George M. Mangion | Wednesday, 15 July 2009

Economy recovery or destabilisation

The title of this article coins two words depicting contrasting situations. This vaguely reminds me of the late Michael Jackson’s popular song black or white. In his case he cheerfully sings that it does not matter if it’s black or white.
In this article it is painfully obvious that it does matter if one welcomes an economic recovery or sows the seeds of destabilisation. Let me explain how at a time of a recession any inordinate demands by the labour market slows down the recovery. Many Western governments are desperately trying to stimulate their economies while others such as Britain and Ireland facing worst recessions want to cut public expenditure and downsize. Currently the Irish government faced with the worst recession since the war has contemplated that it will downsize 70,000 public sector workers.

Thus, it was reported that Brian Lenihan, the minister for Finance, thinks the best way to stimulate the economy would be to cut public sector workers’ pay, by between five and 10 per cent! It comes as no surprise that the opposition is vociferous in criticising the Irish government blaming it for the growing unemployment queues. This heralds a battle cry from unions and activists warning of the horrors of mass unemployment, poverty wages and a gradual ruin of public services, typically health and education. Back home, we hear the recent request to the Prime Minister from the General Workers’ Union general secretary Tony Zarb who pointed out that the cost-of-living increase would continue to be given to “everyone and in full”. He expected support from employer organisations to stand fast and ask the government to relieve them of the burdens that have been imposed on them rather than weaken workers’ conditions of employment. It looks like the battle drums are being beaten in a frenzy since similar sentiments are voiced by the largest public sector union UHM insisting on full cost of living increases to buttress the recent electricity hikes. It is a pity that a dilemma has arisen when the mechanism of cost of living adjustment (COLA) was purposely intended to ensure an equitable compensation to workers based on the computation of inflation as officially registered. True one can blame many external factors and as yet no study has been carried out by the Central Bank to determine why Malta has experienced a relatively high level of inflation in comparison with our trading partners in the EU.

The opposition continues in its tirade to blame the government for its hasty move to solve Enemalta dysfunctional structure where its audited accounts have now revealed that its finances are in a perilous state and is living on a shoe string on the drip financing (so to speak) from a major bank. Yes the Employers Association’s spokesperson complains that such inflationary pressures in themselves are seriously affecting exporters and the relative strength of the Euro to the sterling and dollar is not helping. But nobody can blame such negative effects of a drop in competitiveness because Malta is one of the few countries with an automatic indexation between wages and inflation. It looks like the electricity bills are the new whipping boy for the unions who blame the minister in charge on the abrupt manner that they were introduced. Mr Zarb has an ace up his sleeve when he argues that the workforce is experiencing insecure working conditions and the government constant sugaring of the “recession“ pill has not helped workers prepare themselves adequately for the consequences that a contraction in the economy would bring along. Granted that as the fragile tourist industry feels the full brunt of a 17 per cent drop in arrivals, the inevitable tightening in working conditions will manifest itself in people working below minimum wage levels. Others particularly in construction get paid low wages with no compensation for working overtime, at night, on Sundays or on public holidays. Naturally the unions are building up steam to confront the drafting of the 2010 budget which already has been discussed at MCESD dialogue meetings. On the other end of the spectrum one hears the cautious mood expressed by Helga Ellul, the president of the Chamber of Commerce and Industry. She cautioned restraint and was against any blanket cost-of-living wage increase at this fragile moment faced by some manufacturing sectors. Such unaffordable overheads will inevitably jeopardise jobs. In her view, there is no way how across the board wage increases be tolerated unless they are in turn matched by productivity gains - otherwise this would trigger redundancies. Yet it goes without saying that justice has to prevail and if the stakeholders had legally bound themselves to honour the COLA increase based on the previous year’s rate of inflation, then this will work out not less than €7 per week for 2010. Inopportunely this rate is much higher than the compensation paid for past few years but then inflation is also at its highest. Hot on the heels enter the GRTU General secretary Vince Farrugia (and PN’s nominee for the last EP elections) who drafted a report, entitled Restoring Confidence for a New Start. It appears that the economist is singling out the banks mainly considered as the “fat cats“ of the land, who roam in the economic jungle undeterred by regulation and ignoring the directives of ECB to lower their interest rates. A case in point is the publication of the interest schedule published this week by one major foreign owned bank. This institution is paying the princely sum of 1.7 per cent on term deposits for a three month basis when inflation is running at almost three times that amount. This sounds unbelievable but true.

Undeterred, the GRTU‘s report exhorts the authorities in charge of banks to sharpen their tools and do their share in restabilising financial markets by ensuring that any public support given to banks as well as interest rate cuts are passed on to consumers and not used in entirely favour of bank shareholders. For decades we have been promised that the general service will trim its excesses and start competing for scare resources to feed its burgeoning payroll. Perhaps in the context of balancing the demands of workers and their employers it is best for the finance minister to emulate how SMEs succeed to survive. However, small enterprises face specific problems as regards labour market regulations, inadequate banking finance, poor access to social benefit systems and limited access to training. It seems that rewarding workers for the fruits of their endeavours is a problem which needs the consensus of all stakeholders to be peacefully resolved. Thus to conclude, I quote Economist Lawrence Zammit and government appointed chairman at Air Malta writing in his Saturday contribution in a local newspaper. He said the current cost of living mechanism had been agreed upon between employers, unions and the government and no change can come about without consensus between all interested parties. It is no secret that Air Malta is not exactly brimming with profits due to the sharp drop in tourist arrivals while facing cash flow constraints. This is compounded by competition from low cost airlines and higher fuel costs so any excessive wage demands do hurt the bottom line. Obviously this is a Catch -22 situation in view of the fact that the unions blame the government for procrastination in not affording a financial stimulus last year, while the government says that its noble objective is to protect jobs. Finance Minister Tonio Fenech last week was laying the ground for a tough budget. Tough budgets result when deficits go beyond the Maastricht 3 per cent criteria and to balance it calls for no magic ….it is either spending cuts or more taxes. The minister proclaimed that time is not ripe for new taxes. He is trying a “moon walk” a la Michael Jackson and recently compared the stewardship of the economy to a person guardedly driving a car with two punctures. Realistically he needs more than a magic wand in order to accommodate legitimate demands from pensioners and social cases while axing expenditure to balance the budget. The minister and his advisers are caught between a rock and a hard place in determining the best way forward. Watch out next week for the pre-budget document.

George Mangion
Partner at PKF – an audit and business advisory firm

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