Monday 31 March 2014

Celebrate the process



Today we celebrate the 35th anniversary of Jum il-Helisen, commemorating the closure of the military base on 31st March 1979.

Next September we will celebrate 50th anniversary of Independence on 21st September 1964.

In December we celebrate the 40th anniversary of becoming a Republic on 13th December 1974.

Soon on 7th June we celebrate another national day being the 95th anniversary of Settu Giugno when the British colonizers killed 5 Maltese civilians who were protesting against the rise in price of basic commodities ( bread ) on that day in 1919.

And on 8th September we celebrate the national day of Vitorja commemorating the victory over the Ottomans in the Great Siege of 1565 and the end of hostilities in Malta by the axis power during the WW II.

The stretching of national day calendar to commemorate 5 different occasions exposes political immaturity and forced compromises, partitioning the process in nice clean boxes along political dividing lines.

It is time to grow and show political maturity.   Rather then celebrate the event we should celebrate the process which started with the dream  of nationhood by Mikiel Anton Vassalli in the 18th Century, continued through Manwel Dimech in the early 20th Century and was finalized in the post war history by our current political formations.

Rather than commemorating the event every time we celebrate a national day we should be celebrating the process which involves all the five national days.   And there is no need to celebrate the process five times every year.  Once a year is enough I would say.

Which one?   Ah, that is the million dollar question and unless one adopts a rotation system we need a higher dose of political maturity to resolve that.

And what would happen to the other four holidays if we ever agree to a single national day?  Possibly the best would be to add three bank holidays falling on a Monday in Spring, Summer and Autumn ( so many holidays Winter ).   Why not four?  Because normally one day would have fallen on a weekend.

Advantages:  avoidance of too many mid-week breaks which disrupt production; political maturity; better spread of public holidays.



Monday 24 March 2014

Core Europe in the periphery

 This article was published in The Malta Independent on Sunday 23 03 2014
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If the Economist Business Round Table held in Malta earlier this month served for nothing, it served to raise awareness among international speakers and delegates that Malta is an island of stability representing the best of core Europe in its periphery.


Given the problems encountered by periphery countries like Greece, Cyprus, Portugal and Ireland (who all had to seek bailout from the EU) as well as Spain and Italy (who avoided full scale bailout but have been subjected to strict austerity measures and have seen their banking sectors seriously impaired by the financial crisis) Malta was often unfairly grouped with this sickly grouping. 

As it so happened practically a couple of days before the Malta Round Table the International Monetary Fund (IMF) posted on its web-site an article titled "Euro Area: Deflation versus Lowflation".    IMF posted the chart below which shows the countries on the left half of the chart with an inflation rate higher than 1%. Malta is in this group with the best of the breed i.e. Finland; Austria; Germany; Belgium and The Netherlands.    In the right half there are the countries experiencing inflation lower than 1% and causing apprehension about the risk of their flirting with an outright deflationary environment.



EUR Update_Feb2014_Deflation Blog.007
Not only Malta is on the virtuous page but we are the country with the most normal rate of inflation giving a real interest rate of about 2% which all economic text books would define as having the optimum position often referred to as Goldilocks economics i.e. not too hot causing high inflation and price bubbles and not too cold causing risks of stagnation and deflation. Our net debt as a percentage of GDP is also healthy.
 

