Smartless

5^th November 2006

The Malta Independent on Sunday

I don’t think it is very smart to announce the project when negotiations with the investors are still proceeding. Clearly, the minister felt comfortable enough to present it as a fait accomplit, when in fact it is still not so. Is this not exposing us to the risk of other locations making more advantageous offers to attract the investment to their shores? And it is obvious that by going public rather prematurely, the minister has weakened his position in negotiating the outstanding issues, as the investors know that the minister would lose political capital if he does not accommodate their additional demands.

This is a verbatim quote from my contribution of 3 March 2006 entitled Smart and not so smart published in my Friday column in the daily sister to this newspaper.

The inevitable has happened. The minister responsible had to admit in parliament that negotiations with the investors are not proceeding as smoothly as he expected and he basically gave the investors a warning that unless agreement is reached soon, the government will have to pull out of the negotiations.

Clearly this is a case where political self-serving interests over-rode national interest and to obtain short term political mileage the Minister weakened his negotiating position and had to make a volte-face in parliament in order to regain negotiating leverage. Hopefully, this will be enough to help conclude the deal on reasonable terms, but nothing is in the bag before it is in the bag, commitments are signed for, the ink has dried and the financial security has been provided.

It will be just as well to learn from this experience and remove narrow political interest from the equation when this starts conflicting with the national objective. This applies particularly to the euro project.

The Leader of the Opposition in his budget reply in parliament on 25 October announced that if Labour is elected to power before the materialisation of the euro project, basically if Labour wins an election held in 2007, despite past misgivings it will not abort the process and will, for the sake of stability, proceed with euro entry on 1st January 2008.

National interest would have demanded that the rare newly-found consensus be cultivated to make the euro project a really national affair. Such national unity would help to make the changeover smooth and help avoid inflationary impulses. An absence of such national unity could well harbour inflationary expectations, which are an assured source of real inflation.

Yet rather than grasp this quite unique opportunity, the reaction from the government side was purely self-serving for its narrow political interest. It retorted that the opposition was making another U-turn and in so doing was confirming that government policies were succeeding and delivering a strong bill of health.

The logic of these arguments escape me. Euro adoption is no certificate of economic clean bill of health. Good husbandry in public finance is not necessarily synonymous with overall economic health. The measures of overall economic health go far beyond the Maastricht criteria for adoption of the euro. It involves the size and sustainability of economic growth, the level of unemployment and overall labour participation, the stability of our balance of payments and the control of inflation to be consistent with that of our major competitors.

On all these wider economic criteria our performance leaves much to be desired. The general idea is that euro adoption can hopefully serve as a catalyst to stimulate economic growth by attracting more foreign direct investment, the achievement of higher levels of efficiency and an increase in exports, so addressing the chronic shortfall in our balance of payments.

So rather than castigate the opposition for making an effort to achieve consensus that could lead to higher indirect rewards – as we have experienced through the success of the consensus in the financial services sector – the government should have celebrated the consensus. It should have encouraged the participation of the opposition in the broad spectrum of initiatives that should lead to the adoption of the euro and the few months thereafter until we are all settled into the new reality.

We are simply not smart enough to take opportunities as they come and build on them to achieve the success that is being enjoyed by the east European countries that joined the EU with us. These countries are registering growth rates far higher than ours, even if they have put back their euro ambitions far behind us in the calendar. Maybe their priorities are more logical than ours. But what is important is not whether we join the euro now or later, but that once we achieve consensus on something, we celebrate it and build on it, rather than fight over who had to sacrifice his principles on the way to achieving the consensus.