FX thoughts at end of year

This is hard to understand and much harder to explain.

How can it be that among the major economies the Euro area is the one struggling most to come out of a never ending recession following the financial crisis and yet during 2013 the Euro strengthened against all major currencies:

+26.42% against the Japanese Yen
+21.21% against the Australian Dollar
+ 4.28% against the US Dollar
+ 2.30% against the GBP sterling
+ 1.46% against the Swiss Franc.

Probably the reason is that all international currencies have a single Treasury in charge of guarding competitiveness by managing the external value of their currency through verbal or actual intervention with the help of their respective central banks.

In the Euro area no single federal government is charged with managing the external value of the Euro and the ECB cannot take initiatives to do what governments should be doing.

My hope and wish for 2014 is that the markets are kinder to the Euro to give a chance for boosting export competitiveness in crisis countries like Italy Spain Greece and Portugal and help create sustainable new jobs.

But the question remains: who's minding the Euro shop to ensure that it stays at a level of external value which protects competitiveness and guards against unfair devaluations of other currencies?

Unemployment can't wait

This article was published in The Malta Independent on Sunday 29 12 2013:

In my library I have a particular section for biographies. I rarely read any fiction, Harry Potter excluded, but in-between reading technical books about finance, economics and geo-politics, I find a good biography instructive and relaxing.

Amongst other Christmas presents I received three biographies: Anton Buttigieg’s Mill-Album ta’ Hajti; Nelson Mandela’s Long Walk to Freedom and Javier Zanetti’s Giocare da Uomo.

Those who know me would testify that I am logical person through and through, except where football is involved where I am an irrational fan of Inter to my last bone and Javier Zanetti, Il Capitano, is my idol not just as a player but also as a person. The picture I took with him at his restaurant in Milan on 24 February 2010 after Inter had beaten Chelsea in a Champion’s League clash, serves as wallpaper on my laptop and PC and the same picture he autographed for me hangs in my private study.

Warmed up by last Sunday’s Derby win over Milan, and desiring to relax a bit from routine reading over these holidays, I temporarily put aside Joseph Stiglitz’s latest The Price of Inequality that I was reading and read through Zanetti’s autobiography as he related it to professional writer Gianni Riotta.

Whilst Italian is not a totally foreign language to me, I would much prefer to read an English version when there is one, but this book is still brand new in its original Italian version and I read it over a couple of days much more easily than another book in Italian I recently read: Lorenzo Bini Smaghi, ex member of the Executive Board of the European Central Bank (ECB) Morire d’Austerita. Bini Smaghi would have been Governor of Italy’s Central Bank, had he not been unlucky in having the nomination early under Berlusconi’s tenure as Prime Minister, when Mario Draghi was nominated President of the ECB and had to vacate his post as governor of Banca d’Italia.

Morire d’Austerita builds on economic concepts that the restructuring of EU countries in distress have to conduct to render their economy competitive again cannot be successfully executed in a context of austerity: austerity in the context of a recession becomes a poison pill that could kill the patient rather than cure him, hence Morire d’Austerity – Dying of Austerity.

Back to Zanetti, his book provided the detail in the general story that I already knew. How the young boy, passionate about football, was denied a place in the academy by the Argentine team Independiente as they considered him physically too weak for professional football, but how with determination the poor boy from a builder’s family made it to professional football after he had spent time helping his father on construction sites or distributing milk in the early morning hours before attending training when a football apprenticeship was finally given to him by a 2^nd division team.

Zanetti is respected by foes and friends alike. He is the gentleman of football and he plays the game because he likes it and is passionate about it. At the age of 40, when many other players who retire without serious injury would be in their fifth year of inactivity, Zanetti is still paying at his best and he defied the laws of nature in coming back swiftly from a serious injury in the Achilles tendon that would have ended the career of younger players who do not have the same level of unique dedication and self-sacrifice as Zanetti. What is so impressive about Zanetti is that he is a master of how to handle success. So many celebrities have been destroyed by their inability to cope with the success that their talent, once discovered, pours on them when they are unprepared to handle it.

