Wednesday, 28 May 2014

The PN must change attitude

A quote from today's The Times:

"The Nationalist Party must change its attitude to attract back “switchers”, as the Labour Party is managing to win over different sectors of society by acquiescing to their demands and using an excellent marketing strategy.

These were the views expressed by communications expert and University lecturer Fr Joe Borg and former PN minister Michael Falzon when asked to comment about the state of the two major political parties in the wake of the MEP election"

Let me put it in simple language what change of attitude PN requires.  I put it in BLOCK CAPITALS to stand out:


This is the change of attitude that the PN needs.  All the rest is detail.

Monday, 26 May 2014

Two of a kind

The Maltese and Italian Prime Ministers are two of a kind.   Joseph Muscat and Matteo Renzi have so much in common that they seem political twins:

  • Both are leaders of socialist political parties
  • They are roughly of the same age
  • They are both having their first experience as Prime Ministers
  • They were both elected to lead their party when it was practically non- electable
  • Both worked miracles in turning round the fortunes of their party in a big way
  • They accept a challenge and go head on to win it
  • They communicate exceptionally well to deliver unity of purpose
  • Both command an appeal beyond the traditional boundaries of the party they lead.
  • Both are strong pro-Europeans
  • They both believe that growth not austerity is the solution to Europe's problems
  • Both want Martin Schultz to be the next Commission President
  • They both fight excessive bureaucracy and let nothing stand in the way of getting things done
  • They are both election winners
  • They lead the only two EU governments that have been roundly endorsed by their electorates in the weekend MEP elections.
Pity that the other main socialist Prime Minister in Europe seems cut form a different cloth.   President Hollande has again suffered a huge electoral defeat and he would do well to make Muscat's and Renzi's good fortunes as a case study to learn what he is doing wrong in France.

It is indeed worrying that in an important country like France the main political force turned up by yesterday's election is the far right Front National of Le Pen whose policies are ultra-nationalistic bent on dismantling all that true Europeans built over the last six decades where the continent enjoyed unprecedented period of peace and economic development.

Why is the French electorate behaving so differently from the Italian and Maltese electorates?

Simply because President Hollande is failing to deliver on his main campaign promise to be a valuable counter-weight to the power of Chancellor Merkel in the Council of Ministers of the EU.   Where it matters Merkel is still calling the shots and preaching the merits of austerity and expecting all EU countries to become perfect images of the motherland.   This does not work.   The EU is a union of nation states with their own individual identities but wishing to share their economic fortunes in a spirit of social solidarity.

Following yesterday's result France would do well to team up with Italy and Malta and seek support from other states whose economic growth is being restricted by misplaced austerity measures, to build pressure on Germany to accept flexibility and social solidarity as the fairest and most practical way out of this never ending recession following the financial crisis.

More than anything they should join forces to press Germany and other core Euro countries to let the ECB operate autonomously according to its mandate and lift the pressure for the ECB to fight inexisting inflation; to let the ECB to do whatever it takes to save the Euro and repair the transmission mechanism which is blocking the delivery of its monetary accommodation measures to the places where it is most needed.

Renzi and Muscat should join hands and show the way to Hollande et al.   Yesterday's election results give them the political credentials to take the lead as the only two governments that have been endorsed by their electorates.

Monday, 19 May 2014

Europe votes... but what exactly for?

This article was published in The Malta Independent on Sunday - 18 05 2014

Next weekend Europe will be voting to elect the European Parliament (EP) and indirectly the next President of the EU Commission (although ultimately this has to be chosen by the EU Council who however cannot be disrespectful of the mandate given to Parliament by the electorate).

But what exactly will Europe be voting for?

In Malta the campaign so far has hardly touched on any European issues.   As the saying goes all politics are local and Saturday more than voting to choose our MEPs the electorate will be voting or abstaining to approve or otherwise of government’s performance these last 14 months.

We have not had any discussion about European issues with the exception of the need for a proper burden sharing policy for irregular immigration with a complete revisiting of the voluntary terms of the Dublin agreement.  Otherwise we had no place for discussion about whether the Euro crisis is truly over, whether harsh unemployment in crisis countries can be more urgently and forcefully addressed,  whether the Commission can show more flexibility in applying state aid rules for countries like Malta that are losing their former Objective One status, and whether the EU Commission is paying enough attention to the principle of subsidiarity to respect the traditional democratic will of electorates within their national boundaries.  

