Monday, 21 April 2014

Collective wisdom

This article was publiched in The Mal;ta Independent on Sunday - 20th April 2014

Some old graffiti on the wall of the underpass by the University reads “People get the government they deserve”. This is a 19th-century quote attributed to Alexis de Toqueville (1805-1859), a French political thinker and historian, who had qualified it with the prefix “in a democracy”.

Indeed they do, and I have always been amazed by the collective wisdom of our electorate; a collective wisdom that overrides the stupidity, hypocrisy, irrationality and selfishness of voters at ground level.

I remember each and every election since 1962, and the collective wisdom of the outcome of every election is impressive – especially judged through the wisdom of hindsight.

Two general trends emerge from the results of the 12 general elections held since 1962:

The first observable trend is that a government is generally elected for two terms and only in extraordinary or abnormal circumstances will the electorate change the government after one term, or confirm it for more than two.

Secondly, governments that do not complete their term and resign mid-term are punished by the electorate for failing to carry out the mandate that they had been privileged to receive.

There was a departure from the trend of two-term governments in the elections of 1962, 1981, 1998 and 2008.

In 1962, the electorate's will was thwarted by the interference of the Church through the imposition of mortal sin for anyone who voted Labour. But the electorate was also influenced by the fact that Labour had prematurely resigned in 1958. With these two elements working against Labour, the PN strolled into government in that election.

In 1981, the electorate, in its collective wisdom, voted for change but the margin was not strong enough to overcome the defects in our electoral system at the time, where votes did not have equal weight in all districts. The fact that Labour governed with a majority of parliamentary seats on a minority of votes does not alter the fact that the electorate’s wish for change was clearly expressed in that election. Perhaps 1981 was an exception to prove the graffiti rule.

In 1998, the electorate was forced to depart from the two-term principle because of the early renunciation of the clear mandate it had given Alfred Sant’s Labour in 1996, when the electorate had honoured the two-term principle to the surprise of many political observers who had practically counted Labour out.

Even though Sant probably was left with no feasible alternative but to seek a fresh mandate, and history already judges him as having honoured the sovereignty of the electorate once he could not execute the mandate with which they had entrusted him, when it came to re-awarding the mandate the electorate could not it trust it again in the hands of someone who could not execute it. A mandate with an 8,000 vote majority was changed by a 20,000 vote swing giving a 12,000 vote majority to the PN Opposition.

The elections of 2003 and 2008 were very particular as they had to follow a mandate given in 1996, which had to be aborted in 1998 after less than two years. So it was not clear whether the electorate would consider the two-term cycle as having started anew in 1998 or whether, having punished Alfred Sant for giving up his mandate early in that year, would forgive and vote for a continuation of the mandate it had given in 1996.

That would have been a very important aspect to observe in the 2003 election, had it been a normal election. However, that election was anything but normal. Through a grave political miscalculation, Alfred Sant forced the electorate’s hand to reject Labour for the fourth time in five elections when he rendered the election as an outright exclusive choice between EU membership and a Labour government.

In the election of 2008, the EU issue was dead and buried and Malta had not only been a member of the EU since 2004, but had become further entrenched through membership of the euro monetary system which, as the Greek experience shows, operates like the Hotel California: you can check out any time you want but you can never leave.
Through normal electoral trends, those elections should have gone Labour’s way, once the PN had completed a double two legislature terms broken only by a short interlude of Sant’s 1996-1998 Labour government. How can one therefore explain the break from trend again in 2008 when, rather than winning handsomely, Labour lost narrowly again, giving the PN an unusual third consecutive term that broke new ground in post-war political history?

My view is that Labour could have won the 2008 election handsomely under any leader other than Alfred Sant. Sant forced the electorate’s hand again to keep Labour out of government if that meant he would be Prime Minister. Sant’s strong anti-EU record did not chime well with the collective wisdom of an electorate determined to make a success of Malta’s irreversible status within the EU.

Fate works in a strange way. The third consecutive failure by Alfred Sant to regain the premiership in 2008 has guided him to his true role in Maltese politics, as a left-leaning Euro-sceptic MEP who can keep the establishment on its toes through piercing criticism and pragmatic analysis. It has also delivered to the PL a young leader who has written history in showing that his election as an MEP in 2004 was a springboard to his true role as a national leader. In 2014, Sant and Muscat will reverse the roles they occupied – or to which they aspired – a decade earlier. Labour looks in a much better formation that way: square pegs in square holes.

With the 2013 election, the electoral trend has reverted to normality, with the outsized majority explainable by the departure from the trend in the previous three elections. Labour support that had been suppressed was suddenly released as soon as Labour presented itself for verification under Muscat’s guidance.