Zanetti never forgot where he came from, never makes headlines for the wrong reasons and dedicates his life outside sport mostly to his personal foundation to fund charity work among the poor children of Argentina.
In his 20 years of professional football he has won every honour that club football can give, even though in truth the honours came rather late after he had spent the first 12 years of his career with little to show for it. But his determination and allegiance to his club’s colours (he refused a lucrative transfer to Real Madrid that any other player would have not thought twice about) finally paid off when, in 2010, he won all that was there to win in club football. Unfortunately, although he was captain of the Argentine national team and is still the most capped player, he never won any honour with Argentina whose last trophy goes back to 1993.
But it is typical of Zanetti’s dedication to his mission that, at age 40, and after he was mysteriously not selected for his national team in the last two world cups in 2006 and 2010 where Argentina fared very badly, he is still hoping that he can represent and captain his country in the coming Brazil world cup this summer. Truly Zanetti has learned how to wait and keep focussed on his objective until success finally crowns hard work.


What cannot wait is the critical unemployment situation amongst the youth in crisis euro countries. Can you imagine what sort of Christmas was had by the youth unemployed in Spain, Italy and Greece, where 50 per cent of them are without a job and, worse still, cannot see any reasonable prospect of getting one in 2014?

Unemployment, unlike Zanetti, cannot wait. The recession in Europe crisis countries is now entering its sixth consecutive year without an end in sight. A whole generation is being lost and as these young people will vote when elections come along, who can blame them if they lose faith in all traditional parties of the left or right and go to the populism of extreme parties that dangerously offer mirage solutions that will undermine democracy and social cohesion, in short will destroy the basic values for which Europe stands.

Germany is forgetting that a Versailles approach by the international community served on it after WWI led to the rise of extreme Nazism that led to the atrocities of WWII. It was the Marshall Plan after WWII that brought peace, stability and prosperity.

Forgetting what has worked and what has not worked is leading Germany to escape its solidarity obligations to help countries in distress not only to keep them in the euro but to restore them to health and to facilitate their restructuring programmes. Fifty per cent youth unemployment, and banks that cannot lend to the small industries that create jobs, cannot be a fair way of restructuring problem countries back to health.

The Banking Union cannot wait 10 years to build up the funds to render the safety of banks in peripheral countries unquestionable. These banks have to be recapitalised here and now with shock and awe recapitalisation, which could be funded through one shot monetisation by the ECB. If the rules do not permit this, let’s change them. Such monetisation can be reversed when these banks become commercially attractive again and the private sector becomes interested in buying back into their equity.

The problem is here and now. The solution to 50 per cent youth unemployment cannot wait 10 years purely to avoid exposing German taxpayers to any funding risk, forgetting how much they were helped when they needed it.

Post-Christmas reflections

Reflection No. 1 - Citizenship

The changes made to the Individual Investor Programme, generally referred to as the citizenship scheme, address  all objections raised by civil society and the private sector.

The scheme has been capped at 1800 applicants which will defuse all apprehensions from EU partners that Malta is abusing its EU membership acting as a conduit for wholesale back-door admissions of non-EU persons.

The need to make hard investments in government bonds and immovable property worth an additional EUR 500,000 on top of the EUR 650,000 fee that has to be paid on acceptance, establishes a minimum level of bonding between the new citizen and his new country that can only increase over time as the benefits of citizenship grow on successful applicants.

The Opposition has remained quite isolated objecting to the Scheme on the basis that citizenship should only be granted after a period of some five years involving minimum residency conditions.

Any such condition would have killed the Scheme before it is born considering that other EU countries offer similar benefits ( i.e. very light residency rules which lead to full citizenship within five years) without the need to pay EU 650,000 up front.    Other EU countries only oblige applicants to buy property as low as EUR 250,000 and to visit just once a year and then after some five years during which they would still enjoy Golden Visa to travel throughout the EU without hindrance, they would qualify for full citizenship.

Why did the PN choose to isolate themselves rather than take credit with government for making the Scheme more acceptable?   I cannot help feeling that the PN objections to the Scheme were not based on principle, but on fear that its success will reward Labour government with substantial resources that would permit it to deliver and go beyond what it has promised in its electoral manifesto.

Reflection No.2- Unemployment can't wait

Can you imagine what sort of Christmas was that of the youth unemployed in Spain, Italy and Greece where 50% of them are without a job, and worse still cannot see any reasonable prospect of getting one in 2014?

Unemployment can't wait.   The recession in Europe crisis countries is now entering its sixth consecutive year without an end in sight.   A whole generation is being lost and as these youth will vote when elections come along who can blame them if they lose faith in all traditional parties of the left or right and go to the  populism of extreme parties that dangerously offer mirage solutions that will undermine democracy and social cohesion, in short will destroy the basic values that Europe stands for.

