Is Greece Being "Ripped-Off"? (Trade Deficit)

I had started this blog in June 2011. Early on it became clear to me that one of the greatest problems of the Greek national economy was the current account deficit. The two principal components of the current account are trade and services. Greece has historically had dismal trade figures because it imports so much more than it exports. If one excludes oil and shipping (which distort the figures), Greece currently imports about €65 billion. The highest figure before the crisis had been €47 billion (2008). Then, Greece imported about 3 times as much as it exported. Today, Greece imports 'only' twice as much as it exports. The trade deficit is currently about €36 billion.

On the other hand, Greece has a very positive balance (€23 billion) with services (mostly due to tourism) which brings the total current account deficit to about €15 billion. That represents about 7% of GDP, which is not as high as the 15% before the crisis (2008) but certainly much higher than the 3% which the ECB considers as an informal warning signal.

Greece and the US have something in common: high trade deficits, positive services balances, overall very high current account deficits. A current account deficit is, accountingwise, a transfer of domestic assets into foreign ownership; a transfer of national net worth from Greece to the rest of the world. Donald Trump has invented the term "being ripped-off by the rest of the world" for this situation. This is obviously a paranoiac interpretation of the situation. The simple explanation is: the Greek economy depends so much on imports because of insufficient domestic production/supply. And it does not generate sufficient external revenue (exports, services) to pay for those imports. Thus, Greece has to borrow offshore to finance the current account deficit.

The US, too, needs to borrow huge amounts offshore to finance their current account deficit. In consequence, the US is nowadays the world's largest debtor with net external liabilities of about $26 trillion.

Within a month of starting this blog, I published an article comparing the Greek and American economies ("Greece - A Comparison with the USA"). One aspect seems indisputable: very high, structural and one-sided current account balances cannot go on forever. Warren Buffett once said: "Everything that can't go on forever will end". For Greece it ended with a sudden stop in early 2010. Given the seemingly endless wealth of the USA, one would be inclined to think that the US can go on forever carrying huge current account deficits. Alas! Donald Trump has decided to bring them to an end.

"It's The Current Account, Stupid!"

When I started this blog in mid-2011, in the midst of the crisis, already my first articles focused on the importance of the current account for Greece. Since then, I have seemingly written innumerable articles on the subject.

A country's current account compares the spending outside its borders with the revenues from outside its borders. If the spending outside its border exceeds the revenues from outside its borders, it represents a negative current account balance. Mathematics, not economics, require that such a negative current account balance is 1:1 compensated by capital inflows from outside the country (foreign loans or investments, remittances from abroad, etc.).

Since the foundation of modern Greece almost 200 years ago, the current account deficit has probably been the major and continuous challenge for the Greek economy. It has always been negative (with perhaps 2 exceptions) which means that Greece always needed capital inflows from abroad. For the most part, these inflows took the form of foreign loans.

Put differently, the fact that Greece continuously spent more outside its borders than it had revenues from abroad made the country totally dependent on capital flows from abroad. When a crisis of confidence erupts, the capital flows from abroad tend to stop ("sudden stop"). And then the crisis becomes a real problem. 

Greece experienced that "sudden stop" in late 2009 and early 2010. The current account deficit then was about 15% of GDP, a horrendous figure! The Troika's austerity measures reduced that deficit to almost zero. As economic growth returned to Greece, the current account deficit started to grow again.

According to this article in the Ekathimerini, Greece's current account deficit currently runs at about 6,5% of GDP. While this is far less than the 15% of then, it is certainly a high level which will lead to problems in the future if it cannot be brought under control.

There are essentially two ways for Greece to improve its current account: (a) increase revenue from tourism and (b) increase production of goods and services which can be exported.

Tourism is already at record levels and sooner or later there will be the question of how much more tourism the country can absorb. Thus, the only meaningful alternative to bring the country's chronic current account problem under control is to increase domestic production of goods and services which can be sold abroad. 

Adieu Alexis Tsipras

Alexis Tsipras arrived on Greece's political stage with bravado. That was in 2012. A few days ago he left that stage with a whimper.

Back in early 2012, I asked my Greek friends who Alexis Tsipras was. They invariably told me that he was bad news. A communist revolutionary who had spent his entire life organizing protests and even destructive activities. And that he was married to a communist. As a great admirer of Che Guevara, they had christened their son Ernesto.

In short, I definitely started with a strong bias against Alexis Tsipras.

Then I made my first observations of Alexis Tsipras in action before TV cameras and with a microphone. This prompted me to write my first of later many articles about Tsipras, dated May 12, 2012. It was titled "Cheers for Alexis Tsipras!"