If you should be wondering why having real inflation less than 1% is bad, it is because very low inflation ( or possibly negative i.e. prices falling rather than rising) as being experienced in Spain, Italy, Latvia, Slovenia and Portugal, all on the top right half of the table, means these countries are suffering high real rate of interest ( i.e. nominal rate adjusted for inflation/deflation) which scares away investment and keeps down economic growth.    In Malta because we have very moderate but positive normal inflation,  the real rate of interest is lower and this stimulates investment and economic growth.
During last week’s European Central Bank (ECB) press conference, President Draghi described the Eurozone as an “island of stability”.   If he were referring to Malta he would be right as we have stable inflation in the context of healthy economy growth.  But calling the whole Eurozone an “island of stability” may be a bit of a stretch. With Eurozone inflation well below the 2% target for over a year and projected to stay so until at least 2017, the Eurozone can aptly be described as the “island of price stability”. But price stability at a level well below the 2% gives the stability of the cemetery rather than the stability of economic growth needed to address chronic unemployment.
Very low inflation may sound like a good thing, but one of the risks of prolonged low inflation is that it could become entrenched in inflation expectations and people’s behaviour, thereby becoming the new norm. President Draghi knows this, but perhaps because the current ECB configuration does not allow enough room to manoeuvre with symmetry when inflation undershoots as when it overshoots, the ECB is pretending that low inflation is not a problem. 
It definitely is a problem and the point was made emphatically by Martin Wolf, chief economic editor of the Financial Times this week in an article titled "The spectre of eurozone deflation".   The main points/quotes of the article are:
·         ECB should announce a symmetrical inflation target of 2% indicating it will henceforth treat excessively low inflation as a problem no less serious than rapidly rising prices.
·         Ultra low inflation is dangerous. If inflation in strong core countries is low then inflation in crisis hit countries must be close to zero or negative.
·         If average inflation stood at 2% with the surplus countries at say 3% and adjusting countries at 1% the Eurozone would be in far better shape.
·         ECB should implement a programme of quantitative easing; negative deposit rates should also be considered.
·         ECB would suffer a deep split if it sought to adopt such a policy.
·         The fear (is) that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.
·         ECB might do little about it (fragile economic recovery of the Eurozone) because the measures it would need to take are controversial (with the Germans).
·         ECB's job is to stabilise the Eurozone not the German economy.  If the ECB's policy takes care of the latter rather than the former than the Eurozone is not a currency union, it is something quite different altogether.
 
Personally I do not agree that ECB needs to do something as controversial as quantitative easing or as risky as negative deposit rates.   ECB needs to license the ESM as a bank, give unlimited liquidity access to the ESM through its discount windows, widen the eligibility of assets available for discount and force the ESM to use this liquidity to recapitalise massively fragile banks in periphery Eurozone so that the banks can start acting as banks and no longer as zombies.  In so doing it would strengthen the transmission mechanism for ECB's monetary policy.   SME's in Italy, Spain, Portugal Ireland and Greece must find the necessary bank credit support and at a comparative price as much as SME's anywhere else in the Euro area.

Malta should be proud of being a sample of core Europe in its periphery, but we would be much better off if other countries around us are truly helped by the ECB to heal rather than merely being kept alive by artificially low interest rates.

 

Wednesday 19 March 2014

Putin is substantially right but strategically wrong


Putin is becoming Russia's problem.  The West must be rubbing their hands with satisfaction at the way Putin has shot himself in the foot with his handling of the Crimea problem.


Putin is substantially right in his claim that Russia cannot accept that Crimea, where Russia has strategic interests and which historically was always Russian territory, falls under the control of a pro-West Kiev government that brings NATO right on Russia's doorstep. 

Unfortunately for Putin, even when he is substantially in the right he makes horrendous strategic mistakes which in the long term jeopardises the prospects of realisation of  his dream to restore to Russia the super-power status it once had.   Pity he is rendering Russia as a pariah rather than a reliable partner.

