The great stagnation

A great stagnation is upon us, and it isn’t all the fault of the coronavirus pandemic.

The timing has provided a convenient scapegoat for governments to blame increasingly perilous balance sheets on lockdowns and bail outs, but it is becoming increasingly clear as the crisis winds down that epidemic levels of mismanagement are a bigger problem.

Malta isn’t unique in being poorly governed, or running up massive levels of debt at record speed. Canada is being sucked down the financial drain too, by a drama school teacher turned prime minister who “doesn’t think about monetary policy”.

But Malta’s stagnation is unique in that it is the inevitable result of Joseph Muscat’s celebrated ‘economic success’. That was always built on borrowed time, and his successor has been left with the hangover.

The most obvious barometer of an economy built on vice has been global corruption indices, which plummeted in lockstep with the country’s economic boom.

Malta’s ranking in Transparency International’s annual Corruption Perceptions Index (CPI) fell to an all time low during Muscat’s tenure. That decline seems to have stabilised, but as Transparency International’s official contact for Malta told The Shift, “In a context that is known to be corrupt, a score that remains the same or shifts only minimally indicates that not enough is being done to stamp out corruption.”

The only thing likely to budge this stalled metric is the one thing Robert Abela can’t do.

The private sector is stagnant, too, thanks largely to the government’s effort to stuff the public service full of supporters in the lead up to the general election. Some 10,000 people have reportedly been added to the public payroll since March 2013, at an estimated cost of €184 million in salaries alone.

This rather silly sleight of hand did lower unemployment figures, which allows Abela to claim another Labour success. But it doesn’t take a conjurer to realise governments consume resources rather than create them. Moving people from one category to another only shifts the burden of payment onto you.

And of course the national airline is stagnating alongside tourism revenues. While unpredictable pandemic regulations may have been responsible for some of the decline in visitor numbers, it can’t all be chalked up to quarantines. The uglification of the island is tilting the competitive edge towards other low cost warm weather destinations.

Air Malta was always flying on borrowed time, thanks to epidemic levels of mismanagement. Don’t expect last minute bailouts to save it, either. The EU has taken a hard line on further injections of state aid after a long string of broken promises that Malta never intended to keep.

But not every metric is down in the doldrums.

Prices are rising faster than blood pressure at a viagra convention. But don’t worry, Clyde Caruana has a plan. The government must be ready ‘to take measures’ he said, ‘in the face of rising prices brought about by imported inflation’. He didn’t say whether ‘measures’ are the same as ‘mechanisms’. Perhaps someone should ask the ex Tourism Minister Julia Farrugia Portelli?

He also failed to explain why he thinks the inflation you’re experiencing is ‘imported’, but it’s no coincidence that the national debt is swelling at unprecedented rates thanks to the government’s pre-election ‘investment’ in direct orders, persons of trust and desperately needed public servants.

Steward Healthcare’s VAT bill is growing, too, even as the government shovels another €40 million onto their contract. Think of this swelling ‘accounts receivable’ as an investment in the opposite side of the balance sheet. It can be written off as ‘bad debt’ when the election is safely out of the way.

You now owe €8 billion — at least, you did last week. That number is already higher thanks to the government running record deficits (in other words, spending more than it’s earning).

The largest government deficit ratios in the EU in 2020 — in order — were racked up by Spain, Malta and Greece. The Treasury plans to borrow another €1.2 billion next year, an amount experts have said is unlikely to be enough.

The EU has begun putting the squeeze on Malta, pressuring the country to get its finances back on a sustainable trajectory, but their warnings are being ignored in favour of the pre-election vote buying bonanza.

Unlike Julia Farrugia Portelli, Brussels does have a ‘mechanism’ for dealing with such situations: the excessive deficit procedure, temporarily suspended during the pandemic but sure to be imposed with a vengeance afterwards.

What will the government do when they finish burning through the money they ‘earned’ by selling oligarchs unlimited access to their fellow EU Member States?

The answer isn’t to “sell more,” no matter what Alex Muscat claims. Those days are over, but the Parliamentary Secretary for Citizenship just can’t seem to take the hint. It reminds me of a relationship gone horribly wrong, where “I don’t want to see you anymore” is met with “Okay, so we’ll discuss it next week over dinner”.

I suppose they could always beg money from China. Of course, becoming a vassal of Xi Jinping has a very high price of its own. But I digress.

Joseph Muscat knew that holding the reins of power allowed him to keep rewarding friends. And being able to reward friends and punish enemies on every level of society made it difficult to run out of people to go along with his self serving schemes.

Such practices act as agents of entropy. You reach a point where everyone who’s competent and can make the system function has been replaced with people who are loyal and completely dependent. Replace enough functional people with sycophants and the whole system topples over.

There’s reason to believe this cycle is finally coming to an end, despite another looming Labour victory. That’s the good news. The bad news is, it won’t be pleasant.

Abela will have little choice but to bring the party to a close by imposing austerity measures after the election.

There’s just one thing he wants you to remember. Everything bad happened before he became prime minister. You know, during that grey period under the tenure of He Who Cannot Be Named Except to Praise. The one whose mandate Abela is still governing under thanks to the leadership contest he won with the Unnamed One’s backing.

Unfortunately, the prime minister can’t have it both ways. Muscat’s tenure can’t be both the best of times and “it wasn’t me, it was him!”

The great stagnation you’re experiencing is The Great Consulting Economist’s policies finally coming to fruition.