The main thrust of PL campaign was to get out the vote of those disgruntled sympathisers who expected their grievances, justified or not irrespectively, to be addressed immediately, and for the PN to unashamedly appeal to such disgruntled sympathisers to use their vote to protest against the government.

Any objective observer would be concerned if there was no disgruntlement from core Labour groupings many of whom expected a quick return to old style politics where Ministers dished out favours, especially jobs and housing, to sustain their electoral base.    Contenting such disgruntled sympathisers would quickly peril our economic and financial sustainability.  Its existence proves that government is putting the national interest before the Party’s political convenience.   Frankly I struggle to remember any government that has achieved so much in so little time.
Such disgruntlement will lead, in the best circumstances, to substantial trimming of PL’s unreal majority registered at last general elections.   This majority will be scaled back further by the return to PN of traditionally blue votes that temporarily turned white or pink at last elections purely to force a change of leadership within the PN.

But in Europe the situation is different.   Especially in the periphery countries that were severely distressed by the financial crisis and had to suffer crushing austerity conditions to be bailed out as their economy and banking systems collapsed, this is the first time that voters can express their democratic dissent without risking self-destruction.

Euro-sceptic parties like Golden Dawn in Greece and Lega Nord and M5*in Italy are expected to gain substantial EP representation.   Voters there will be protesting the lack of solidarity by core countries when against all economic logic they imposed austerity on economies that were already in recession, leading to a lost generation of youth unemployed.

But even in core countries extremism and euro-scepticism is on the rise.  Le Pen’s national Front in France, the Party of Freedom in The Netherlands, UKIP in UK, True Finns in Finland, Alternative for Germany and FPO in Austria  are expected to gain substantial representation which will further undermine the EP’s legitimacy. Marine Le Pen, Gert Wilders and Nigel Farage are considered ‘monsters in Brussels’ and their increased weight in Parliament will unavoidably lead to more concentration of powers in the European Council.  This will be more pronounced if voters’ turnout does not improve on the poor 43% registered in 2009.

A low turnout will underscore the European voters’ doubts about the effectiveness and validity of the EP who many consider as a travelling circus between Brussels and Strasbourg for 751 members from 28 member states who can talk endlessly but practically have no executive or legislative authority.

Next weekend’s election will be a wake-up call for EU leaders to realise that the disconnection between the institutions and the people has grown unsustainably wide.    Efforts to channel re-connection efforts through the EP will be proven failed as the electorate realise that power within the EU is not in the hands of Schultz or Barroso but in the hands of Merkel.  Next weekend Europe’s vote will be a protest vote for having their life dominated by leaders they did not elect whereas leaders they elected are powerless where it really matters.

This will be particularly evident in France where Hollande has failed to deliver what he was elected for, to be a counter-weight to Merkel’s dominance of the EU, representing the interest of southern EU Latin members states and pushing the social market philosophy to soften the extreme conservatism of Merkel who expect to Germanise the EU rather than leading it through a European Germany.   It is not without reason that extreme euro-scepticism will be most pronounced in France.

Voters will be giving their thumbs down to Germany’s handling of the Euro crisis.   Rather than curing problem countries and restoring their economies to health through growth assisted restructuring,  Germany seems to be enjoying the crisis, doing just enough to keep crisis countries alive but  permanently in the sick bay with the least possible cost to German taxpayers.   Germany remains completely insensitive of their social solidarity obligations to share their gains  from the Euro that has maintained their export competiveness which would have been lost of Germany still maintained their own currency.

In Malta we have a small taste of this insensitivity as core EU countries continue to expect us and other southern periphery States to carry the full burden of illegal immigration even though this is essentially a European problem.  

The 50% youth employed in Italy, Spain, Greece and Cyprus cannot but use next EP elections to voice their dissent.   Hopefully EU leaders will get the message and understand they have to show what Europe really stands for.   Whether we are truly all in this together or whether the EU has become merely a tool for the strong to dominate the poor, to hegemonise Europe through pseudo democratic means where hot and cold wars have failed.



Tuesday, 13 May 2014

The ugly has one defect

Whenever I used to complain about anything, my late Mum used to warn me:

The ugly has one defect - it is ugly.  The pretty has many - it is pretty but this could be better and that could be improved.

This was flashed back to me upon reading the presentation given by the Governor of the Central Bank to Parliament's Economic and Financial Affairs Committee in House yesterday.  