Needless to say, I immediately recognized his communicative talent: "Alexis Tsipras strikes me like a youthful, energetic and, above all, charismatic individual. The type of natural leader who can easily get people to follow him. Those are the traits which any leader who is hopeful of pulling Greece out of the present mess must have. I do not see those traits with any other Greek politician at this time." There are leaders who lead with passion and there are leaders who lead with brains. Only seldom are there leaders who can do both. Tsipras struck me like a leader who could not do both but who could effectively employ passions. Thus, my conclusion of this article was that "having said all this, I think what Mr. Tsipras needs more than anything else is good advisors."

I listed 10 points which competent advisors should recommend to Tsipras and I even stated that "if he (Tsipras) accepts such advice, I could even envisage recommending to vote for him."

Tsipras' greatest failure was to chose the wrong advisor(s). In those days, the German weekly Der Spiegel put Tsipras on its cover with the question "Is this the most dangerous man in Europe?" Yanis Varoufakis, the chosen premier advisor, set out on a crusade to show the world that he could be an even more dangerous man. 

Varoufakis was (and still is) a gifted seducer who was looking for a target to use as a trampoline for personal glory and gain. I can see why Tsipras fell for him. Here was a slick cosmopolitan with intellectual brilliance, supreme eloquence in Greek and English and a wide network of other intellectuals around the globe. The international media were eager to have him display his messianic messages and quotable quotes.

On a rare occasion of honest self-recognition, Varoufakis had stated at an April 2012 conference in April 2012 "until this crisis erupted, I used to be a fairly decent second rate economist. The implosion of my country bestowed upon me the dubious honor and title of being a first class Greek economist." I am fairly certain that Tsipras had already recognized by that time that he had bet on the wrong guy, but it was too late. He could (not yet) extricate himself from the magic of this man. 

There is one scene with Alexis Tsipras which I think displayed more than any other the complexity of the man: in the evening of Sunday, July 5, 2015, two-thirds of Greeks were in public ecstasy about the outcome of the referendum. Tsipras was not one of the celebrators even though one would have expected him to be the greatest celebrator of all. Varoufakis later wrote that, that evening, he found Tsipras in no celebratory mood at all. On the contrary, he seemed subdued. Perhaps he was thinking of the Greek proverb that "any fool can throw a stone into the sea, but once he does, a hundred wise men can't pull it out!"

It speaks for Tsipras the man that after his gigantic kolotoumba (somersault), he could achieve re-election a couple of months later. However, the Tsipras thereafter was not the same Tsipras as before.

Alexis Tsipras had begun to enjoy the 'good life'. He found that life was much more pleasant when one is liked by the global elite instead of hated. He switched from being the 'Greek firebrand' to being 'the nice young Greek'. Madame Merkel displayed almost motherly care when she joined Tsipras on a stage. Bill Clinton extended Tsipras fatherly help when he had trouble with English in an interview. Every summit photo showed a smiling group with a smiling Tsipras in the middle. 

The global elite had good reason to like Tsipras. After all, he accepted every measure, however brutal and/or nonsensical, which the Troika put before him. In the process, he put his compatriots through an unnecessarily painful adjustment and an hitherto unheard of level of austerity. His goal was to 'exit the program' and he accomplished that with flying colors. No non-leftist government could have gotten away with such 'reforms' because people like Tsipras would have started a rebellion. The irony is that, by doing that, Tsipras unwittingly set the stage for his successor to rebuild after such destruction.

During the campaign for the 2019 election, my sense was that the 'European elite' almost would have preferred Alexis Tsipras to win. Even Angela Merkel did not come out forcefully in support of her political colleague Kyriakos Mitsotakis. After all, Tsipras was a Prime Minister whom they felt that they could control and Mitsotakis was a question mark at the time. Still, Tsipras lost and Mitsotakis won but the irony is that without Tsipras' 'destruction', Mitsotakis would not have found it so easy to 'rebuild'. 

Alexis Tsipras strikes me as a somewhat tragic figure. With the right advisors, he could have gone down into history as the man who transformed Greece into a solid social-democratic country with consistent and effective reforms. As it was, the opposite happened. Greece today is governed by a solid center-right government with a certain emphasis on the 'right'. Quite a few things which Mitsotakis has done in his first tenure were things which, if Viktor Orban had done them, would have caused an uproar in Brussels. 

Tsipras had started out with 100% passion but borrowed the brains of the wrong people. When he realized that his passion no longer carried the day, he could no longer prove his relevance. Instead, he lost his political compass like a boat which has lost its rudder but was hoping to catch the right wave to carry it to pleasant shores. That wave never came and Tsipras could only watch how a speed boat called 'Mitsotakis' left him in its wake. 

