Cola Hard Choice

Cola Hard Choice

30^th October 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Whenever the Prime Minister makes a heartfelt appeal for yet another attempt for a social pact, then as sure as night follows day, continues that government is facing hard choices, the burden for which should ideally be shared out with the rest of society.

On the eve of presentation of the Budget for 2010 nothing presents a harder choice than the cost of living increase to be legally mandated through the out-dated Cola mechanism which has grossly outlived its purpose since it was introduced in the early 1990s.

To an outsider it probably seems odd that wage setting forms part of the public budget which itself is the main tool of fiscal policy. Budgets should deal with government expenditure, government revenues and the difference between the two and how such difference, which is normally on the negative side, is to be financed.

This on its own presents enough headaches to whoever is putting together a budget in a harsh economic environment which has depressed consumption for reasons beyond any government’s control and has shrunk the normal sources of fiscal revenues just at a time when automatic stabilisers triggered increasing social expenditure and subsidies.

In reality, the government has a basic but simple choice. It should place economic growth over budget deficit control and should take measures to ensure that the economy does not experience another bad year following the disaster of 2009. The government should not feel committed to meet any particular deficit figure for 2010 as the EU seem to expect and should let the deficit increase as necessary provided the expenditure goes into fruitful investment and not unsustainable consumption.

Equally the government should not feel committed to pre-electoral pledges. Promises made before the financial collapse of 2008 can hardly be considered binding in a world that is financially falling apart and in the midst of a recession which is likely to be deep and long. Obviously politicians will continue playing games with cheap demagoguery but leaders should rise above cheap party politics and do what is right for the country.

Leaders should take the electorate into their confidence, communicate effectively that suddenly the world has shifted from a growth trajectory to an environment of mere survival, relate the morass which is afflicting the citizens of US, UK, Ireland, Iceland, Hungary Latvia et al, and explain how we need to go through this hard period without blindly feeling straight-jacketed by promises made in a different world. Alfred Sant’s experience in obstinately persisting with the promise to dismantle VAT even though he inherited a budgetary financial crisis which was not at all evident when the promise was made, should not be forgotten.

Cola is however a different matter altogether. Although we have now embedded Cola into the budgetary process it does not merely affect our relationship with government like decisions involving taxes and subsidies do.

It affects the relationship between one sector of society with another. It affects how much wages employers should pay their employees irrespective whether they are affordable, justified by efficiency gains or otherwise.

Government argues that the Cola mechanism has brought industrial stability. I doubt it, but even if it did, just see where it has landed us now. In the midst of a recession when the risk of deflation is much more real than the risk of inflation, so much so that we are living with record low interest rates which will likely remain stable for a considerable time, the Cola mechanism has produced a proposed wage increase of e6.06 per week just at a time when competitor countries are forcing wage cuts and other drastic measures in a desperate effort to survive the crisis rather than be ‘Icelanded’ by it.

So on one hand employers, especially those whose fortunes depend on export markets (which includes our hotels and related tourist outfits) are sending serious warnings that such mandated wage increases in the midst of a recession will bowl them over and force them to either re-size or relocate. This will inevitably lead to higher unemployment and economic contraction at a time when growth and job creation should be our priorities.

On the other hand employees expect that a mechanism that has tended to work against them in the past should be sustained now that it is working in their favour mostly because government suppressed prices in the period around the March 2008 elections and then these prices snapped back with vengeance in the period after June 2008, once subsidies and price controls were lifted. It is such release from price repression that is being captured by the Cola mechanism that produced the e6.06 proposed increased. The unions can hardly be expected to make any unilateral gesture for national interest without losing their own significance in the eyes of their members.

If government really means to give substance to its calls for a new social pact it is pretty obvious that both employers and unions are going to shout ‘show us the money’. And I can see a valid cause for government to enter into the equation by taking onto itself a slice of the burden of the Cola increase as a one-off measure provided the social partners agree to dismantle the Cola mechanism and put back future wage setting where it belongs, in direct negotiations between employers and unions.

Obviously the government will keep a foot in the process firstly as a direct employer and secondly in the guardian of our social policy in regularly adjusting the national minimum wage to protect non-unionised employees.

Employers should be keen on such an arrangement as it gives them control over their costs. Unions should not scoff at it either. The Cola mechanism has usurped their role in wage setting and has reduced the incentive for union membership once wage increases get legally mandated rather than freely negotiated. But the real winner would be the general economy as it removes an inflexibility which is prejudicing our international competitiveness.

It’s time to move out from being trapped between a rock and a hard place

Throwing Stones

Throwing Stones

 

23^rd October 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Gospel, John (8) “However, when they persisted with their question, He raised Himself up and said, Let him who is without sin among you be the first to throw a stone at her. Then He bent down and went on writing on the ground with His finger”.