The following facts, which are beyond contention, explain why Putin is substantially right to manoeuvre for Crimea to become Russian territory:

  • Annexation with Russia  is what the vast majority of Crimeans want.
  • Crimea is historically part of Russia and was partitioned to Ukraine in 1954 when both Russia and Ukraine formed part of the Soviet Union - USSR.
  • Russia has strategic interest in Crimea which hosts Russian strategic military assets.
  • Russia, though not the super power it once was is still a formidable military force and strategically cannot accept the risk of NATO becoming in control of Crimea if Ukraine moves west and joins NATO (as many other countries under Moscow's influence during the cold war have done)
  • Russia strategically needs a buffer between its borders and NATO countries.
  • Russia has good reason to feel betrayed when the agreement signed by the Ukraine President Yanukovich and the representatives of the Kiev Maidan protesters, negotiated with 3 EU foreign ministers and a representative of the Kremlin, was undone as soon as it was signed and a new non- elected government took over whilst elections agreed for December 2014 were brought forward to May 2014.
These are valid reasons to explain that there is substance in Putin's decision to re-annex Crimea to the Russian Federation.    This extreme move gained further justification by commitments given by Putin, that Russia will respect the rights of minorities in Crimea and will allow Ukrainian and Tartar as official languages alongside Russian in Crimea. 

But at the same time the decision while substantially justified, is strategically wrong for these reasons:

  • The method used smacks of occupation which establishes dangerous precedents which are a risk to Russia itself for safeguarding its territorial integrity when many of its eastern regions in the Caucuses have cessation ambitions.
  • In 2014 the international community cannot accept such crass methods of territorial grabs.
  • Russia could have achieved total control of Crimea through diplomacy.
  • For safeguarding and guaranteeing  the integrity of the remaining Ukrainian territory Russia could have extracted guarantees from Ukraine that it will not join NATO or offer strategic military facilities or rights to NATO. 
  • Russia could be forced to pay a high economic price for its undiplomatic liberties when its economy is still very weak and overly dependent on energy exports.
  • USA and the west will be forced to open an economic strategy to reduce reliance on energy imports from Russia which in the long term could cripple the Russian economy.
The problem with Putin is that at heart he remains a KGB man, someone the west cannot trust and cannot do business with in reciprocal confidence.   This event marks his clear preference for using force rather than diplomacy.  He has denied himself acceptance and respect as a true world leader willing to play by the rules rather than by use of force.

In the end with China moving ahead on all fronts to acquire super-power status,  Putin should realise that Russia's long term interests do not lie in fighting the West but in making Russia as an integral and influential part of the West as with the world economic centre of gravity moving eastwards, Russia cannot stay in the middle.

Imagine a different scenario.   Imagine a situation where Russia respects existent sovereign borders but uses diplomatic channels to demand respect for Russia's military interests in Crimea and protection of the rights of Russian minorities in Crimea and Eastern Ukraine.   Imagine a scenario where Russia displays its military power within the confines of its territorial limits to strengthen its diplomatic demands.

Within such strategic positioning Russia would have, rather than diplomatically isolating itself, found support from core European countries, especially those countries that rely on its energy supplies, for a peaceful solution.   This would have restored Crimea as Russian territory against a multilateral guarantee for the territorial integrity for the rest of Ukraine.  Ukraine would have given a commitment not to join NATO, and assurances to give sufficient autonomy and respect to its Eastern regions where Russian ethnics form a majority.  The mildness of the sanctions imposed for the annexation of Crimea bear witness to the possibility of such diplomatic solution.

Such a behaviour would have persuaded the West of Russia’s commitment to play by the rules while defending its strategic interests.  It would have gained for Russia diplomatic respect and economic stability attracting foreign investment so necessary for the development of its economy.   However by choosing the undiplomatic military route to force its right Putin has rendered himself an unreliable partner that cannot be trusted that his ambitions truly stop with Crimea.  Unavoidably the west will be forced to isolate Russia diplomatically and economically until it crumbles just like the USSR did.   The West cannot risk another Munich moment as with Hitler in 1938.

Putin is still in time to work back his ambitions through diplomatic channels but only if he shows in deed not just words his commitment to respect Ukraine territorial integrity while demanding full respect for rights of  Russia and  Russian ethnic minorites.


Monday 17 March 2014

Proud to be green

EUR Update_Feb2014_Deflation Blog.007

No it has nothing to do with St. Patrick's day and the festivities among the Irish Community all over the world.

