argues that the German austerity recipe is the right cure for Europe’s problems, that progress is already evident and as fiscal discipline turned Germany from the sick man of Europe in 2003 to the economic power house it is today, so the periphery countries under distress have to stay the course till redemption comes.

“Structural reforms take time. Those responsible for them need patience and an aptitude to ignore the siren call of quick fixers and the protestations of special interests.  Signs of improvement are no reason to backtrack – they are reason to persevere…… We should fight the human tendency to extrapolate the present forever into the future. Systems adapt, downturns bottom out, trends turn. In other words, what is broken can be repaired Europe today is the proof”

Politicians must think positively. When facing a weekend election politicians must be doubly positive. So while there is truth in Wolfgang Schäuble’s assertion it does not go far enough.

What matters is not whether Europe is being fixed. Time will fix anything if you can afford it. The question is whether the speed at which Europe is being fixed is something that countries in distress can bear for long enough to stay the course, or whether democratic systems under stress in deficit countries will abort the process before completion. Under extreme pain of austerity without growth, electorates may turn to extreme populists that offer easy solutions. This almost happened in Italy just last February.

The comparison that the German minister makes between Europe and his own country’s experience since 2003 is comparing apples with pears.  Germany was endowed with the strong legacy of an export-oriented industrial base, which could produce exports as the country regained competitiveness through socially-fair burden-sharing adjustment. It had the benefit of strong demand from the current crisis-stricken EU countries as it turned a self-serving blind eye to their breaking of the single currency monetary rules. On the contrary, the crisis-stricken EU countries are today facing a global recession in which even countries that, like Germany, can afford to loosen up to stimulate consumption, insist on the false virtues of balanced budgets.

Next week, Mr Schäuble may have to work harder to match his pre-election positive outbursts. With the next elections far over the horizon he may finally accept that surplus countries have to do their part to restore internal equilibrium within the EU and in a timely manner that protects the solidarity that Europe stands for.

Yet next week Mr  Schäuble may no longer be in charge of Germany’s finance ministry if the polls indicating the need for a grand coalition between the CDU/CSU and the SPD are proven right.    In such a scenario it is probable that Peer Steinbrueck  SPD probably unsuccessful challenger to Mrs Merkel,  will be restored to his post as Minister of Finance, a post he held quite successfully in the last grand coalition.

Such a scenario opens the way for Germany to adopt a much more pragmatic view to resolving Europe’s economic distress and instability of the Euro monetary system. In her last term as Chancellor Merkel would not want to leave a legacy of breaking the Euro.   She wants to be remembered as the saviour of the Euro, a monetary system that has brought so much benefit to Germany’s economy helping it to remain rock solid whilst all around it were floundering. Steinbrueck as finance minister will implement his Marshall Plan approach towards the restructuring of the economy of countries in distress and will abandon the Versailles approach insisted upon under Schauble’s guardianship.

In the last weeks of the electoral campaign I perceived a stance on the part of Mrs Merkel where she sent discrete signals to push the last coalition partners FDP below the 5% threshold.  This would deny them parliamentary representation, and leave the grand coalition as the inevitable solution for a stable government.  This will strengthen Merkel’s hand to overcome internal resistance towards a more benign approach towards the Euro problem.   It would also help to bridge the conceptual differences between Germany and France and augur well for a rapprochement of the twin motor that is necessary to drive European integration forward to the next level.

For all their economic strength Germany remains shy of their economic power and as always need  France by its side to give it political cover for the institutional changes that would be necessary to deliver an ever closer Europe.

A new chapter for Europe and the Euro begins tomorrow.

Yesterday’s 49^th independence celebration also opens the way to some political maturity that Malta needs to reach in preparation for the 50^th anniversary next year.   In a conference held in 1989 on the 25^th anniversary I had concluded my speech as follows:

“In my opinion just as a young man celebrates his birthday whatever the circumstances of his birth, so Malta should celebrate the anniversary of its political birth and keep open if you will at the political level the argument whether we should eulogise or otherwise those who with an eye on  perception rather than reality,  ruled over our political birth among thorns when with more propriety, wisdom and affection could have had our birth at least on straw if not on cotton wool.”