Going through the presentation it was generally a very up-beat rendition - see link below:

Governor's presentation 12.05.2014

Trying hard to find something to fault it with, that was found in the fact that bank lending to the private sector is falling rather than growing and that this could be a bad omen for future economic growth -  see slides 22 and 23.

Firstly one should note that this is a phenomenon which is happening in the whole Euro area even in the strong core Euro area countries as is well explained in slide 22.

Secondly there are very good,and I would say positive reasons,  why this is happening in Malta.  These include the following:

1. Most of the drop is in the construction sector.   Given that real estate was suffering from oversupply the decline in construction lending will help to stabilise and improve the real estate market.

2. The drop in construction lending will be easily reversed when the excess stock of unsold real estate is digested and developers can see a ready market for their new developments.

3. Bank borrowers are accessing the bond market where they can raise long terms funds at 'cheap' fixed rates.  Often they are borrowing on the bond market to pay down their bank borrowing based on variable rates in order to lock the low interest rates for the long term.  This process of disinter-mediation is healthy and should  be encouraged as it compels banks to price their loans more competitively.

4. The economy is diversifying into  the services sector which is less capital intensive and therefore require less financing even though it has more value added - see slides 10 and 11

5. Given low interest rates prevailing many foreign investors no longer rely on local financing to execute their Malta projects.

The other point of discussion is why local banks, in spite of the falling demand for loan, are still pricing their lending to SME's higher than other Euro area countries - see slides 20 and 21.   There is a very clear reason why this is so and the Central Bank and the MFSA should blame themselves for it.

We have created a strange system where we have licensed foreign hedge funds to invest in locally licensed banks, allowing them to dip their fingers in the jam jar of the local deposit insurance scheme,  but then operating only on the liabilities side of their balance sheet, i.e. raising deposits,  but doing little other commercial operations on the assets side of their balance sheet i.e. they hardly do any lending locally.

This means that the banks are finding competition for deposits which keep them priced above what banks nominally pay for retail deposits in Euro area countries.   To protect their interest rates margins banks have to keep lending rates correspondingly high, especially as they find no competition from such foreign owned licensed banks who show no interest to grow their lending book locally.

The solution is simple.   'Force' such banks to use their license also to offer competition in local lending and the market for loans and credit to SME's will take care of itself to price itself in line with Euro area realities.

Having said that, what is pretty remains pretty notwithstanding its defects.

What voters want

I found this quote in an article in today's FT ( Conservatives still fail to grasp the minority vote - James Ganesh) as particularly apt:

"Voters do not judge a party only or even mainly by its manifesto.  Many cannot even name a specific policy commitment even as they mark the ballot paper.  A party stands or falls by the gut impression it creates during sporadic flashes in which voters pay any attention to politics.   Its 'brand'.... is what it lives by".

Seeing the debate between the Prime Minister and the Leader of the Opposition on TVM's Reporter yesterday I remained with no doubt about who is capturing the attention of voters, busy as they are with the travails of their daily life, during such rare flashes.

People remember that they are benefiting from lower utility rates,   that they are living in a liberal society respectful of minorities, that they trust government is corrupt-free and giving value for their tax money, and that many are now able to join the work-force through making work pay initiatives.

The brand of the Opposition is that they forgot they were in government for 26 years and did not manage to do what PL government did in just over a year;  and that they are now so confused and clueless that they are promoting ideas that Labour is already committed to implement in this legislature.

A Labour government is not faultless but I do not remember a government that has achieved so much in so little time.

Monday, 5 May 2014

The EU Spring 2014 Report: Malta robust growth outlook.

And now the EU Spring Report has also confirmed Malta' s robust growth outlook:

European Commission Forecast Spring 2014

Go to pages 80-81 for the Malta Section.

The Commission has topped the IMF's forecast of 1.8%  to 2.3% real GDP growth in each of 2014 and 2015.

As explained hereunder, barring some extraordinary international turmoil ( e.g. Russia escalting Ukraine issue to involve a cold/hot war???) we should be able to beat both targets and register real growth with a 3% handle.

On the other hand the current account of the Balance of Payments may show a worse position due to high investment and equipment imports.

IMF Malta projections: very good but we can do better!

Table from the IMF - World Economic Outlook April 2014

According to the IMF latest set of projections (April 2014) the Maltese economy will grow, as shown on the Table being reproduced, by 1.8% in each of  year 2014 and 2015  compared to the 2.4% registered in 2013.