Germany is forgetting that a Versailles approach by the international community served on it after the WWI led to the rise of extreme Nazism that led to the atrocities of WWII.   It was the Marshall Plan after WWII that brought peace, stability and prosperity.

Forgetting what worked and what has not worked is leading Germany to escape their solidarity obligations to help countries in distress not only to keep them in the Euro but to restore them to health and to facilitate their restructuring programmes.    50% youth unemployment, banks that cannot lend to small industries that create jobs cannot be a fair way how to restructure problem countries back to health.

The Banking Union cannot wait 10 years to build up the funds to render the safety of banks in periphery country unquestionable.  These banks have to be recapitalised here and now with shock and awe recapitalisation which if necessary have to be funded by monetisation by the ECB.   If the rules do not permit that let's change them.    Such monetisation can be reversed when these banks become commercially attractive again and the private sector can become interested in buying back their equity.

The problem is here and now.  The solution to 50% youth unemployment cannot wait 10 years purely not to expose German taxpayers to any funding risk, forgetting how much they were helped when they needed.

Pre-Christmas reflections

Reflection No. 1 - A Christmas present to the nation
A compromise solution between the government and the opposition regarding the Individual Investor Scheme would be a nice Christmas present to the nation.

Government has already agreed to lift the secrecy provisions included in the original version.  Negotiations have continued in earnest related to differences about the requirement to make investment and residency as a form of bonding before individuals qualify for citizenship.

A compromise is possible.   Government should concede a quota to ensure this is a very selective exercise not a wholesale arrangement.  The fee of Euro 650k, increased if need be, may be converted into a long term investment in a development or sovereign wealth fund.   The residency requirement should be handled carefully as any hard stipulation about it could put us out of the game when other EU members states have very relaxed residency conditionality to similar visa  schemes.

Reflection No. 2 - Success often means self destruction to its authors

Life often presents leaders with hard choices.   Success could often depend on their self-destruction.

Take former German Chancellor Gerhard Schroeder.  He engineered the social changes that has turned Germany from being the sick man of Europe, as it struggled under the weight of integrating the East, to the economic champion it is today.   But for that he was punished with an electoral defeat in 2003 as at the time he could only show the pain and not the gain that came after.   The gain was enjoyed by Chancellor Merkel who is entering her third consecutive term as Chancellor.

Another example of this hard reality is the Gdansk shipyard in Poland.  It was where the trade union Solidarnosc movement was born which led to the resistance which brought down the USSR and liberation of former Soviet satellite nations in the Warsaw pact.   In 1980 it employed 18000 workers including Lech Walesa, the leader of Solidarnosc and eventually a President of Poland.  The Gdansk shipyard was part of the core industry in communist Poland.

Now it employs 1200 workers and is heading for its third bankruptcy since it was partly privatised.

This explains why change is so difficult to administer and why often it is easier to defend the status quo.  The status quo defends narrow interest and prejudices wider ones.  Change challenges narrow interest of the change motivators but enriches wider sectors.

The true heroes are those ready to self-sacrifice for the common good.

Reflection No. 3 - Banking Union proposal is detached from reality





















A viable banking union is important for the survival of the Euro and the EU.   Without it we will have a banking crisis and the prolonged recession in distress countries will never end.  Indeed it could turn into depression as weak banks withhold credit and the single EU market for banking services remains a dream as banks in surplus countries don't trust banks in deficit countries.  It is the cruel truth that banks are international in life and national in (troubles threatening) death.

The problem with banks in peripheral countries is here and now.  Unless banks in Spain, Italy, Greece and Portugal are rendered capable of performing their true function of extending credit especially to small and medium sized companies who have no access to capital markets, the economy of these countries will remain in recession in spite of the restructuring pain they are going through.

The agreement reached at last week's EU summit, as usual after facing tough German resistance to ensure that they do nothing that could endanger their taxpayers' money in any show of European solidarity, especially if that could be challenged in front of German constitutional court, projects the painful process of finding a long term solution to funding the Banking Union rescue mechanism through bank contributions collected over a period of 10 years.   Even then the amounts projected are nowhere near what could be required in a financial crisis of the 2008 type.

The ECB rightly pointed out that the scheme put together was too complicated, was insufficiently funded, and could not be put into practice with the speed required to head off a crisis.   The Germans remained adamant and as usual it will take a market challenge to force a crisis for a proper architecture of the Banking Union to be put in place at one minute to midnight.