How will the trend operate for the forthcoming MEP election? Dr Sant will probably break the record for first-count votes, as his former leader legacy will focus Labour’s vote on his candidacy. But Labour will struggle to retain a majority of votes. Governments normally have to accept poor showings in mid -term secondary electoral tests. You can’t please them all, certainly not in 14 months, and people have a right to protest with their feet by staying away or with their hands by voting against the incumbent government. But it’s better to accept a protest when it hurts the least so as to re-group and peak when it really matters.

But nothing changes the fact that people get the government they deserve. For its collective wisdom, the Maltese electorate deserves a lot.

Tuesday, 15 April 2014

Conventional, unconventional and common sense

A vibrant debate is going on about what the ECB should do to address the fact that inflation in the Euro area is falling way below the target of 2% and that the latest reading of 0.5% for  March 2014 sits deep into disinflation territory and uncomfortably close to deflation.

Given that 0.5% is the average, there are Euro countries already operating with negative  inflation and this is dangerous.

Disinflation could be evil or benign. It would be evil if a low reading of inflation is due to a downturn in economic activity and is the result of a contraction in the rate of growth of the GDP or indeed an outright contraction.   It would be benign if low inflation is the result of a drop in external prices, like lower prices of imported food and energy, which as they unfold will leave more spending power in the hands of consumers who can spend on other goods and services so that the low inflation reading is accompanied by economic growth.

Whether it is evil or benign,  it is important that a period of low inflation or deflation is considered as a temporary phenomenon and that it is not permanently anchored in consumers' psyche.   The danger of an extended period of low inflation is that if it enters the general mindset of consumers it acts as negative stimulus through postponement of consumption and could drive the economy into a vicious spiral of falling prices and falling demand,  building momentum on a mutually reinforcing slippery slope.

The vibrant debate is between those in core Europe whose domestic inflation is above the average and who tend to consider the average reading as caused by benign reasons of falling prices for imported food and energy and who generally press for the ECB to do nothing until there is more evidence of the permanency of disinflation.    On the other side there are countries in periphery Europe, generally those countries coming out of atrocious austerity programmes, where inflation is below the average or outright negative, and who are pressing the ECB to take extraordinary unconventional measures as an insurance policy against the risk of falling deeper and irreversibly into lowflation or deflation which makes debt servicing more burdensome impinging negatively of their pace of recovery.

Caught between these two forces the ECB governing council has decided to do nothing but launch a verbal barrage delivering expectations that they will adopt unconventional measures as necessary if further evidence emerges of  deepening risks of disinflation.  

What sort of unconventional measures can the ECB take to address the risk of disinflation?

There are two categories which both come with a lot of ifs and buts, with absence of evidence about their effectiveness in a Euro area context, with great potential for dangerous unintended consequences,  and given the divisions within the ECB, with a risk of being adopted in mild doses which will be considered by the market as too little too late.

The most logical category is overcoming of the zero bound for interest rates and cross over to negative interest rates forcing banks to invest their excess liquidity rather than incur charges for parking it at the Central Bank.   If banks pass the reduction down the line to their depositors, would depositors be tempted to keep cash rather than bank deposits and thus neutralise the effectiveness of the policy?    Would it be fair to force old age pensioners to pay a 'tax' on their deposits  to help economic recovery?

The other category is QE - quantitative easing - the increase in money supply ( to overcome the fact that reduction of bank lending is shrinking the money supply) by purchases by the ECB of bonds or other assets on the secondary markets.   The risk here is that without a single Treasury supporting the Euro, the ECB will have difficulty in buying sovereign bonds of member countries and there could not be enough private bonds and assets to buy on the secondary market in order to deliver QE on the scale required to make a difference.

I am sceptical of both solutions, and would argue that the benefit of adopting either would be indirect - the softening of the value of the Euro on the F/X markets - which could be obtained by other less unconventional means including verbal and if necessary direct intervention on the F/X markets by Euro governments, co-ordinated by the ECB and supported by other main Central Banks.

But there is a much more, simple, conventional and effective solution which the ECB can mebark upon if the Euro governments were to give their political support which unfortunately is lacking due a mindset by the Germans in their misguided belief that the German taxpayer would be prejudiced by the adoption of true measures that could stabilise, indeed save, the financial system and the monetary union.

This is the direct recapitalisation by the ESM of under-funded Euro area banks.   Such recapitalisation would be forced on all banks found wanting through the AQR and stress tests.  Capital would be generously provided to render Euro area banks well funded and capable of repairing the money transmission mechanism of the ECB monetary policy to deliver the bacon where it is most needed;  to SME's in Euro area countries especially in the countries in distress, where SME's are dependent on bank credit for their growth and where bank credit is just not available.