By the time we come to celebrate the second 25 years of our nationhood may be we would have moved close enough to political maturity to choose Independence Day as our one and only national day, keeping other days as state holidays to commemorate the respective events. We may learn to appreciate that in celebrating Independence we are not strictly celebrating the event.  We celebrate the journey leading to it and the key political developments that followed it.

No taper - see you later!

Markets were poised yesterday for an announcement by the US Federal Reserve that the speed at which they are flushing the market with new money will be gradually slowed down from the current rate of USD 85 billion each month.

This initiative technically referred to as QE (quantitative easing) aims to keep long term interest low to promote investment and housing recovery.   As the US economy is clearly recovering without gaining momentum, the market was expecting a gradual withdrawal of this monetary accommodation so much so the the market in the last few weeks drove up the 10 year Treasury rate from 2.5% to just under 3%.

The Fed surprised most when it decided not to taper just yet, and sent a signal that it may do so later.   In communicating its reason the Fed, apart from signalling its concern that the recovery lacks momentum, argued that the increase in 10 year rate was premature and tapering now would risk pushing this rate up further suffocating the recovery especially in the housing sector.

The Fed is taunting the market.  If you push the 10 year rate up beyond what the recovery requires to gain momentum, it will keep flushing money to put the rate back down.

This decision has consequences beyond America's shores.   The first consequence was a sharp drop on the US$ value on the exchange markets including the Euro which is now back to nearly $1.36, close to the high of $1.37 of last January/February.

This is what the European recovery absolutely does not need.   We need a lower Euro to give a chance to economies in distress to become competitive on world markets.   A hardening of the Euro on the exchange markets neutralises the gains made by the austerity sacrifices and makes the hill yet to climb steeper.

Perhaps it is time for the ECB to consider verbal intervention to keep the Euro in check.   If this does not work than it will have to seriously consider whether it makes sense to keep sanity by refusing QE when all around it are going mad.

Confused opposition

"The agreement reached between Malta and China last Wednesday will make Malta lose its independence in the generation of energy, PN leader Simon Busuttil said this morning."

This was stated by Dr Simon Busuttil, Leader of the Opposition, yesterday when giving the Sunday sermon on Radio 101.

Where is the logic?   How is Malta losing its independence in energy generation if the what we are talking about is a minority shareholding equity participation in Enemalta?

And if the Leader of the Opposition is worried that even a minority position could compromise our strategic control over energy generation and distribution, why was he not similarly worried when:

• Our sole airport which is our main link with the outside world was privatised in full to foreign private enterprise
• When Maltacom, Malta's primary and legacy telecom service provider,  was privatised in full beyond the 40% minority float launched by Labour in 1998.
• When Mid-Med Bank, which controls over 40% of our banking sector, was privatised in full to foreign ownership in 1999.
• When gas importation, storage and distribution was given to 100% owned private interests.

Airport services, telecoms, banking and gas supplies are critical operations over which many governments would not let go of control unless they were pretty certain that no private sector dominant position resulted through privatisation.    In all sectors the PN government privatised and created private sector dominant positions which are being or could be used to generate monopolistic profits at the expense of consumers in particular  and the economy in general.

The correct reaction for the announced deal being negotiated with the Chinese for a minority position in Enemalta should have been positive with reservations until the full details of the negotiations become known.    By government keeping a controlling stake over Enemalta there is no question of the PL doing the same errors done by the PN, over and over again, in passing on to private interests dominant positions in essential and strategic services.