One of the founders of the EU once wisely said that in the EU big decisions are only taken when forced by crisis.   The EU is taunting the markets to bring along the next crisis.

Contrast that with the US approach where they rolled out the TARP at second attempt putting together a shock and awe sum of USD 700 billion instantly which could be further leveraged up to re-capitalise instantly its weak banks.   The result is that the US is now out of recession and enjoying an impressive recovery, whereas the Euro area, or parts of it, are risking deflation.

Clearly Germany's current leaders do not want to self sacrifice themselves like Gerhard Schroeder did.

Getting serious about tax evasion

This article was published in The Malta Independent on Sunday - 15.12.2013

It is quite shocking that reliable studies put the size of Malta’s black economy as high as 25% of the GDP. The black economy can never be fully eliminated, and perhaps in small doses it is beneficial in getting things done by oiling the wheels of the measured economy.

But at 25%, Malta ranks among the highest in the EU and reaches a level that becomes socially offensive and economically unacceptable.

We have had every newly elected government promising war on tax evasion. We have had several amnesty schemes offering tax offenders a chance to come clean and turn over a new leaf. On each and every occasion such amnesty schemes were described as the last opportunity to redemption before offenders faced the rigours of tax enforcement with all its consequences.

I remember the tax year holiday given by the first Labour government of the seventies when it introduced the PAYE and Provisional Tax mechanisms.  There was the tax amnesty given to businesses before the introduction of VAT in 1995 where they could declare their under-reported stock in trade. Between 2001 and 2003, there were several versions of a scheme permitting undisclosed registration of undeclared overseas investments against the payment of a meagre penalty of between three and five per cent of the declared value.

In 2007, before joining the euro, a similar tax amnesty was offered to local investments and undeclared holding of cash to facilitate the conversion from Maltese lira to euro.

The fact that the new Labour government has announced through the Budget speech for 2014 yet another such tax amnesty under the heading of Investment Registration Scheme, is perhaps the biggest proof that such past amnesties have not delivered on their objective of achieving better tax compliance.

While it has not yet defined the assets that will be eligible for registration under the new scheme, one struggles to think of any type of assets that has not had ample opportunity to come clean through past amnesties. One is therefore tempted to argue like Einstein that it is insanity to try the same thing over and over again and expect a different outcome.

Perhaps the only asset that has not benefited from past schemes represents private loans given to commercial organisations by way of directors’ or shareholders’ loans. There may a valid argument to offer these types of assets the opportunity to benefit from a tax amnesty as other types of assets have benefited through past amnesty schemes, in the interest of equitable and fair treatment and to avoid discriminatory treatment of tax offenders.

There is a serious risk however that such schemes work against creating a culture of tax compliance and fiscal morality. It portends to tax offenders that they can live with the comforting knowledge that they can come clean about their tax evasion by paying a small fraction of the taxes they should have paid in the first place; that immediately after registration they can start using the funds in the normal economy without any risk of tax consequences; and that they can continue with the old games of tax evasion on future earnings as at some point in time in the future another new administration will again offer another amnesty and they again will be able to catch a future bus paying a cheap fare to tax compliant destination.

Indeed, such schemes could be very offensive to compliant taxpayers as they are made to look like fools for abiding by the law. It gives incentives to switch from being compliers to becoming evaders rather than the other way round.

This would go against another initiative announced in the Budget Speech where a tax evasion awareness campaign has been promised in the first quarter of 2014. This campaign, apart from increasing awareness about the good causes to which taxpayers funds are applied in order to sensibilise taxpayers that their contribution is a fair price to pay for living in a civilised society, is meant “to highlight the initiatives which Government plans to take to address tax evasion and tax avoidance”.

Unless government wants to send conflicting objectives where it massages tax avoidance through yet another run of the mill amnesty scheme with one hand and launches a campaign to instil fear in tax offenders with the other, the new tax amnesty has to be different from its predecessors’ versions. Otherwise the insanity charge Einstein made would apply to us fairly and squarely.