Such a growth rate would still be better than the average for the Euro area projected at 1.2% for 2014 and 1.5% for 2015.   The only countries that are expected to do better over these two years are Ireland ( 1.7% and 2.5%) Slovakia ( 2.3% and 3%) Luxembourg ( 2.1% and 1,9%) Latvia ( 3.8% and 4.4%) and Estonia ( 2.4% and 3.2%).

But with the exception of Luxembourg, all countries that are expected to do better than Malta are starting from very low numbers as evidenced by their unemployment level in 2013.

Malta had unemployment rate of 6.5% and Luxembourg had 6.8% in 2013 ( Juncker does not have much to criticize us about unemployment!!) but the rest had the following levels of unemployment in 2013:

Ireland:        13%
Slovakia:      14.2%
Latvia:          11.9%
Estonia:           8.6%

As I recently stated in a public address I made at a PL activity in Zejtun I bet my bottom dollar that in 2014 we will better the economic growth of 2.4% registered in 2013 and I am confident that our growth this year will have a 3 handle.


1. because last year's growth was achieved in 9 months as the economy was largely frozen in the election quarter.

2. because the economy has momentum.

3. because measures to make work pay will start being felt in 2014.

4. because the fruit of the IIP will start being felt especially in the property and construction market.

5. because confidence leads to investments which leads to employment and growth.

So it is good to use the IMF's cautious projections for the purposes of budgeting.  But on the ground where it matters we can do better.

Sunday, 4 May 2014

Making work pay

The Budget 2014 objective : making work pay, was given a big practical boost by the announcements last week of a bubbly revamp to the national employment policy in the context of the Jobs+ initiative.

The exercise was announced after extensive consultations with the social partners to ensure that there is full 360 degrees appreciation of the impact of the measures proposed, and to guarantee that they contribute and re-enforce each other to reach the intended objective with as little unintended consequences as possible.

Of all the measures announced two are particularly promising and capable of delivering much needed flexibility in the labour market contributing in no small measure to job creation, economic growth and control of social benefit fraud.

1. The proposed top-up to minimum wage earners should address social dependency for those who can live just as well on permanent social benefit as much as on minimum pay employment.   Add to this the tapering of social benefits over an extended period for those who choose to move from dependency to being enabled in productive employment, and we should see the labour market work in favour of those who actually wish and want to work.   Government should be able to fund the extra top-up of minimum wage earners from the additional revenues generated by economic growth.

2.  The spread of the cost of maternity leave on all employers will remove many of the residual barriers discriminating against female employment.

What needs to be tightened up after the successful implementation of these initiatives is a case by case review of all social cases who remain on permanent entitlement.    Social payments, outside the parameters of permanent sickness and disability, should be temporary and enabling.  If they fail to enable it means they are not reaching their purpose and should be reviewed.  Anybody who is on social dependence for anything more than a few months and who is not suffering permanent sickness and disability, should only be allowed to stay on social dependency if subscribed to some full time skills training programme under the aegis of the ETC.

Inflation, disinflation and deflation

This article was published in the Malta Independent on Sunday - 04 05 2014

The divide of the euro area countries, between the strong core and the weak periphery (with Malta being an exception: a speck of core on the periphery), is now showing up in the debate about the risk of the euro area falling into secular low inflation (or into outright deflation), or whether this is a temporary phenomenon that will unwind and restore healthy equilibrium across the whole euro area.