It should be viewed favourably because:

• fresh equity capital by foreign shareholders taking a minority interest in Enemalta would be the first real steps to address the weak financial structure of this strategic corporation which unless nursed to financial health could infect the public sector's general finances with its malady.
• outside minority shareholders will impose strict governance standards to ensure that the Corporation is run both efficiently and transparently.  No way the scandalous absence of governance uncovered by the NAO could have been possible if minority shareholders had a stake in the Corporation with representation on its board.
• the minority equity stake is reportedly linked to opening of international business opportunities which on its own Enemalta has never exploited and could never exploit.  On the contrary under the PN the limited exposure to 'exports' Enemalta had through MOBC was run aground.  Thankfully MOBC is being revived.

Why does the Leader of the Opposition prefer to bestow on his Party the perception of spoilers and bitter losers rather than learn from the last election defeat, accept it as a fair payment for their faults, learn from their mistakes and just move forward in the national interest?

What the German elections mean for Europe

Extract research paper by Martin Lueck - UBS Investment Bank 9th September 2013

 

What the German elections mean for Europe

So if Mrs Merkel remains in power, what does it mean for Germany’s stance on
Europe? Numerous discussions with investors in different parts of the world
suggest that there are two camps out there. One camp is expecting the German
government to switch back to austerity mode after the election. This camp
basically believes that Germany’s recent move towards a more lenient position
was just election posturing, and that Berlin’s call for tough reform will resume
after 22 September. We think this view is wrong. The impression we are getting
from conversations with policy makers over the recent past is that their
assessment of the euro crisis has rather changed for real, in the sense that there is
now a genuine understanding that austerity alone will not be enough to remove
existing imbalances. If our impression is correct, it is, hence, very unlikely that
the government switches back to tough austerity language after the election.The
other camp thinks that upon entering her third term as chancellor, Mrs Merkel
will start looking for her place in history books and will therefore turn softer on
the periphery. While we agree that the chancellor is eager to one day go down in
history as the one who saved the euro, rather than the one who tore it apart,
it will be in Merkel’s best interest to continue weighing off any German commitment
against the request for reform in debtor countries. This quid pro quo strategy has
 been extremely successful. It has created the basis for Merkel's reputation as a
good manager of the euro crisis. In fact, polls suggest that even a huge majority
of SPD followers believe that the task of saving the euro is in good hands with
the chancellor.

So what happens if the SPD comes in? First, in the unlikely yet possible case

that an SPD/Greens coalition takes over, many financial markets participants
would likely expect the German stance to soften significantly. However, the
SPD, who used to promote eurobonds until late 2011, is no longer openly
advocating positions that are highly unpopular among German voters. Apart
from eurobonds, this is burden-sharing in a banking union (often referred to as
‘debt mutualisation through the backdoor’ in Germany), as well as too moderate
a stance on fiscal adjustment and structural reform. As a consequence, the SPD
would not be able to move away, at least not by much, from Merkel’s policy
stance, because otherwise it would get punished by German voters right away.
This is why we believe that even a change in government would hardly change
Germany’s position on Europe, at least not by much. A less dramatic change
towards SPD participation, ie, the SPD joining Merkel’s CDU as a junior
coalition partner, would hardly dilute the centre-right’s euro bias at all. As a
result, even with the SPD in government (in the driver’s seat or as junior
partner), Germany’s role would not change either.

Yet this does not mean that for financial markets this kind of outcome would be
a non-event. On the contrary, we think that in the case of SPD participation in
the new government, many investors would expect a softening of Germany’s
stance. As a result, most likely peripheral spreads would come down, risk assets
outperform and the euro exchange rate depreciate. However, as we believe that
expectations would be built on shaky ground in that case, we would expect a
counter-reaction somewhat later on, once investors realise that their expectations
regarding the SPD were too sanguine. In that event, the election would at least
create some volatility, with asset prices back at their pre-election levels at the
end of the process.

To sum up: We do not think that the German election is a done deal yet. Many

voters are undecided, and unexpected events can still change the outcome.
However, from today’s perspective, it looks very likely that Mrs Merkel will
remain in office, probably even in a coalition with her preferred partner,
liberalist FDP. Against this backdrop, we think those expecting big changes in
Germany’s stance on the European crisis after the election will be disappointed.
Participation of the SPD might provoke even more hopes, and some volatility in
financial markets, which would most likely be disappointed later on. In this
sense, the election does not look like a non-event at all. 
  