To render the arrangement more effective and less depending on funding the ESM by member countries, it should be accepted that ESM is considered as a licensed banking institution and the ESM can use its equity investments in capitalised banks at the discount window of the ECB to monetise the massive capitalisation without being a burden on the fiscal position of member governments.

Once the situation gets stabilised and we start seeing real growth in the Euro area the whole process will be reversed by the ESM selling back their investments to the Banks or to private investors.  As the US reversed the TARP programme and profiting from it,  so would the ESM, so would the ECB and so would the entire Euro area.

What is needed is just a change of fossilised mindsets, creative thinking and leadership to follow this through until the unemployment problem in the Euro area is resolved and strong growth becomes the norm rather than accepting present stagnation as the new normal.

Thursday, 10 April 2014

Letting Rome burn - 2

This is a follow up to the first instalment published in this blog on 13.03.2014 and accessible through this link:

At last week's meeting of the ECB, faced with a persistent fall in the average Euro area inflation rate now hitting 0.5% in March 2014 and drifting further away from the 2% target inflation and ever closer to a dangerously deflationary environment, the ECB decided to do.............. nothing.

Just imagine if the inflation target was overshooting at 3.5% and the ECB would do nothing.  No way!  They raised interest rates in Summer 2008 when the overshoot was much lower and when the future was pointing to illiquid financial markets  and a financial crisis which followed soon after and dragged the whole world in the great recession.

They did nothing even though the IMF issued an appeal for monetary policy in the Euro area  to be loosened much further in order to cultivate the nascent recovery and give impetus to economic growth which would act like balsam for the restructuring of  economies  of distressed Euro area countries.

The ECB decided to do nothing, but only to continue to study and monitor.  It took cover under the excuse that the March 2014 inflation reading is erratic as it is compared to March 2013 which included Easter ( this year falling in April) giving rise to  seasonal price rises included in March 2013 are not represented yet in March 2014.     This sounds like a mere excuse to continue to doodle as the inflation trend is unmistakably downward irrespective of whether the first full moon of spring falls in March or April.

Whilst ECB President Draghi seems eager through verbal intervention to explain that the ECB is seriously considering extraordinary measures,   the excessively hawkish Lens Weidmann of the Bundesbank and who sits on the governing body of the ECB, has again felt the need to express a personal view that in  spite of what statistics say and show,  the Euro area has no risk of falling into deflation or of being trapped for a long period of time in a low inflation environment, and consequently non-conventional measures should not be seriously considered yet.

Europe has two new boys on the block who seem determined to fight austerity and restructure their economy on a growth platform irrespective of what the German Finance Minister and the Bundesbank President think.   Italian Prime Minister Renzi and new French Prime Minister Valls have independently arrived at a common conclusion that they must challenge the false policy concensus that landed the eurozone into its deepest recession / depression yet.

It is high time that the Mediterranean countries form a common front to force Europe to take the unemployment problem seriously, to help rather than hinder the painful restructuring programmes that Italy and France are undertaking and that the ECB can no longer continue to base its monetary policy on what suits Germany but has to take into consideration the situation in the whole Euro area.

After all the Euro is the currency of 18 EU countries not just of Germany and after all whilst those that had imbalances on the negative side have made substantial progress to address such imbalances ( as a proof see how the bond yield differential for these countries has narrowed and how even Greece had a successful re-appearance on the capital bond markets) Germany has done nothing to address its structural surplus imbalances.

The ECB is the Central Bank of all Euro countries not just of Germany and its Frankfurt location must not signify submission of its views to those of the Bundesbank.

Monday, 7 April 2014


This article was published in The Independent on Sunday 06.04.2014

Old age brings disadvantages. However, it also comes along with the benefit of many flashbacks that permit analysis and interpretation of current situations in the light of comparable past experiences.

This week I was invited to participate in a discussion programme on Net TV and the experience triggered a reflection on a similar situation some 27 years ago, when Labour was struggling to adjust to its new role in Opposition following three consecutive legislatures in government. Equally now the PN is finding it hard to adjust to its new role in Opposition after a quarter-of-a-century in government sliced in two halves by the short interlude of Labour government between 1996 and 1998.

An overlong stretch in executive power, which I categorise as anything beyond two legislatures, gets so deep under the skin that it becomes natural to assume that the loss of executive power is a purely temporary phenomenon merely designed to prove that democracy still works, and that in no time at all the electorate will realise its mistake in voting for change and will restore it to executive power, come the first opportunity of the next general election.