It has all to do with a study carried on the IMF's web-site categorising Malta among the virtuous Euro area countries.


In an article titled "Euro Area: Deflation versus Lowflation"  posted on 4th March 2014, there is the above chart which shows the countries on the left in green which are having an inflation rate higher than 1%.  Malta is in this group with the best of the breed i.e. Finland; Germany; Belgium and The Netherlands.   On the right the countries in red as experiencing inflation lower than 1% and causing apprehension about the risk of their flirting with an outright deflationary environment.

Not only Malta is on the right page but we are the country with the most normal rate of inflation giving a real interest rate of about 2% which all economic text books would define as having the optimum position often referred to as Goldilocks economics i.e. not too hot  causing high inflation and not too cold causing risks of stagnation and deflation.   Our net debt as a percentage of GDP is also healthy.

Great to be green especially on St. Patrick's.

Thursday 13 March 2014

Times talk - 11th March 2014

http://www.timesofmalta.com/articles/view/20140308/timestalk/one-year-on-is-the-labour-government-delivering-on-its-promises.509771

#TIMEStalk
Watch: One year on, is the Labour government delivering on its promises?

Letting Rome burn

If Rome is burning and you can do nothing about than you may be entitled to claim that there is no problem or that it is not your problem.

This seems to be the attitude being adopted by the European Central Bank (ECB) when faced with the threat of disinflation or deflation, or more simply the stark undershooting of the average inflation in the Euro area from their just below 2% target.

Ingram Pinn illustration










        If the average inflation rate was missing the target inflation rate on the upside i.e. if it were exceeding 3%, you can rest assured that the German driven ECB would have raised interest rates, even if faced with evidence that going forward the economy would slump.   They did it twice under Trichet's leadership and in both cases they had to reverse their decision as soon as crisis struck.

But there is evidently great asymmetry in the way the ECB operates when inflation undershoots target.   Rather than take action based on the average Euro area inflation it is quite evident that the ECB is forced to model it policy on the basis of the inflation rate in Germany, and to hell with the rest.

Because Germany can live with a Euro exchange rate of US$ 1.40 the ECB does nothing about it, not even verbal intervention, even though this rate of exchange nullifies the sacrifices being made by periphery countries to regain export competitiveness through harsh internal devaluation ( involving lowering wages, pensions and social payments).

These observations were eloquently spelt out in an op-ed by Martin Wolf, chief economic editor of the Financial Times in yesterday edition with a column titled "The spectre of eurozone deflation".

The main points/quotes of the article are:

  • ECB should announce a symmetrical inflation target of 2% indicating it will henceforth treat excessively low inflation as a problem no less serious than rapidly rising prices.

  • Ultra low inflation is dangerous. If inflation in strong core countries is low then inflation in crisis hit countries must be close to zero or negative.

  • If average inflation stood at 2% with the surplus countries at say 3% and adjusting countries at 1% the eurozone would be in far better shape.

  • ECB should implement a programme of quantitative easing; negative deposit rates should also be considered.

  • ECB would suffer a deep split if it sought to adopt such a policy.

  • The fear (is) that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.

  • ECB might do little about it ( fragile economic recovery of the eurozone) because the measures it would need to take are controversial (with the Germans).

  • ECB's job is to stabilise the Eurozone not the German economy.  If the ECB's policy takes care of the latter rather than the former than the eurozone is not a currency union, it is something quite different altogether.

Personally I do not agree that ECB needs to do something as controversial as quantitive easing or as risky as negative deposit rates.   ECB needs to license the ESM as a bank, give unlimited liquidity access to the ESM through its discount windows, widen the eligibility of assets avaliable for discount and force the ESM to use this liquidity to recapitalise massively fragile banks in periphery eurozone so that the banks can start acting as banks and no longer as zombies.  In so doing it would strenghten the transmission mechanism for ECB's monetary policy.   SME's in Italy, Spain, Portugal Ireland and Greece must find the necessary bank credit support and at a comparative price as much as SME's anywhere else in the Euro area.