Those who are not satisfied with MLP’s leader expressed regret for the events of 1979 Black Monday, which events happened when he was a toddler, have started throwing stones.

There are no two ways about it. The events were a grave offence to democratic values. They were a denial of all that Labour had worked for in its quest to modernise the country, to up-grade its economy and to free it from its dependence on the economic value of the military base. The burning of The Times and the attack on the personal residence and family of the Opposition Leader are condemnable without reservation.

PL leader Joseph Muscat made a statement in this sense but some quarters who are never satisfied with whatever Labour does, expect him to walk on his knees till wounds expose his bones and beg forgiveness till he turns green in the face.

Analytical examination of why what should not have happened did in fact happen must adopt a broader view to understand why Mintoff, who had nothing to gain politically from these abysmal events, had either allowed them to happen or was careless or powerless in not preventing them from happening. One has also to configure what Mintoff had to gain by adopting a soft posture in bringing the perpetrators to answer at law for their misdemeanours.

These events in themselves weakened Labour and strengthened the national profile of the PN and of its (then) new and unproven leader. So while the immediate impact was shocking and fearful on Labour’s adversaries, on a longer perspective they were a month of Sundays which turned their political fortunes and gave them a near monopoly at the polls for the following 30 years, and still counting.

So I am still searching for an answer to a question which unfortunately few are interested to ask, let alone to discover a true answer for. I cannot for a single moment accept that Mintoff instigated, let alone master-minded, these and other similar shameful events. But being the strong leader he was, such an assertion leads to the obvious question of why he was apparently impotent to prevent these shameful events.

This is the crux. This is the question I continue to search a sensible answer to. I can only conjecture but I conjecture with logic that links the historical dots.

Chapter one of Mintoff’s political history spanned from 1947 to 1979. His achievements during this period need no recital. But in toiling to gain his achievements Mintoff had to struggle against a powerful network of interests that were bent on defending the status quo. This network include the colonial government, who wanted to give us independence on the least expensive terms, the Church, who wanted to retain earthly authority and privileges by invoking its celestial mandate, political adversaries, who wanted to see Labour as a permanent opposition, commercial interests, who traditionally cashed in their influence much more effectively with a conservative government, the media, who had commercial and political interests to defend, and the upper segments of society who had privileges to safeguard.

Mintoff’s first brush with violence was in the uprising of 1958. But this was clearly not a terror type of event. It was the violence of liberation forces against their foreign occupier. It was brief, proportionately dimensioned and it was led with bare faces from the trenches by Mintoff and his high ranking colleagues, many of whom were disciplined by prison sentences.

During the period between 1962 and 1971, when Mintoff was in Opposition mostly thanks to the mortal sin imposed by the Church, violence was no issue. It was after Mintoff gained government in 1971 that gradually violence started re-surfacing. And I can only conclude that it became a real issue after the conservative network tried to nullify his long fought and hard won political mandate by bribing one of his parliamentarians to cross the floor, just months after his June 1971 victory at the polls. I think that at that point in time Mintoff realised he needed his unofficial ‘republican guard’ as a threat to keep discipline and to protect his electoral mandate.

Keeping the ‘republic guard’ as a mere deterrent rather than as an executive force demands commitment and discipline. And in time the ‘republic guard’, who must by necessity be kept hot all the time, wrestled out of Mintoff’s discipline and switched from mere deterrence to actual execution. This happened in the celebration of the 1976 election victory and it certainly happened on 15 October 1979 when the ‘republican guard’ sparked from hot to boiling by the events which happened at Castille that morning.

In time somehow the network against Mintoff started trading fire for fire but in a finer less obtrusive manner. They did not attack Labour Party Clubs, the GWU printing press or the residence of Labour senior exponents. They attacked whoever was helping Labour to maintain its political power. This ranged from the case of Karen Grech, to bombs left behind doors of several non political executives serving under Labour, to confrontation with Labour’s republic guard at Zebbug, Rabat and Zejtun in the run-up to the 1987 election.

Thankfully we have matured enough to exclude violence or the threat of violence from our political exchanges. I am not sure we have matured enough to allow the proper alternation of power without sabotage by the network of power who traditionally support the PN to stay in government. The happenings of 1998 seem to indicate otherwise but there remains an element of doubt about contributory negligence on Labour’s part for the events of 1998. The true test will come next time Labour regains government.

Ok, Joseph, ignore the broader picture, get on your knees so that the network can throw their stones.

 

When The Economy Implodes

When the Economy Implodes

 18^th October 2009

The Malta Independent on Sunday

Alfred Mifsud

Never in a million years had I thought it possible that I could live to see three rich European countries experiencing an economic implosion. I am not talking about bottom-of-the-league countries like Ukraine or Albania; I am talking about countries that, before the financial crisis of 2008, were considered amongst the richest and most successful. Specifically, I am referring to Ireland, Iceland and Latvia.