If there is one silver lining to Tsipras' tragic then it is the fact that Varoufakis was voted out of parliament before Tsipras resigned. That was some bit of justice, after all. 

On the day after the July 2015 referendum (and the day after the resignation of Yanis Varoufakis), I wrote a satirical article which has registered the largest number of readers (almost 13.000) of all the 1.357 articles which I have posted so far. It was intended to be the story of how Varoufakis manipulated Tsipras by pretending to be his greatest supporter only to stab him in the back later on. It was titled: "To: Alexis. From: Yanis. Subject: Thank you!"

Greece - Living Beyond Its Means Again?

In a commentary published in the Ekathimerini on June 6, the well-known British journalist Hugo Dixon stated that "Greece is living beyond its means again." This prompted me to think because I have made similar arguments in this blog.

What does "living beyond one's means" really mean? That depends...

It is easy to define it on the level of a person or family. If a person (or family) has more expenses than income, he would appear to be living beyond his means. But that is not necessarily so. If that person has wealth like savings, he would not be living beyond his means because savings are part of his means. Correctly speaking, that person would be living off his substance.

If that person (or family) has no wealth, he needs to cover the hole with debt and that would clearly be living beyond his means because he is using other people's savings to pay for his expenses.

In both cases, one has to look at the composition of the expenses. If the expenses include a large portion of investment which will generate income in the future, the person (or family) may currently live beyond his means but he is investing into the future, which is good. The opposite is the case when the expenses are entirely for consumption.

At the level of the state, the analysis becomes more complicated because it is difficult to assess the wealth of a state (for example: real estate and other tangible assets). At the same time, a state may have a budget deficit not because the expenses are too high but, instead, because the tax revenues are far too low because of tax cheating. So while it may appear that the state is living beyond its means, it is not an expense problem but a revenue problem which could be solved through more efficient tax collection.

The ultimate level of living beyond one's means is the national level. The level of the national economy and of the country as a whole. And this brings me to the subject on which I have focused since I started this blog 13 years ago - the national current account.

The current account measures the revenues which a national economy generates outside its borders compared with the expenses which it has outside its borders. If the current account registers a deficit, it means that the national economy is living off the savings of other countries. On a cross-border basis, the national economy (i. e. the country) is living beyond its means. Those savings of other countries can take the form of foreign debt, foreign investment or foreign grants. Typically, it is the foreign debt which represents the bulk of the savings of other countries. 

My intensive readings about the history of modern Greece have suggested, that - since the foundation of modern Greece 200 years ago - there have only been very few years where Greece had a current account surplus. Put differently, Greece has a long history of living beyond its means on a cross-border basis. 

When the financial crisis erupted in 2010, the voluntary flow of foreign savings into Greece stopped suddenly. There was only an 'involuntary flow' from official institutions and the Troika made sure that this involuntary flow covered only the bare minimum of necessities. For once, Greece was forced to more or less live within its means. The economic pain for Greeks was dramatic (it was only 'more or less' living within its means because, despite all the austerity, Greece did not have one single year of a current account surplus during this austerity).

Have things improved under the Mitsotakis government?

With Mitsotakis's assumption of power, the voluntary flow of other countries' savings into Greece returned. It returned in huge amounts and it was necessary because the current account deficit exploded under Mitsotakis and it was approaching pre-crisis levels. On a cross-border basis, this was (and still is) clearly an enormous living beyond its means for Greece. It could only happen because of the enormous voluntary inflow of external debt, because of substantially increased foreign investment and because of substantial funding from the EU Recovery Fund. 

The most important point of interest: during Mitsotakis first tenure, the external debt of Greece increased by about 130 BEUR! That is more than 30 BEUR per year! And that is at least the level of external debt growth prior to the crisis.

Hugo Dixon stated that Greece's current account deficit was about 10% of GDP last year. Adjusted for the spike in energy prices, it was still about 6%. Those are VERY high figures. Red flags should typically show up when the current account deficit passes 3% of GDP. The pre-crisis peak in Greece's current account deficit was close to 15% but that included much more interest expense than Greece is having today.

Does that spell trouble for Greece's future?

That depends. Just like in the above examples of a person or family, it depends on what the money is used for. If it is primarily used for prudent investments into the future, it is actually very good news. However, it must be remembered that Greece's insolvency of 2010 was not à priori caused by huge amounts of debt accumulated in prior years but, rather, because that debt was primarily spent on consumption. Had it been spent primarily on investment, there would not have been an insolvency in 2010. 

