State of the Union: Five key takeaways from Ursula Von der Leyen
17 September 2020
Key points from von der Leyen's state of the union speech [caption id="attachment_14822" align="alignnone" width="640"]...
Most of all, however, he warns against compensation for the oil price measures announced last week. Compensating for moneys which ultimately left the local economy to foreign suppliers at this point in time means we could be in for real economic "trouble".
Basically, we cannot achieve the rate of growth we had some five years ago unless we improve our competitiveness and, given that the government has forfeited the right to cushion the shocks from the international economy through fiscal, monetary and exchange rate policy, then the only avenue left open in the short run is wage policy – wage competitiveness, Prof. Scicluna argues.
He insists that, in spite of any positive results in the third quarter of this year, something which the Prime Minister has referred to recently, figures for the past five years show that economic growth is on a roller coaster ride, up in one quarter and down the next and, besides, the rates achieved so far are nowhere near what the country needs to converge with the eurozone's standard of living.
The huge hole created by the international surge in oil prices complicates matters but it is indispensable that we bite the bullet.
"If we try to compensate for the surcharge and the fuel prices we are in for trouble… big trouble. A sum of Lm50 million is a very big shock. It's roughly over four per cent of the country's private consumption; from holidays to hobz biz-zejt (tuna roll). It translates to some Lm1 per day for each wage earner. After all that's who will finally be paying.
"That is a sizeable economic shock with considerable repercussions. However, we either suffer this, bear it and find a way out to be competitive and grow in spite of the pain or else we start blaming each other and expect to be compensated. If we go for the second option the problem will escalate. From a macro-economic perspective now we have to do our utmost to reduce what are known as the secondary shocks; the primary shock is there and you can do nothing about it. If, instead of bridling the situation we compensate there will be an inflation spiral which will affect the already uncompetitive nature of our exports and, therefore, the country's fragile rate of GDP growth."
The famous two per cent GDP growth which is being claimed by the government as the latest noted success would be lost, he emphasises. "Of course, we can talk of sharing the pain evenly. But the Lm50 million have gone out of the country's reserves and that's that. You cannot compensate for that. Fault finding apart, it's the oil people who took the money. Had the money been taken by, say, the banks, by contractors or any other local operator then the government could get them back through distributional policy but once the money has left the country it's a question of sharing the pain."
The problem gains even more magnitude given what Prof. Scicluna thinks of the instruments available to the government for fostering economic growth. "Basically, what happened to Malta is that it lost its demand on the international market, mainly because it lost its competitiveness. Now you can tackle that with four instruments: monetary policy, exchange rate policy, fiscal policy and wage policy. The government decided to do away with the first two when the lira was pegged to the euro at a fixed rate. The third instrument, fiscal policy, is also locked because you basically either cut on expenditure or raise taxes. It will help the economy in the long term but in the short to medium term all we are left with is wage policy – wage competitiveness."
In short, does it mean that rendering wages even more uncompetitive and increasing inflation would be equal to hacking away at our only lifeline? "Yes, it's just foolhardy to think that the workers can be compensated. Basically, the taxpayers will have to compensate for Enemalta's revenue shortfall but the workers are the taxpayers at the end of the day. Naturally, you have to exempt those who are in certain social bands but the government has already done this."
Going back to the oil crisis issue. "Without going into the issue of money for the time being, the Cabinet has shouldered the political responsibility for that decision. Fine, but my disappointment is that the real actors, Enemalta, and, more importantly, the Malta Resources Authority (MRA) were completely absent during this time. We set up a regulator for this purpose; its job is to regulate the service provider. In this case MRA should have opened Enemalta's books and justify or condemn the raise the corporation was asking for. But there was nothing… the regulator was conspicuous by its absence. Much money is being spent on these authorities and regulators… Can we do without them? The public has the right to such justification."
What does he make of the way the matter was dropped suddenly on the social partners a couple of weeks before the budget and that there was no mention of a Lm50 million shortfall in the pre-budget document?
"Either the advice was not forthcoming to the Cabinet or it wasn't listened to. The Cabinet was not well informed that this problem would be exacerbated. They were probably hoping the oil price would go down and that the 17 per cent surcharge would be enough or nearly so; now we have double the blow because on the one hand we are increasing the prices for the future and, worse, we're also increasing utility bills for the past.
"It's like a windfall tax because you cannot react to something which you have already consumed. You cannot choose to use less electricity to tackle the portion of the money which is going for the oil already consumed. From an economic point of view this is the most painful fact.