And all this is unquestionably within the ECB's mandate no matter how distasteful it would be to the Germans who mistakenly think they can keep the Euro project on track if all countries become carbon copy images of mutterland.

Tuesday 11 March 2014

A year later: the true picture of unemployment

This article was published in The Malta Independent on Sunday - 09 March 2014
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I am fed up with endless arguments between Government and Opposition where the former emphasises that the employment situation is getting better whereas the latter stresses that the unemployment situation is getting worse.

In theory, because of the old adage of lies, damn lies and statistics, both arguments could be correct.   If the labour supply increases faster than employment, government could boast of increased employment and the opposition could point out increased unemployment.

To avoid this statistical conundrum one has to avoid going by registered employed or unemployed and read the situation through the Labour Force Survey (LFS) which rides over the erratic registration issues and looks at employment and unemployment in toto, irrespective of whether registered or not.

To give an idea about the difference in results produced by different methodologies just see these figures both related to September 2013, the date of the latest published LFS:


                                                            LFS Q3/2103                        Registration Statistics                                                                                                                                        September 2013

Employed                                        179476                                          157684
Unemployed                                      12827                                              7619

Labour Supply                                 192303                                          165303

What this basically means is that over and above registered workers there additionally are some 21792 productively employed, but unregistered and therefore paying no payroll taxes or national insurance.    It means there are a net additonal  5208 unemployed persons  who wish to work but are not registering with the ETC.   It also means that our labour supply is 27000 (16%) greater than official registered records indicate it is.

So politicians of left or right should stop singing from the hymn book that suits them, which gives a very incomplete picture of the employment situation, and instead interpret employment data from the LFS which is more complete and consistent.

The last LFS is for Q3/2013 and in comparison to Q3/2012 the situation is :


                                                                     LFS Q3/2103            LFS Q3/2012

Employed                                                          179476                    174126
Unemployed                                                        12827                      12283

Labour Supply                                                   192303                   186409

This shows that unemployment has held steady in absolute terms even though the Labour Force increased by 5894.   In percentage terms the unemployment as a percentage of the labour force kept steady from 6.59% to 6.67%.

In September 2013 the present government had been in office for just 6 months.   It is doubtful whether in the first 6 months any government can do anything material that translates into noticeable differences in the rates of employment / unemployment, although the very removal of uncertainty of  elections help to stimulate job producing investments.  In fact jobs increased in the 12 months to September 2013 by 5350 compared to 3660 in the previous 12 months to September 2012.

It is too early for the government to take credit for job creation as well as for the opposition to pin fault on government for what they perceive as rising registered unemployment.   Generally such increase in registered unemployment in the context of increasing employment is a sign of people who had stopped registering coming back on the labour market as they perceive better employment prospects.

But for a real analysis of government labour policy effectiveness we have to await a few more LFS quarterlies.
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A year ago to the day Labour won the general elections with an untypically wide margin that left no room for doubt that people wanted change.   Next Tuesday Dr Joseph Muscat will celebrate his ‘quccija’ as Prime Minister.    Many columnists today will do their analysis of Labour’s performance of its first year in office and may be one expects me to put in my two penny bit,  biased or objective as it may be perceived.  

I will try to keep it short.  If one prefers one-line assessments it can be condensed to “so far so good but could be better”.  

For a somewhat more detailed analysis the good is:
  • ·         Can do attitude

  • ·         Business-like approach, free of corruption and minimal bureaucracy

  • ·         Tackling old problems like Enemalta’s finances  , cost of utilities, public transport and restructuring of the judiciary systems and set-up.