It has to be different in these ways:

a.     A good portion of the funds raised by the Registration Scheme has to be directly allocated to beef up the investigative resources of the Revenue enforcement structures.

b.     The Registration Scheme has to be on a fully disclosed basis so that the Revenue Authorities are fully aware of who registered what. Otherwise too many of the scant resources at Revenue Enforcement gets wasted as it is spent chasing tax misdeeds that had already bought, on the cheap, a tax amnesty on an undisclosed basis.

c.      Tax revenue structures which protect anonymity need to be re-visited to take account of present realities where the risk of capital flight from full disclosure is practically non-existent given that moving capital across borders is difficult because of stringent money laundering regulations and is still captured by global tax co-operation schemes like the EU Savings tax directive. Why should the state promote non-disclosure of people who are actually paying their taxes at source in full compliance with the tax laws?

d.     The tax charge applicable to benefit from the amnesty has to do justice to compliant taxpayers rather than motivate them to move in the opposite direction.

If we are to get serious about tax enforcement and tax compliance we cannot have yet another scheme meant to produce some instant revenue while jeopardising future tax flows. This one must be seriously structured to persuade taxpayers that there will never again be another tax amnesty scheme and that Revenue authorities are being given the tools and resources to trace, capture and punish tax offenders.

We can only afford to keep our deficit targets, sustain our social programmes, and reduce tax burden on fully compliant taxpayers if the State collects what is actually due and reduces the black economy to a level, I would say not exceeding 10% of the GDP, where it is not socially offensive and where it would be counter-productive to force it down further.

If government succeeds in this objective, the revenues it expects from the IIP scheme can either be done away with completely or the IIP could be subjected to very restricted quotas which would completely remove the perception of launching the indiscriminate sale of Maltese citizenship to plug some unbridgeable budget hole. It would help to emphasise that the main benefit of the IIP is the networking and potential for inward direct investment not the upfront payment.

A bouquet of reflections

Reflection No 1 - Mandela

One of the greatest man of last century has passed away. What impresses me most about Madiba is the consistency of objectives and the flexibility and pragmatism of the tools used to reach those objectives.

His objective was always to unite SA as one nation for black and whites with equal rights and opportunities. The tools changed from non violent protests, to violent reactions, to forgiveness and inclusion.

27 years in prison purely because he could not tolerate injustices would have broken most but not Mandela.

Rough justice made him live till 95 because his devotion to the mission made him waste 27 of them locked away in a prison cell.

Reflection 2  -  Oil Scandal

In giving evidence this week in court the beneficiary of the Presidential pardon of the oil scandal who is bound to say the truth and nothing but the truth implicated involvement of an ex ambassador who demanded his cut from the goodies.

Are the police going to show the same haste they showed when they charged my brother Tarcisio before the election in a clear effort to divert political damage onto people of Labour's creed?

Ask anybody around and you get the same answer.  When Tarcisio was at Enemalta until 2003 things in oil procurement were always fully documented and done with high standards of corporate governance.  If anything the criticism against Tarcisio was that he was too doggedly rigid in defending his employer's interest.

That's Maltese justice!  Before elections police are very selective in their operations trying to please their political masters.  After the elections one gets the impression that anything goes.

Reflection 3 - IIP

Minister Scicluna has not criticized the Scheme. He has criticized the undue haste with which the Scheme was marketed and the wrong perception projected that passing through the due diligence test was mere formality.

As to the substance of the Scheme the only new things which Scicluna has said is that government could enforce strict quota on the Scheme and may consider some form of minimum residency.

This is a highly divisive issue about which government has not defended its position as well as it should.  It makes sense to keep consultations and efforts for consensus going over festivities but after that government has to decide.  If no consensus can be reached it has to execute or scrap its IIP plans.

After all it is becoming clear that the PN have no intention of reaching consensus in a fair way but only to force government into submission to score political points.

Reflection 4 - Health service

It is ironic that in discussing problems with Mater Dei and the Public Health Service a mistake is being committed which the medical profession is trained to avoid.  We are treating the symptoms rather than the cause.

The cause can only be treated if we ask ourselves the relevant questions and give honest answers:

CAN WE AFFORD TO KEEP UNIVERSAL FREE ENTITLEMENT?

IS IT SOCIALLY CORRECT TO DO SO?

Maltese gemgem

Is it because the forces that had grown comfortable till last elections are finding it hard to adjust or is this just another case of Maltese gemgem?

Apart from the false tears being shed about the IIP now we have two other cases where Maltese gemgems are venting their frustration.

MEPA's approval of the Mistra development may be atrocious and environmentally unfriendly.  I don't like it and would not buy property there.    But the fact remains that an Outline Development approval was issued by the previous government.

I don't understand what made the Planning Ombudsman argue that MEPA had the right to revoke the Outline Permit and refuse issuing the full development permit.   But just imagine if MEPA did just that.  Can you imagine what dangerous precedent would have been created?