I well remember a stalwart Labour representative arguing after the 1987 election, which Labour lost by some 5,000 votes, that Labour should easily win the 1992 election as it would take merely 2,500 voters to float back after realising that Labour was Malta’s natural government – as if in the five-year interlude between one election and the next, everything else stays frozen while some of the deserters repent.

With an election defeat of unprecedented proportions, the PN can only follow such false reasoning if it assumes that nearly 18,000 voters will repent. Yet although the likelihood of this happening is extremely more far-fetched than it was during Labour’s first term in Opposition, the mindset is identical.

I could hardly believe my ears when a PN representative in the TV debate went on a long litany of doomsday-mongering, arguing that the cabinet reshuffle brings instability, that people are scared, that consumption is waning and investment is nowhere to be seen as unemployment is shooting up and inflation falls to dangerously low levels.

The message was that Malta cannot do without a PN government, that the sky has fallen in since the last election and that unless people repent and put the PN where they naturally belong, the country is doomed to economic ruin in the hands of Labour, whose leadership and management, as well as its rank and file, consist solely of amateurs trying to wear boots too big for their feet.

Now there is not a shred of evidence to confirm any such doomsday claims. On the contrary, the economic statistics being churned out show a rapidly improving situation. GDP for 2013, according to the first flash reading, shows a real growth of 2.4 per cent, four times more than in the previous year and amongst the best in the EU. Unemployment as measured by the last Labour Force Survey, which overrides erratic shifts between un/registered un/employment, shows a fall from 6.5 per cent in the last quarter of 2012 to 6.4 per cent in the last quarter of 2013. It also shows the labour participation rate increasing from 63.6 per cent to 65.3 per cent, proving that more people who had dropped out of the labour market are returning to or seeking employment. Tourist arrivals and earnings continue to break records month after month.

And while inflation – at just over one per cent – is below the target of two per cent, it is much better than the eurozone average of just 0.5 per cent and is being kept low for virtuous reasons. It is not that prices are showing a general tendency to grow so slowly, but it more that the government is effectively controlling the price of energy and reducing the impact of other government-induced costs, which have reflected lower measured inflation for some time. Should we complain of lower inflation as we start benefitting from the 25 per cent shave on utility prices?

There are three main reasons why things are evidently getting better. Firstly, it is because the uncertainty of political instability of the last legislature had forced people to postpone consumption and investment which has now sprung back as the election delivered stability. Secondly, it is because government policies to reduce the cost of utilities while making work pay are further encouraging investment and consumption. And lastly, it is because the international scenario around us is brightening up better than we could have expected a year ago.

Many of the eurozone countries in distress are showing promising signs of healing because they can start servicing their borrowings through normal capital markets operations at a fair and sustainable price and because growth is re-emerging as the EU adopts a more balanced stance between fiscal prudence/austerity and stimulus/restructuring for economic growth. In Italy in particular there is evidence of fresh air blowing through a government determined to push through much needed economic adjustments and this is helping consumer and business optimism which are the foundations of future economic growth.

The PN will eventually realise that nagging and doomsday-mongering are poor credentials for seeking to regain the electorate’s confidence. Just as it was with Labour after the 1987 defeat, it will take a second defeat for the PN to realise that only positive change can bring home the bacon.

Wednesday, 2 April 2014

The LFS explodes the myth of rising unemployment

National Statistics OfficeI have already argued that the state of the true un/employment can only be estimated when we have the Labour Force Surveys (LFS) as this overlooks the distorting shifts from/to un/registered un/employment.

Now we have it for the last quarter of 2013 which can be accessed through this link:

LFS Q4/13 NSO 26032014

The broad conclusions are the Labour Force increased by 4785 =  2.76% whereas unemployment increased only by 161,  so that the unemployment rate REDUCED from 6.5% to 6.4%.

The activity rate increased from 63.6%% to 65.3% indicating more people are entering the jobs market.   Furthermore of the 4785 net more jobs created , 2718 were males and 2067 were females indicating a more healthy 57% : 43% ratio split between sexes.

One can of course argue that an unemployment rate of 6.4% is still high, and indeed it is.   But let it be clear that unemployment is not increasing as some ill-informed PN gurus argue and scaremonger.  If anything unemployment is steady and slightly reducing even though the activity rate is increasing as more and more people who had given up on finding a job are now back seeking employment as they sense better opportunities.

And with so many projects in the pipeline, and as more people will start spending what they are saving from utility bills and get more confident about their existing employment, things can only get better.