"Consumers and businesses lost one whole year to take measures for conservation and efficiency and, to be fair, the situation was different with regard to fuel. The mechanism worked there and the prices increased accordingly."
Turning to the current economic scenario and the seeming mismatch between the Prime Minister's recent comments on the positive results of the third quarter and the contradiction, on the same day, apparent from statistics issued by the National Statistics Office, Prof. Scicluna is diplomatic: "I thought about this and think that, in one way, economists and industrialists are saying that the glass is half empty and the Prime Minister is saying it is half full.
"I empathise with the Prime Minister who is putting a lot of effort trying to cut expenditure, reforming the education sector, restructuring a number of enterprises, privatisation and so forth to draw some comfort from certain successes in order to encourage the government to do more. But what the economists and industrialists are saying is simply that it's just not good enough to reach the 'high quality' fiscal consolidation and 'sustainable growth' which the IMF and the rating agencies are expecting from us."
Turning to the recently published quarterly data by the NSO – seasonally adjusted in such a way that they iron out imbalances due to seasonal factors – he emphasises the point: "If you look at figures for this same second quarter we are referring to and compare it to the same quarter in 2000 you will find that our economy has stood still. We are talking of a five-year stretch in which we haven't seen any growth at all. The growth we have in one quarter is ironed out by decline in another quarter."
The issue becomes more evident when we compare ourselves in a global context. IMF managing director Rodrigo de Rato said recently that in 2004 global growth was the highest in three decades, it was five per cent. "The growth was not evenly spread, there were the fast growing duo China and India, with nine and seven per cent respectively, the US, with just less than four per cent, and the eurozone, with just over two per cent. More so when we compare ourselves to our class of new member states. So… we have to acknowledge that we do have a problem.
"More importantly, however, the man in the street at the end of the day voted for EU membership because he wanted Malta to converge with the EU's standard of living. Basically, we have to grow at a rate faster than the EU's in order to achieve this. It is very simple, if we don't we will never catch up. Unless we show that our projected rates of growth are such that we could reach the standard of living levels of some of the best European economies, at least in two decades, then it's not going to be good enough.
"When you look at all the projections that Malta has given to the EU (in terms of the growth and stability pact) and to the IMF, the rate of growth targeted for years to come, as far as 2010, don't go beyond the 2.2 per cent per year. With all the peg stability, deficit cutting, reforms and all that, we won't be able to deliver what the people are expecting: a European style standard of living. We will not be reaching the targets of the Lisbon Agenda in terms of employment either – a higher participation of people working and earning a decent income.
"Fiscal consolidation, low inflation, the stability of the exchange rate peg… these are good things, they contribute to macro-economic stability but this is where I disagree with whoever is advising the government on this issue of stability. I cannot be comforted with these results unless we progress in the areas which are holding the economy from growing. Our price competitiveness, no matter how you look at it, is not looking good; inflation is higher. Those are the contributing factors. It's only when these start changing that we can start sighing in relief.
But what is holding back the economy?
"Take the restructuring, for example. Just by saying that we are going to cut five per cent on public expenditure is not enough. We have to have meaningful reforms. The IMF are very clear about it. They are saying that we should have high quality adjustment and not just cutting expenditure across the board. In other words you have to take the trouble, have a special committee which will advise on cuts where there are inefficiencies and doesn't cut from where there are efficiencies.
Moody's have been saying the same thing and they are not convinced that the government is implementing such quality expenditure cuts."
"The economy grows in two ways; by reaching its full potential… making full use of the resources available (filling up hotel beds, reducing manufacturing excess capacity, reducing unemployment) and then by raising that potential further upwards (raising savings and investment, increasing labour force participation, investing in scientific education and so on). So far we have not yet reached full capacity which we had five years ago."
With regard to his expectations for the budget Prof Scicluna emphasis the need for more ambitious growth targets than Malta has given the IMF and the EU and statements on how it intends to achieve these targets.
"Let us have benchmarks for our price competitiveness and a clear plan on how we intend to achieve these targets for the short term revival of the economy. Let's have wage targets and productivity targets. In order for them to be sustainable, wage increases have to be linked to increases in productivity so let us tackle that.
"Let us have targets to decrease the real effective exchange rates over the next two three years and be clear on how we are going to achieve these goals. Then once you have the ingredients you just wait for the cake to bake basically. I hope the budget will have the courage to address these issues."
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