  • ·         Disclosure of corrupt practices as in the Smart Meter scandal

  • ·         Allowing continuity where necessary as in the case of Air Malta’s restructuring and the tourism sector in general

  • ·         Delivering pro-growth and pro-employment budget while staying within Euro area deficit targets

  • ·         Energising foreign investment promotion through a re-born Malta Enterprise.

  • ·         New initiatives related to oil exploration

  • ·         Build-up of  regional support for effective lobbying in the EU council to revisit EU’s burden sharing arrangement related to illegal immigration

  • ·         Innovation to open up new economic areas such as the IIP and ensuing boost to infrastructure investment through sovereign wealth fund like mechanisms.


Could be better:

  • ·         No initiatives for higher tax compliance and enforcement of fiscal morality.

  • ·         Not enough consultations before important decisions are taken, projecting an image of dithering when decisions have to be revisited following subsequent consultations

  • ·         Not yet fully adjusted to government role and clinging to practice when in opposition to point out problems but offering little by way of effective solutions. 


      We are also marking the first anniversary of the PN’s role reversal to opposition after an overlong stay in government when they finished with an empty tank leading to their disastrous performance at last elections.

How did the PN fare?  The simplest answer is the same as the then MLP fared in the legislature between 1987 – 1992 after three consecutive terms in government.   Like the MLP then, the PN have not accepted their new reality and are continuing to assume that by depicting government in the most negative way and obstructing in the most confrontational manner possible, they can force the electorate to realise their misjudgement last year and restore their pretence for a God given right to be a permanent government.   Their interpretation of consensus is still what it was when in government: my way or the highway.

As is normal it takes a second electoral defeat before the PN will take steps to  re-make themselves electable.


Wednesday 5 March 2014

The power of the markets





"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

This is a popular quote credited to James Carville in the early 1990s in his role as adviser to President Bill Clinton.

The Ukraine saga this week showed the power of the markets, not just the bond markets but also the foreign exchange and the equity markets.

Last Friday 28th February most equity markets closed at their record or multi year highs.   In spite of the political problems on Russia's border with Ukraine the general thinking of investors was that this matter will blow over and a political solution will be found to respect Ukraine's sovereignty but re-assure the rights of Russia to its Crimea base and about the protection of Russian ethnic community in Eastern Ukraine.

Over the weekend President Putin began sabre rattling.   Evidently Putin was pissed off with the West.  He felt betrayed. 

Firstly by denying him a spot in the sun when the world political  leaders kept away and from the Sochi Olympics ( and the Italian PM who attended was forced out no sooner he got back to the office!!).   But much worse he felt betrayed that the agreement signed on Friday 21st February between the then President of Ukraine Yanukovich, representatives of the Kiev protesters and three EU foreign ministers of Germany, France and Poland,(which  agreement was blessed by Putin through an envoy to these negotiations) was unravelled as soon as it was signed.

The protesters kept insisting on the immediate exit of Yanukovich who had to run for his life.  The result is an interim unelected government in Kiev which is not recognized in the eastern side of the country and with elections called for May rather than December as originally agreed.   This will leave Putin little time to influence the election outcome which he thought he could with Yanukovich in place and the elections set for December.

The sabre rattling had dramatic effects on the financial markets but especially on Russian equity markets and on the forex value of the Russian Rouble.   Both fell more than 10% on Monday 3rd March.

This sharp reduction hurts investors but it especially hurts the Russian population and Russian investors in their flagship companies.   So much pain that by Monday evening Putin was forced to restore priority of the brain over the heart and was looking for an honourable exit.   He accepted appeals for de-escalation  and showed willingness to resolve the issues diplomatically rather than militarily.

On Tuesday the markets responded by recovering most or all of the losses suffered on Monday.

When Russia last invaded another European country (Czechoslovakia)  in 1968 there were no markets.  Russia was a closed economy, the Rouble was not convertible and stock markets in Russia did not exist.

In 2014 Russia and it politicians have come to understand that their power in a globalised world is highly circumscribed by the power of the markets.