All euro area countries are experiencing an extended period of low inflation showing a marked departure from the “close to but below two per cent” official target of the European Central Bank (ECB). Strong core countries, Malta included, are experiencing inflation of around one per cent whereas the weak periphery countries are close to zero and some, like Spain, are recording negative inflation, i.e. falling consumer prices.
Some readers may question this concern about low inflation when we spent the last quarter of the last century fighting high inflation. Should we therefore not be celebrating the achievement, rather than worrying about it? The answer to that is, as almost always, it depends.
Low inflation or indeed falling prices could be both a blessing and a curse.
If low inflation or falling prices result from positive supply shocks then it is a blessing. Following the industrial revolution of the late 19th century, great leaps of productivity led to increased supply of consumer goods at cheaper prices giving consumers better choices and value for their money. That certainly is a blessing which stimulates consumer demand and leads to economic growth and job creation as a welcome bedfellow to falling prices. 
Take the drop in our utility rates. Surely these will eventually work their way to lower readings in our domestic inflation, but equally surely no one should be complaining about it. That is a positive supply shock, leaving purchasing power in consumer’s pockets which will be spent on other consumables, giving a stimulus to demand and leading to economic growth and job creation.
On the other hand, if low inflation or outright deflation is a result of demand shocks, then that is the curse and if prolonged could be difficult to reverse. The lost decades in Japan following the bursting of the eighties’ speculative boom, clearly demonstrate as much.
Countries in the euro area periphery, Greece, Ireland, Portugal, Italy, Spain, Cyprus and Slovenia have been forced to address their fiscal stress by crushing internal demand. Higher taxes and harsh expenditure cuts drained purchasing power from consumers’ hands. As a consequence, their economies shrank, unemployment exploded, especially among young people seeking their first job, and prices stagnated or indeed started to fall.
The core countries argue that the situation is worth watching but it calls for no intervention. They maintain that their low inflation is mostly virtuous and was the result of lower energy and food costs and the periphery countries should persist with their painful restructuring as this would eventually restore their competitiveness and lay the foundation of export-led economic growth and job creation.
The periphery countries do not dispute the need to persist in their restructuring process. But they argue, with good reason, that low inflation and falling prices make their task much harder, giving the impression that they are running on the spot with little to show to maintain democratic support for the pain of restructuring. With so much pain and so little gain, the risk is that the electorate could lose their staying power with painful restructuring and could be lured by false prophets from the extreme right and left, who promise easy, populist but unreal solutions.
The upcoming MEP elections could be the democratic signal that the divide between the core and the periphery, if allowed to fester, could prejudice the democratic foundations of the EU and the euro area. If, as expected, extreme parties gain significant representation in the formation of the next European Parliament, it could send a strong signal to core countries that allowing periphery countries to stew in their pain with little real support was a grave miscalculation. It threatens the sustainability of so much of the good that has been achieved. This is not in anybody’s interest, and most of all not in the interest of core European countries.
Caught in this debate is the ECB as the only pan-European institution that is empowered to act swiftly without the heavy baggage of the slow institutional decision making of EU structures. The German-led core is putting pressure on the ECB to sit this out without adopting non-conventional monetary measures that helped the US and the UK manoeuvre their way out of the recession better than the EU. The periphery countries are demanding that the ECB takes preventive measures to address the risk of deflation which could kill demand just when their economies are showing some signs of stabilisation, even if it is stabilisation at low levels. If falling prices become a mindset for consumers, they postpone consumption expecting to buy cheaper tomorrow than today, leading to a dangerous deflationary spiral.
If the April reading of inflation shows no progress in the dismal euro area average inflation 0.5% p.a. of March 2014, the argument of the periphery should gain weight and force the ECB into action.


Second time right for public transport
The first attempt to provide this country with an efficient public transport system was a dismal failure.  But it was a failure of execution not of principle. It is the same experience we had with privatisation of postal service. The first attempt with Posta Limited was a miserable failure. The second attempt with MaltaPost proved a success. So many good ideas are destroyed because of bad execution.
It is imperative for success of the second attempt to ensure that it meets three criteria:
  1. The route network must be well thought out with sustainability in mind but ensuring timeliness and efficiency.Better to sacrifice some route frequency and coverage for punctuality and reliability.
  2. The commercial underpinning must rely on cheap bus fares to generate revenue growth from volume rather than price increases.
  3. To achieve these objectives the service has to be subsidised, possibly on a decreasing scale as confidence in reliability augments its usage.
An interesting experiment is going on in the state of Oregon in the US. Taxes on fuel are being reduced but drivers of private vehicles are being charged per mile driven on state roads through electronic billing. Technology now permits such devices especially in a small place like Malta.
We should not remove taxes on fuel as that would lead to waste and unintended subsidies for energy uses outside public transport. But we can switch our annual licence fees to a usage scale rather than a flat charge irrespective of usage. This would also permit the flexibility of charging differential tariff for different time segments, high in the rush hours and low or zero in the easy traffic hours. It would also permit different tariffs for different locations to distinguish between traffic hotspots and other areas without congestion.
In the end, once a reliable and efficient public transport service is in place, the burden of the necessary subsidies could be shifted from the general taxpayers to those who continue to prefer private transport