How sustainable is the government’s decision, with the concurrence of the monetary authorities, to lock the value of the Maltese lira in the ERM II at a fixed rate of just under forty three cents per euro?

How credible is the government-expressed intention to use this central rate as the eventual conversion rate when the Maltese lira gets fused into the euro some time in 2008?

One must point out the ERM II mechanism permits wide fluctuations of 15 per cent on either side of the chosen central parity rate and it was Malta’s own choice to declare that it is not minded to use such flexibility and instead to lock in a fixed rate arrangement.

It is also to be pointed out that the ultimate rate for conversion into the euro will have to be re-visited and re-discussed with existent members of the euro area a few months before the actual euro conversion date.

The sustainability and credibility of the government’s decision depends to a large extent on the success of truly addressing the fiscal deficit problem over the next two or three years and on doing so without accelerating inflation, without sacrificing growth and without causing sharp swings in the domestic level of interest rates.

The simultaneous achievement of all these objectives depends in turn on the success or otherwise of accelerating the economic restructuring programme which generally entails the taking of politically unpalatable decisions that politicians normally avoid taking in the second half of any legislature.

These are decisions like the abolishment of universally free state health services and the introduction of co-payments system, possibly on a means-tested basis.

It involves the extension of retirement age to reduce the deficit in the pension fund. It involves charging fees at commercial rates for government services which were hitherto offered free of charge or below cost.

It involves offering no real increases to public sector employees in agreeing the next collective agreement, possibly including revision of certain privileges to facilitate the migration of excess unproductive resources within the public sector to productive jobs in the private sector. It entails achieving success in attracting foreign direct investment in manufacturing, ICT services, financial services, education services and the film industry.

This is indeed a tall order, and it would take a strong dose of optimism to believe realistically that all this can be achieved in such a short time by the same government that has expertly manufactured the problems we have by continually giving priority to its electoral popularity over prudent management of the economy in general and its fiscal position in particular.

But even if we do all this successfully, we are still hostages to fortune in respect of international events over which we have absolutely no control.

It makes a big difference to our chances of achieving the set goals whether the general world economy over the next two three years will be booming or whether it will fall back into protracted slowdown caused by such events as high oil prices, international terrorism, disruption of financial markets or pure and simple cyclical movements.

A case in point flashed this week in one of the headlines in The Financial Times of Tuesday 17 May which read “ST Micro unveils more job cuts”.

ST Micro is our major exporter and one of the major employers in the export sector. The Maltese economy is heavily influenced by the fortunes of ST Micro.

I often argue that our general economic statistics (exports, imports, investments etc,) should be analysed both on a total basis as well as excluding the figures of ST Micro to get to the real underlying trend.

Such is the dimension of influence of ST Micro on the local economy.

The FT report said that the job cuts were due to “ continuing weakness of the dollar (that) was forcing the company to restructure its cost base…The company said it planned to cut a total of 3,000 jobs outside Asia by mid-2006… About 1,500 jobs will be transferred to Asia.”

In plain and simple language, this is saying that unless there is a sharp reversal in the value of the US$, the company is embarking on a plan to migrate jobs to the Asian dollar-based economies to achieve cost competitiveness with its dollar-based competitors such as Intel and Texas Instruments that are performing strongly and winning market share.

With no assistance possible from an inflexibility of the exchange regime that we have voluntarily placed on ourselves, jobs at ST Micro in Malta can only be preserved by restructuring at company level to achieve cost competitiveness.

This would mean that the most efficient amongst our workforce will again be the most penalised, while the least efficient will continue to enjoy summer half-day privileges, job security irrespective of performance and probably pay increases.

It just does not make sense.

Ask any corporate manager. Any system that penalises the efficient and rewards the inefficient is doomed to failure later if not sooner, wasting much needed resources in the process.

www.alfredmifsud.com