Hate it or love this country needs a certain volume of building development going on to keep the economy going.   MEPA is there to ensure that such development follows certain environmental standards and is executed with taste.    If MEPA were presented today with an Outline Permit application for the Mistra development there would be a strong case for arguing against it as in my opinion the project is environmentally offensive and quite tasteless.

But MEPA did issue its Outline Permit under the previous administration and wonder of wonder those now shedding crocodile tears were relatively silent then.   

As normally happens once an Outline Permit is issued MEPA and the developer work together to generate the details needed for the issue of a full permit.   But the developer knows that in the end the full permit will be issued on the basis of the Outline Permit and substantial investment in planning and financing the project is incurred.    If MEPA were to use purely the change of administration or change of policies to refuse issuing the full permit it would be exposing itself to substantial claims and damages from the developer.

But worse than that the government would be accused as the hidden hand behind MEPA playing the big brother and disrespectful to the rule of law.     Just imagine if precedents are created where Outline Permits are not worth the paper they are written on and full development permits would be necessary for having a safe case to invest money in property development.   Entrepreneurial risks risks would multiply, banks will not consider any project financing before the full permit is in hand and investment will simply be scared away leading to economic under-performance.

Or is it a case where those who were comfortably quiet before last elections but have now discovered their long unused protest voices are merely putting spokes in the wheels in the hope of actually forcing economic under-performance?

Take the other case about the presidential award of Gieh ir-Repubblika given to GAIA the young singer that made us proud for winning the Junior Eurovision in style.

Even if hypothetically those who argue that the award was inappropriate, given the age of the awardee, are right, do they need to make such a mountain out of a molehill and in the process ruining the moment of glory for our young singer.

And if such Gemgems want something to complain about they should make an inventory of the many monuments and plaques paying homage to fully aged politicians who did pretty little for the country to earn recognition.   At least GAIA competed and won.

The lines are drawn

This article was published in The Malta Independent on Sunday - 01 . 12. 2013

This last week, the lines have been drawn on several political and economic battlegrounds.

In Italy, the ousting of Berlusconi from the Senate, and the splitting of his party into hardliners who have joined the Opposition and middle-of-the-roaders who have opted to continue as members of the governing coalition has more clearly defined the political landscape. At last Italy has a government that need not continuously look over its shoulders to guard itself from the enemy within.

Prime Minister Letta has greatly enhanced his political credentials and now has the strength to look Merkel in the eye when negotiating how best to restore growth in the European economy and address the atrocious chronic unemployment levels. Italy now has the levers to force pragmatism over economic Talibanism fighting inflation that does not exist and ignoring unemployment that is all too real, especially among young people, leading to a lost generation.

The Italian government has a short-term mandate. It plans to stabilise the economy and change the electoral law during 2014 and then hold fresh polls in 2015. Unless the EU helps Prime Minister Letta to continue with restructuring in the context of growth rather than counter-productive austerity, there is a grave risk that the Italian electorate will send Europe a protest vote that puts back into power populists like Berlusconi and Grillo. That disaster came close enough in last February’s elections and could well be realised if the Italians are forced to vote with emotion rather than logic. That would practically mean the end of Italy in the eurozone and, by implication, the end of all that the EU and the euro stand for.

Lines were also drawn in the German political landscape. Dynamics in Germany are moving in the opposite direction to Italy. While the dynamics in Italy have now clearly made a distinction between the centre/left in government and the extreme right and protest vote in Opposition, in Germany the dynamics have led to a grand coalition of the right and left. I view this positively. The concessions that Merkel’s conservative CDU/CSU had to make to get the socialist SPD on board mean that Germany will have to loosen up and restore purchasing power to consumers and stimulate a shift from investment to consumption. The minimum wage and the lowering of the pension age could well force German industry to move to other lower cost locations within the EU, helping to rebalance growth across the region. Addressing the surplus built by Germany will make correcting the deficits in problem countries somewhat more manageable.

What still has to be seen is how the important ministries will be shared among the coalition partners, in particular who will occupy the Foreign and the Finance Ministries. Especially in the Finance Ministry and in the Bundesbank (the German Central Bank), there is an acute need for a fresh approach to resolving the euro’s problems.

In fact, battle lines have also been drawn on the turf occupied by the European Central Bank (ECB) and German finance authorities, in both government and the central bank. A major point of principle is being fought over: will the ECB be a replica of the Bundesbank dressed in European clothes, or will it truly be a central bank operating in the interests of the whole euro area? That is the question that needs to be resolved, and the earlier the better.

