Sunday, 20 October 2013

The big picture

This article was published in The Malta Independent on Sunday - 20th October 2013

It was all so predictable. Like Berlusconi in Italy, the Republicans in the US had to eat humble pie.
Taking their country to the brink, threatening to render the US a pariah in the eyes of the rest of the world, posturing that they were prepared to allow their country to default on its obligations unless they were allowed to impose their minority view on the majority and then, right on the stroke of midnight, the majority view was finally allowed to prevail.
This is not the way to do politics. As President Obama stated in an address after he signed the bill that permitted the US government to re-open and the debt ceiling to be raised, the way to change things is not by holding the whole country hostage to your minority views. In order to change things you have to win elections. You have to have your views endorsed by the majority to gain a democratic mandate for change.
A lot of harm has been done to the US economy through this unnecessary debacle. And a lot of harm is still being done, as the patched up agreement gives a very temporary solution and there is every likelihood that the same game will have to be played again early next year. This insecurity could dampen consumer and business optimism, force the postponement of capital investment plans, entice consumers to buy just what is necessary and generally deliver a very flat Thanksgiving and Christmas shopping period – the tempo of which normally decides the rate of growth of the US economy, dependant as it is on consumer demand.
But the damage done goes well beyond America’s shores. Against most predictions – which had not taken into account the silly extremes of the Tea Party element of the Republicans in the US Congress – the debacle has weakened the appeal to international investors of holding dollars and instead we have seen a shift into other currencies, including the euro, with all its defects.
The fall of the US dollar against the euro and predictions that, until the US political debacle is finally resolved, the dollar may well fall further, has rendered the euro uncomfortably strong on foreign exchange markets. This goes diametrically against the interests of the euro countries in distress, that are undergoing painful internal restructuring processes to regain competitiveness, as it makes their challenges more uphill.
While Germany, competitive as it already is, can well live with a rate of exchange of $1.40 for every €1, particularly as Germany exports machinery and big ticket items where quality is more important than price, countries such as Italy, Spain, Portugal, Greece, Cyprus and Ireland, whose exports are more price-sensitive consumer goods and services, will see a rate of $1.40 neutralising most of the efforts made internally to regain competiveness at great political and social cost.
If this situation is prolonged, Europe must defend its own. The social tensions in distressed countries have rendered political stability extremely fragile. People cannot give democracy a fair chance forever if it fails to meet their rightful expectations. If round after round of austerity and sacrifice do not deliver growth, people cannot be expected to continue pursuing a painful policy where the light at the end of the tunnel keeps moving further away, rather than bringing redemption closer.
If a few US Tea Party Congressmen can hold the US hostage and, through the impact of their actions on exchange rate mechanisms, nullify the hard work of workers in distressed EU countries, then sooner or later the latter will decide “to hell with globalisation”.
Although the central banks of all other large, industrialised countries have adopted an ultra loose, unconventional monetary policy to ease their countries towards economic growth after the financial crisis of 2008, the same cannot (yet) be said of the European Central Bank (ECB). The US Federal Reserve, the Bank of England and the Bank of Japan have all conducted various rounds of quantitative easing (QE: a polite term for creating money artificially by the central bank entering the market to buy long-term bonds with newly-printed/created money) when bringing the interest rate to zero proved to be not sufficiently stimulating.
The ECB has shied away from such interventions for two reasons. Firstly, because it is not clear whether it has the mandate to do so, given that its constitution gives it the sole objective of keeping inflation close to but under two per cent and does not specifically make it responsible for economic growth; and, secondly, because – being the only large central bank that is not supported by a single treasury but has to deal with the 18 treasuries of its constituent countries, all of whom operate their fiscal policy independently of each other – there would be practical problems with the ECB deciding whose bonds to buy, even if it wanted to pursue QE.
But this does not mean that the ECB should just sit on its hands, given the unfair events happening on foreign exchange (forex) markets. It may well have to see the big picture, rather the granularity of the legalities in its mandate, and rightly uphold that it is within its mandate to remove anything that blocks the transmission mechanism for its monetary policy, especially when the readings of inflation start to consistently underscore the two per cent target and hover dangerously around deflation levels. With inflation falling to around one per cent, the ECB may well be forced to intervene on forex markets, initially through verbal intervention by merely indicating that it is considering a choice between QE and negative interest rates in order to bring the euro forex value down to levels that remove unfair obstacles to countries undergoing painful economic restructuring.
Staying upright and sane alone, when all around you are going wild, may well be deadly when business is taken away from you through unfair practices. In such circumstances, sanity can kill you and you have to defend yourself in order to survive instead of merely preaching virtues.
Something along these lines applies to Malta when dealing with illegal immigration. It is all well and good that we have to honour international and social obligations by saving lives and giving shelter to immigrants who force their way on us through illegal channels. But that is the narrow picture. The big picture is that, in doing so, we are encouraging more and more immigrants – whether purely economic migrants or genuine refugees is not yet clear – to risk their lives taking to sea in rickety, overcrowded boats that are not fit for purpose.
And the more risks that are taken, the more tragedies will occur and the more exposed will be the dishonesty of north European countries who are pretending that southern European border countries, many of which are already grappling with nerve-wrenching economic restructuring programmes, can handle the burden of such illegal immigration without solidarity and determination to resolve the problem at its source: before these immigrants leave their countries and embark on boats of death.
And those who totally deny “pushback” policies, whatever the circumstances, should see that their conscience-pricking is playing into the hands of the merchants of death who remorselessly continue trafficking people and sending them to their death purely for financial gain.
It is time to see the big picture.

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