EU is 60 years old – are we celebrating?

Author: George Mangion
Published on Malta Today 29th March 2017

UK Prime Minister Theresa May invoked Article 50 on Wednesday and faces uncertainties due to Brexit, and one hopes that its gloomy economy will not seriously affect the arrival of Brits as tourists this year. Can this mean less traffic and continued loss in travellers carried incurred by the national airline which is rumoured to be over €66 million in the red?

With a livery of eight leased aircraft, Air Malta employs a substantial number of qualified pilots and technical engineers which is too heavy a burden to match dwindling revenues. Observers say that unless it quickly restructures and starts an early retirement scheme it may face insolvency or possibly have to apply for a second bailout, which many fear may not be approved by the European Commission.

Experts in the field of aviation suggest that the company needs to be segmented into its basic four functions such as ground handling, technical repair services, administrative functions and the regulatory services associated with its AOC license. The parts, which are outside the scrutiny of EU regulation, can be restructured and losses absorbed into an ad hoc special purpose vehicle to be administered under the law concerning restructuring of loss making units. A creditors’ meeting can be held with such units to help give the administrator a breathing space to revive the struggling operation.

Over a reasonable span, the active parts of Air Malta’s tree can be given a second chance to bear fruit after a firm pruning of any dead branches.

Another aspect of the local economy concerns manufacturing and construction industries, which have seen a healthy rise in full-time employment. Cynics disagree with this, saying economic growth is only a temporary signal and it is not sustainable. They are quick to criticize a recent increase in employment in the government sector which now employs over 44,000 people. They feel that extending the reach of bureaucracy in the public sector can be a Damocles’ sword perched over the Exchequer’s head which will come to haunt us in the coming years.

Party apologists are not shedding any tears over this profligacy saying that the number of extra staff can be absorbed in creation of more private-public-partnerships. They throw caution to the wind and ignore the doom-mongers, quoting the positive indicators issued by major credit rating agencies. The latter praise is for implementing tighter control over public expenditure (no new taxes), but as 2017 is the last year before elections one fears that pressure to turn open the taps is inevitable. A typical example is the drive to increase minimum wage across the board as a cause to satisfy protests from unions, Caritas and NGOs in their perceived holy fight against absolute poverty.

The Opposition is also expressing its solidarity with voters towards a 10% minimum wage increase spread over three years. Government is tempted to increase wages but one cannot ignore the warning issued by the Fiscal Council to government, advising fine-tuning of expenditure plans so as not to derail the policy to continue reducing national debt below the 60% of GDP mark. In fact, one notices that the approved list of capital expenditure for next year is a prudent one, yet if properly executed it will continue to improve the well-being of citizens. This includes (amongst others) a call for the design, building and operation of the Gozo tunnel and a tender for a fast ferry service between Valletta and Mgarr. It is expected that new iGaming companies will domicile here if the proposed new fibre-optic link will be laid between Malta and Marseilles (France) to reduce the existent full reliance on a link with Italy.

The cherry on the cake is the pledge to set up a new national oil company to kick-start our neglected drive on oil exploration, particularly in the Sicily channel which is contiguous to rich oil-bearing rock. The price of crude oil is now about double the low it reached in January and augurs well for any new investment to domestic exploration. The oil market has been driven to a large extent by the agreement to reduce output late last year of OPEC, a group that includes most of the leading oil exporters.

Other factors which may be of concern our economy is the frailty of the euro currency. It is facing difficulties due to political uncertainties this year but one hopes it might get through the year unscathed if Marine Le Pen is defeated in France’s presidential vote and Angela Merkel is re-elected in Germany. Italy may soon go to the polls and if it manages to secure a safe landing for its flagging bank sector and possibly see the return of the energetic Matteo Renzi government, then the future of the euro may stabilize.

Economic growth in Europe cannot be assessed in isolation and it is important to review the score sheet by the US economy. The US is expected to continue at a moderate pace following the election of Donald Trump with his mantra of ‘making America Great again’, and investors are expecting superlative economic growth, higher inflation and stronger profits. Expectations are high this year for the effectiveness of Trump’s policies to reduce taxes and reduce complex regulation. Trump has withdrawn the United States from the Trans-Pacific Partnership (TPP), and he plans to renegotiate NAFTA. Renegotiation of existing trade pacts is one element of Trump’s agenda, but other policies include border tax adjustments and targeted tariffs on Mexican and Chinese imports.

Surely change will take time amid resistance coming from political adversaries such as the stiff resistance from both Senate and Congress to repeal ObamaCare. Surely it takes time for his populist agenda to be implemented and one may not be surprised if the much vaunted public spending may be stalled by Congress.

Notwithstanding, the US economy is heading for a rally fuelled by optimism that he would deliver on pro-growth promises, including tax cuts for small companies, higher infrastructure spending and a lighter regulatory touch. Trump’s approach to trade is considered to be less friendly to international trade, albeit economists think that his protectionist trade policies would slow economic growth while increasing consumer prices and inflation.

Another agent of change is the interest rate hike announced this month as the Federal Reserve is rumoured to announce three rate increases in 2017. This will probably push the dollar higher and make other currencies including sterling and euro look weaker by comparison and obviously render US exports less competitive.

The question one may ask is – will 2017 usher in a general-equilibrium theory given the strong impetus Trump has pledged to American business to intense competition from low cost countries in Asia and Mexico. The theory assumes perfectly competitive markets in the USA are made up of businesses that all set prices at marginal cost. It says that in a competitive market, prices are a signal of the marginal value of goods to consumers as well as the marginal cost of goods to producers.

Back home, 2017 brings in exciting times due to augmented exposure from global media during the remaining term of EU presidency yet voters are not in a celebratory mood to congratulate political leaders partying in Rome at the 60th anniversary of the Union. They are more cognizant of the increased tempo of partisan bickering over the airwaves which is discernable across the social media in the run-up to elections.

Author: George Mangion
Published on Malta Today 29th March 2017
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