The lines were drawn when, at the last meeting of the ECB on 7 November, the Council decided by a large majority to cut interest rates by a quarter of a point to 0.25 per cent. Faced with a situation where the inflation rate is rapidly falling below the target of two per cent, and coming dangerously close to the zero level, the ECB’s hands were practically forced to loosen monetary policy further.

But the ECB council members from Germany and other allied North European countries voted against the rate reduction, arguing that it was too low for their domestic economic realities. ECB president Mario Draghi – and the majority – argued that the rate decision had to take account of the realities in the whole euro area and not just in the northern countries. And they carried the day, much to the dismay of the German group, who then decided to leak their dissent outside the Council.

Whilst Draghi made sincere efforts to play down the differences, arguing it concerned more the timing than the principle of the rate cut, the German reps externalised their dissent and their disappointment that they could not sufficiently ‘Germanise’ the ECB.

But the battles have not ended with the decision to cut the interest rate. There is an evident conceptual clash round the ECB table, and the matter needs to be settled without further delay, as the risk of a relapse into recession and deflation in Europe is getting ever more real. While the US economy seems to have entered a solid recovery trajectory to which it was guided by ultra-loose monetary policy including aggressive quantitative easing (QE – monetisation of purchases of long-term bonds to also bring down long-term interest rates) and by the forced recapitalisation of banks to remove any doubt about their ability to extend credit and act as an efficient transmission mechanism for monetary policy instruments, Europe is still staring at the abyss of deflation without its Central Bank having as yet embarked on QE.

Deflation is far more treacherous territory than inflation. If consumers slip into a frame of mind that tomorrow one can buy more cheaply than today, deflation will be a spiral building on itself as consumption stalls and investment is postponed. Recovering from deflation would be like trying to run uphill while skidding down to the bottom. The last deflation of the 1930s needed the catharsis of a global world war to address it.

The ECB has a choice to make if the situation continues to deteriorate: either introduce the US and UK (and now Japan, too) style of QE or continue reducing interest rates to zero and below, introducing negative interest rates. Negative interest rates mean banks charge depositors when accepting their deposits rather than paying them interest, in an effort to persuade investors to spend rather than save.

Negative interest rates are within the mandate of the ECB as they are a pure monetary instrument, but they represent uncharted territory with huge potential for unintended consequences. QE is an unorthodox monetary measure that impinges on fiscal policy. The Germans argue that QE is outside the mandate of the ECB, as it is only tasked to make stable prices as its objective with no brief for economic growth and employment levels. But QE is charted territory and is easier to implement and fold back with far fewer unintended consequences than negative interest rates.

Should the ECB force Germany’s hand to lift objections to potentially outside mandate QE with the threat that the alternative of negative interest rates would be more risky even if within the mandate? Some argue that QE is not outside the mandate of the ECB, even though it is not specifically allowed. If QE is adopted to repair the transmission mechanism for monetary policy decisions, then it falls within the mandate as the ECB cannot tolerate a situation where its monetary policy decisions are sterilised by a broken transmission mechanism.

And we seem to be inching towards drawing some political battle grounds in Malta too. Following 25 years during which the Labour Opposition gave the PN government a consensus for building the financial services industry to where it is today, the signs are that the PN have not yet adjusted to their role in Opposition. They expect the view of the minority to prevail over the view of the majority. Their understanding of consensus seems to be ‘my way or the highway’. That is the only thing I could conclude when I heard the Leader of the Opposition denigrating Malta’s image in the foreign media, giving the impression that Malta is about to sell citizenship wholesale to the most undesirable characters, and announcing that he is participating in further rounds of negotiations with the government about the citizenship scheme but would only give his consensus if his conditions are met.

The Leader of the Opposition has threatened to unconstitutionally revoke the Labour government’s contractual commitments if he is ever elected to power, has declared that he is prepared to sit on the governing board of the Scheme only to externalise its details, and has now agreed to attempt consensus negotiations with prior declarations of ‘my way or the highway’. In the event of no agreement, he has indicated that he may consider an abrogative referendum.

Here, too, the Opposition is on treacherous ground – both legally and morally. Legally, because the scheme can be interpreted as fiscal legislation, given that the government has included €15million of revenue from the scheme in the 2014 Budget and fiscal legislation is specifically excluded from the Referenda Act and morally because if the abrogative referendum mechanism is used so liberally just because a person cannot accept that the executive power has been passed on, then the PN needs some lessons in accepting that they are no longer in government. I know that after 25 years this does not come easily, but come it must.