Chinese blessing

A report in The Times of today carries the best news the new Labour government has come up with in its 6 month long tenure so far:

"State-owned China Power Investments is to inject millions of euros into cash -strapped Enemalta and become a minority shareholder.

A memorandum of understanding signed today between Malta and China provides for the Chinese energy firm to inject 'tens of millions' into Enemalta, which has a debt of €800 million.

Reliable sources close to the Maltese Government told timesomalta.com that around €200 million will go to reduce the corporation's debt.

The announcement was made today following a meeting between Prime Minister Joseph Muscat and his Chinese counterpart Li Keqiang in the Chinese city of Dalian, which is hosting the Annual Meeting of World Champions organized by the World Economic Forum."

China has a strong balance of payments surplus and countries in the developed and developing world make strenuous efforts to lure Chinese investment.    The US government would have serious difficulty to finance its budget deficit if the Chinese were not active buyers of US Treasuries and US dollar interest rates will c shoot up if China were to withdraw from investing in the US.

So Chinese investment in Enemalta is more than welcome.

For me the benefit and blessing of such investment goes beyond the headlines and the popular comments in the blogs.

The benefit is that with a minority shareholder of substance within Enemalta who can provide much needed external equity capital, the Corporation will be set on a serious road to recover its financial sanity.   Minority shareholders will impose discipline of governance and efficiency and Enemalta will no longer be perceived as a government corporation with a big daddy always ready with the cheque book to pay for its inefficiency.

Furthermore the news that:

"The agreement which is set to be finalised in six months' time also includes the setting up of a joint venture company in Malta specialising in the manufacture of photovoltaic panels with the objective being to enter the lucrative EU market."

and that

"In return the Chinese company as well as its subsidiary Shanghai Electric Power will be able to service its plants in Europe by calling upon the expertise of Enemalta employees."

means that Enemalta will have an avenue to re-deploy productively its surplus employees into export activities capable of making a significant contribution to new sources of economic growth.

There is no denying that the agreements, apart from aspects of political co-operation and nostalgia between the respective governments,  have  dimension of strong mutual economic benefit.   For Malta it is much needed foreign direct investment.  For China it is a smart and inexpensive way to penetrate EU markets with an investment which by China standards is pretty negligible but by Malta's standards is huge.

Welcome.

Time to shape up

This article was published in The Malta Independent on Sunday - 08 September 2013

Six months ago almost to the day, the PN got an electoral blow of unprecedented proportions.  Not only did they lose the election with a margin beyond their most horrifying dreams, but they were forced to admit that the party was in a deep financial mess, unable to pay its most basic commitments and basically needing a top to bottom makeover.

This rotten state was more than confirmed last Sunday when the party’s new General Secretary issued a brief statement saying that the last election campaign cost the PN just under €2.2 million which was €368 k short of revenue collected to fund the campaign.

It is symptomatic of the no-value-for-money metrics with which they were running the country. How could such a flat, disjointed and ineffective campaign cost the PN more than two million euro? It is a carbon copy of the state of the country they left behind with high debt level and poor infrastructure as reflected by the energy supply, road network and public transport.

The country needs a strong and effective Opposition. The government needs it too to remain faithful to its mandate, without getting too comfortable in their seats and remembering that the electorate retains a democratic choice.

Unfortunately, the evidence so far is that in spite of a total change in the leadership and administration line-up, the disastrous mind-set that led to the electoral defeat is too ossified to accept the new reality and shape up for the challenges ahead.