Politically, these countries enjoy a different status. Ireland is a fully-fledged EU member that adopted the euro and transformed its economy through substantial financial assistance from the EU funds. Its GDP was among the highest in the EU and many referred to Ireland as a shining example of a country that made the best use of EU opportunities to attract huge waves of foreign investment and become leaders in financial services and back-office operations. This sparked massive bank-credit-financed investment in real estate, residential, commercial and leisure.

Latvia is one of the Baltic countries that regained its sovereignty after the collapse of the Soviet Union and successfully achieved EU membership in 2004, along with eight other eastern European countries and two Mediterranean countries, including Malta. Its economy was floating up nicely with improving GDP and it had attracted European foreign investment to the extent that its banking sector was practically dominated by acquisitions made by Swedish operators. Sweden acted as a sort of a sponsor for the economic development of the three Baltic states to ensure that they continued to distance themselves from economic dependency on their former Russian motherland and Latvia was in line to convert its currency to the euro around 2012.

Iceland was not an EU member, much less a member of the euro area. However, along with Norway and Liechtenstein, it was a member of the European Economic Area, which gave it many rights of freedom of establishment in other EU countries. It is a large country with a small population, very resourceful and having a thriving fishing industry that was one of the main reasons why it frowned on EU membership, which would have entailed opening up its territorial fishing waters to intrusion by other EU countries, particularly Spain. It had adopted a very aggressive international economic posture, punching well above its weight, with its banks opening operations to raise deposits from other EU countries in order to finance the boastful foreign acquisitions by its flamboyant entrepreneurs, which also included ownership of a local healthcare company Pharmamed.

The economy of three countries enjoying a different status collapsed as the plumbing of the world’s financial and credit system became clogged as a result of the US property sub-prime crisis. Their banking systems lost the confidence of depositors, domestically and internationally, and had to be supported by their states and, in the case of Latvia, by the Swedish owners of its banking system, following nudging at EU level to ensure that Sweden lived up to its moral responsibilities not to let Latvia implode. In case of Latvia and Iceland, the IMF had to be called in to engineer a rescue operation and basically take over the economic management of the countries from their governments to ensure that the necessary but hard adjustment decisions were taken.

Both Latvia and Iceland are living through a harrowing experience, with GDP contraction in high double figures and a brutal reduction in government spending, even in socially sensitive programmes, resulting in deep and sudden cuts in the standard of living of the ordinary citizen. Iceland has experienced a sharp devaluation of its currency and is now trying to embark on an EU membership project to bring back stability to its economy and inspire fresh confidence in foreign investors.

Latvia is desperately trying to avoid devaluing its currency and has shifted the adjustment pain to the real economy by cutting wages and other social expenditure. Currency devaluation would normally ease the political, if not the real, pain of adjustment. The US and the UK have embarked on a subtle programme of letting their currency devalue to regain competitiveness without having to cut government expenditure. Latvia cannot really do this, for two reasons. Firstly, because it would basically postpone its ambition to join the eurozone by at least a decade and, secondly, because many Latvian households had already converted their mortgages into euro or Swiss Francs to benefit from low interest mortgages, on the assumption that Latvia would simply sail into euro membership. Devaluing the Latvian currency would increase the burden of mortgages in local currency terms at a time when property values have collapsed, leading to massive defaults, foreclosures and more economic implosion.

Ireland has not so far had to seek IMF support. But it has had to nationalise its main banks, guarantee all deposits and, with credit in short supply, has experienced a massive collapse in its property market, leading to a substantial loss of revenue by the state, which is running atrocious deficits. The situation is untenable. This is what an Irish government minister warned this week:

“We’re spending e500 million a week more than we’re raising. If government hasn’t the capacity to do what’s needed then others will come in like the IMF and overnight they will make decisions. We can’t let the deficit drift past 12 per cent and 15 per cent next year and 20 per cent the next. Without reform, Irish public debt would rise from about e76 billion today to e160 billion by 2013 by when two out of every three Euros raised in taxes would be going to service the debt.”

Thankfully Malta’s position, whilst not comfortable, is not as bad as that. But we should not underestimate our exposure to the property market. Our banks are considerably exposed to the property sector and a collapse in property values could bring into question the solvency of our banks, which would require recapitalisations to avoid loss of confidence. So far we have sailed through the international financial crisis with minimum damage, but the over-exposure to the property market should be keeping our bankers and regulators awake at night.

If the 2010 Budget is to have a short-term objective, than this ought to be stabilising the local property market and fiscal measures in this sense should be seriously considered.