Who is really the client?

This article was published in The Times on Friday 29.11.2013

A lot has been said about the citizenship scheme, technically known as Individual Investor Programme (IIP). Critics have divided themselves in two camps. Those who oppose the scheme as a matter of principle, whatever the terms, whatever the conditions and those who seem to oppose whatever innovations come from the government’s side but are quite willing to support the scheme on the lines proposed by the Nationalist Opposition.

For those who oppose the scheme as a matter of principle I have nothing but respect. My only addendum would be that if they think that citizenship should be strictly reserved for people born in Malta and their offspring, they should also oppose current schemes offering citizenship to foreigners who marry Maltese citizens and reside here for five years and other such schemes that extend citizenship to people other than those with Maltese blood in their veins.

As to the others who would not oppose the scheme on principle but feel that the government’s model is too lax, I understand that they would only support the scheme if it carries the following conditions: strict disclosure accompanied by rigid KYC (know your client) procedures to ensure access to citizenship is denied to unsavoury characters who think their money can buy anything; obligation to make investments in Malta to promote economic development; and minimum residency obligation.

People do business with people they know and people they like once bottom line criteria are met

The first objection has already been taken on board and the government has announced that although full disclosure would reduce the marketability of the scheme (some potential clients would not wish the authorities in their country of birth to know of their choice to acquire a second citizenship) it will adopt full disclosure following robust due diligence procedure.

The government also confirmed that the final decision on whether to grant citizenship will not be outsourced. It will only be taken by the government.

Regarding the other two conditions, in an ideal world they ought to be taken on board too. But this is not an ideal world. Far from it!

So before suggesting conditions one should ask who are the potential clients of the IIP scheme. Only when we have a clear idea of the attributes of potential clients can we make an assessment of what maximum conditionality would keep the scheme marketable. As many other things in life, the citizenship scheme comes wrapped in paradox. If we make conditions regarding investment and residency we may be addressing our offering to people who do not need it. People who make such investments can gain right of residency and if desired tax domicile in many countries.

By offering what the Opposition seems to be insisting upon we would be largely making our scheme unsaleable. It’s like when the PN government suddenly decided to change the rules for acquisition of property with right of residency by non-EU nationals and, cold turkey, killed a market that was flourishing. Do we want a repeat of that? Do we want to kill the IIP before it is born?

The question is who needs citizenship and is prepared to pay a million dollars for it? Note that I said pay not invest.

Investment means clients can get their money back once they decide to cash out their investment. But paying a million dollars to acquire citizenship under the IIP scheme is a one-way payment. It’s a fee. It’s not refundable.

So who needs such expensive rights to a second citizenship and is prepared to subject oneself to tough due diligence process?

Such citizenship would interest successful entrepreneurs in countries that suffer political instability due to external threats or internal problems. They have no immediate intention of leaving their original country of birth or acquired citizenship where their business is still evolving.

They are not interested in taking up residency in any other country and they mean to continue living in their country of primary citizenship. But they need an insurance policy that if the perceived threats turn real they would need to relocate to a country they can still call home.

Imposing investment and residency conditions to such potential clients would mean blocking them out. On the other hand, awarding citizenship to such clients on government conditions subject to rigorous due diligence would mean that such clients will be willing to pay one million dollars for the privilege, they will probably visit on holiday and will probably be interested to buy real estate here to enjoy their visits. And, gradually, as Maltese citizenship grows on them, they will start looking for business opportunities to deepen their roots. After all, people do business with people they know and people they like once bottom line criteria are met.

First you have to understand who the client is before starting to suggest conditions, unless the intention is to kill the baby before it is born.

On the government’s part, it must do a serious effort to keep control on the marketing rollout of the scheme. The IIP should be rolled out with an aura of prestige and scarcity.

The government would do well to announce a very restricted annual quota for such citizenship grants.

It would address unfair criticism that we mean to start selling citizenships in wholesale bundles creating problems to other countries that reciprocate rights to Maltese citizens. And it would add a scarcity premium to the programme.

If we budget revenue of €30 million in 2014 at the price indicated this would amount to a quota of 50 grants. Certainly not a problem for us, much less for our Schengen partners. The quota for future years may be the basis of a compromise between the government and the Opposition.