The performance of the Opposition in the Public Accounts Committee (PAC) when questioning the Auditor General on the Enemalta report is shocking. It was an outright assault on the institution of the National Audit Office (NAO) and had a clear objective of trying to discredit the NAO in order to gain cover for the gross faults of ex-PN Minister responsible for Enemalta between 2004 and 2011. The performance of the PN’s members on the PAC was so grossly out of order that at one stage it elicited from government’s members on the PAC a sin of reaction.  They made an equally wrong demand from the Auditor General to confirm corruption on the part of whoever was responsible for running the Fuel Procurement Committee (FPC) at Enemalta and of those that appointed them.

The Auditor General admirably stood his ground against both affronts.   The purpose of the NAO report was not to prove or disprove corruption.  It was to prove that the FPC was operating without even the most basic standards of governance and that documentation and records were so lacking and deficient that the whole fuel procurement process is basically incapable of being subjected to a proper audit.

Is it so hard for the PN to realise that having already paid the price at the last election for the faults of their ex-ministers, further efforts to defend the indefensible can only lead to their having to pay the bill over and over again?

The PN should move on. The election is some five years away. Simon Busuttil should borrow a leaf from Alfred Sant’s performance as Leader of the Opposition between 1992 and 1996 which led to his unexpected election victory. For the first three to four years of that legislature, Alfred Sant’s focus was inward looking, seeking to refresh the Labour Party, new headquarters and all, to face the challenges of the future. Sant did not waste energy and resources trying to defend the past.

What sense does it make to blow cases of administrative slip-ups, which can be written-off to inexperience on the part of any new administration, beyond all reasonable limits? Have the police never accused the wrong culprit? Does it really make sense to try to discredit the Police Board headed by a retired Judge even if the Opposition does not agree with its findings, which incidentally I find logical and sensible? Was the police catering unit set-up on 9 March? Have Secret Service appointments always been approved without the Minister’s nod even if not sitting at the interview process?

Why do I find the Police Board report logical and sensible you might ask?  In my area of expertise, if an operator makes a profit by operating outside the rules and another makes a loss by operating within the rules, you discipline the one who operated outside the rules and give whatever assistance is necessary to the operator who plays by the rules to improve performance, which in any case cannot and should not be judged by a single event.

It is all a matter of objectives. It seems that the PN have set their objective to denigrate whatever the government does so that they get elected by default. It does not work that way. Such an approach is diabolical persistence in the mind-set that the PN have a God-given right to govern this country, that Labourites are children of a lesser god and the electorate was grossly mistaken in voting the PN out six months ago and should not miss the first opportunity that comes along to correct their mistake.

The PN should set as their primary objective the rebirth of the party and accept that such a clear electoral verdict cannot be questioned - it has to be accepted without reservation. The decision to shift the party independence activities from the eve to the national day proper is a further sign that the PN have not yet understood what the electorate voted for last March.

Another re-birth is needed in economic policy thinking. As Europe struggles through the sixth year of recession, as recovery is proving slow and inconsistent, and as many countries are grappling with atrocious levels of unemployment especially among the under 25s, we must ask ourselves what changes are needed to the traditional tools of economic policy.

Fiscal policy has lost its effectiveness. Many countries have no fiscal space to manage demand levels in their economy. But we must ask ourselves whether it makes sense to be so rigid with 3% of GDP or similar limits without making any distinction between deficit caused by excessive consumption and deficit caused by financing of productive infrastructure investment.  

Monetary policy has been overused to make up for the deficiency in fiscal policy. But we are finding out that beyond a certain limit, excessive doses of monetary accommodation have the same effect of ‘pushing on a string’ explained by Keynes in the General Theory. Worse still, excessive monetary accommodation is economic uncharted territory. It could render its timely reversal destabilising and worse still, if such timely reversal fails, it risks sowing the seeds for future inflation.

And if fiscal and monetary policies have lost their effectiveness as the primary tools of economic management, what tools are left for economic managers to increase the potential productive capacities of their economies and restore economic growth to pre-crisis levels?

Probably it’s time to go to basics. It is time to bypass policies and act directly on the real economy. It’s time to ensure that banks in the euro area are re-capitalised, if necessary through the European Stability Mechanism and monetisation by the ECB, to start acting as banks and give credit to businesses and SMEs that are the real creators of new employment opportunities.  

It’s time for government to accelerate the regeneration of productive infrastructure irrespective of artificial budget limits. Good investment invariably repays itself through economic growth. It’s time for structural reform to be accelerated with further liberalisation of the product and services market, with added incentives for labour mobility throughout the EU and with countries in distress being aided through a Marshall Plan type of investment assistance for upgrading their education levels and fiscal enforcement systems. It’s time to think outside the box to get rid of this never-ending recession. 

The EU must focus once again on the Lisbon agenda, which has been forgotten or abandoned as the bloc has been consumed by endless fire fighting the crisis.

Complex issues have no quick fixes

Syria

Put on your day dreaming cap.   Let's assume that Bashar Assad wakes up next morning after a sleepless night with guilt of conscience for so much blood on his hands, and he agrees to resign and give himself up for fair trial at the ICJ at The Hague.

Assume this will greeted with a big sigh of relief world-wide that another bad guy has been taken out, that military action in Syria is no longer necessary and the Syrians may be allowed to decide their country's future without foreign interference.

What would happen to Syria as it is left with a power vacuum?   The experience of Egypt and Libya may be indicative.

The removal of a despot often creates a bigger problem than it solves.    The ideal would be that the vacuum would be filled by an effective system of democracy leading not only to free elections but to a participative democracy in full regard to minority rights.    But democratic culture roots slowly and in its infancy it is often quashed by bigger forces who are not prepared to wait to play the democratic game in order to get their seat of power.

The vacuum could be filled by extremists, fundamentalists or downright terrorists.  Sometimes it is better the devil you know.

German elections

The one and only direct debate between the major contenders has come and gone.   

Although the SPD pretender Pier Steinbrueck has been generally  awarded a narrow win on points, it was no blow out punch  and certainly not enough to erode the wide margin that incumbent Merkel has in the polls.

It is symptomatic of the general apathy of the electorates that the media paid more attention to the necklace with the national colours that Merkel wore than to the real arguments of the debate.

But at least Steinbrueck had the courage to  accuse Merkel of causing misery by imposing austerity on southern Europe.

"I would have followed a different crisis strategy. Of course there must be budget consolidation in these countries, but not a deadly dose," he said."Germany once got help too and we must not forget that. Germany was massively helped after the Second World War with the Marshall Plan."

Yeah Yeah Steinbruek!!   You would have got my vote if I had one.  I was not impressed by Merkel's necklace.

Economic policy

To taper or not to taper!!  That is the dominant argument in the US about the next steps in monetary policy.   I am sorry but we are really missing the wood for the trees.

Fiscal policy has lost its effectiveness.   Many countries have no fiscal space to manage demand levels in their economy.    But we must ask ourselves whether it makes sense to be so rigid with 3% of GDP or similar limits without making any distinction between deficit caused by excessive consumption and deficit caused by financing of productive infrastructure investment.  

Monetary policy has been overused to make up for the deficiency in fiscal policy.    But we are finding out that beyond a certain limit excessive doses of monetary accommodation have the same effect of ‘pushing on a string’ explained by Keynes in the General Theory.    Worse still excessive monetary accommodation is economic uncharted territory.  It could render its timely reversal destabilising and worse still, if such timely reversal fails, it risks sowing the seeds for future inflation.

And if fiscal and monetary policies have lost their effectiveness as the primary tools of economic management, what tools are left for economic managers to increase the potential productive capacities of their economies and restore economic growth to pre-crisis levels?

Probably it’s time to go to basics.   It is time to do the real economic restructure needed and to undertake the infrastructure investments  to increase the growth capacity of economies.   Rather than how much you spend it is more a case of how well you spend it.

I would rather have a 5% deficit to finance infrastructure investment that generates true economic growth rather than a 3% deficit that leaves infrastructure deficiency unaddressed while scoring political points to boost unsustainable consumption.