So, the conclusion is very simple. If Greece now spends the enormous inflow of the savings of other countries primarily on prudent investments, a Golden Age lies ahead of the country. If the consumption spree of the 2000's is repeated, the next insolvency is already in the cards.

The verdict on the above is still out.

Greece - No Country For Young Arrogance

In an August 2022 essay by Alexander Clapp, published in the NYT, I found the following quote which I have cited many times since then:

"It is, rather, the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

Prime Minister Mitsotakis is an excellent salesman of his country and he certainly has sold me on it. It is only in the last few months that some doubtful clouds have shown up on the horizon. To sum it up in one word: arrogance. I had given 3 examples thereof in the above-linked article. 

Still, I felt quite uncomfortable voicing these crescent doubts because I was afraid that in the midst of Mr. Mitsotakis' success, they might be considered sacrilegeous. So much more was I surprised to read in today's Ekathimerini a commentary by Alexis Papachelas who started out by saying:

"This is not an easy country; not by a long chalk. A part of it looks and may also be European. Another is deeply Balkan and looks, in fact, a lot like what the international literature would call a “failed state.” The struggle between the two is constant and sometimes it is even violent. Anyone who is ambitious or crazy enough to govern it has to deal with this struggle between good, European Greece and Greece of yesteryear, between what it could be and what it is at its worst."

So far so good. Anyone who has followed the scandal around the recent train accident can agree with that. But then Papachelas continued (the emphasis is mine):

"The current prime minister has a very clear picture of where the country should be headed. In some areas, the country has made progress, and quite a lot of it. But this government has also made mistakes. No one can change the state alone, nor can they promise to change Greece 0.5 to Greece 2.0 in just a few years. Such undertakings require humility, and what the government is paying for right now is overselling its managerial capabilities. It settled for many of the bad habits of bad Greece and in some instances acted as if it owned the country. Some of the examples are painful and make people mad. The condition of our hospitals is a case in point. Greece is changing, but important areas are being left behind."

That is exactly the concern I have voiced in recent months. I see no Greek politician around who could represent the country internationally as well as Mr. Mitsotakis does ("pitching his country") and I think it is extremely important for Greece's domestic success to be represented well internationally. That has to do with credibility. If Mr. Mitsotakis were to stumble domestically because of cockiness or arrogance, it would do enormous harm to Greece internationally. And that, of course, would affect Greece's domestic success.

It's A Short Putt From Greece-Praising To Greece-Bashing

In the last few years, since Mr. Mitsotakis became Prime Minister, my Greek friends have often criticized me for being idealistically (and unrealistically) bullish about Greece. In short: I had predicted a Golden Age for Greece under only one proviso - that the tsunami of foreign funds coming into Greece in the last 3-4 years and expected to come in in the next few years is spent wisely. Frankly, I was not alone in that assessment. My sense is that most foreign observers had a similar impression.

It only took one dramatic scandal, the train accident, to turn Greece-praising into Greece-bashing. Above all, Greece-bashing on the part of Greeks themselves. The foreign media which I follow have not really engaged in any Greece-bashing.

The Greek blog GreekReporter has now published an article titled "The countless times Greece was convicted by EU courts." The article really provides for some astonishing reading.

EU Court of Justice Convictions

2015: Conviction for violating working hours in hospitals and in general.

2016: Conviction for constant violation of EU waste disposal rules.

2016: Conviction for undermining free movement of capital.

2018: Conviction for failing to recover state aid to Ellinika Nafpigeia.

2019: Conviction for failing to provide support for persons with inabilities.

2019: Conviction for failing to recover state aid to Larco.

2020: Conviction for failing to comply with conservation standards.

2023: Condemnation of Athens over its poor air quality and for failing to take the necessary measures.

European Court of Human Rights

"Greece’s convictions at the European Court of Human Rights (ECHR) amount to 948, according to the Greek judge of the Court Yiannis Ktistakis. During a recent briefing of the Parliamentary Committee for the Monitoring of the Decisions of the Court of Human Rights, Ktistakis attributed the low position of Greece in this field to our country’s non-compliance with the sentencing decisions and its inability to eliminate the hotbeds that multiply human rights violations. As he said, a telling comparison can be made with Belgium, a country that has many similarities with Greece, and not only in terms of population. “Belgium has only 285 convictions compared to Greece’s 948 and only 234 pending appeals today as we speak, compared to Greece’s 2,214. In the numbers, Belgium in the last decade 2011-2021, paid 1,745,909 euros for compensation awarded by the European Court, while Greece paid six times more, 28,256,237 euros,” he explained."

I wish someone would comment on the above!

Greek Train Accident - The Culprit Was Found And Put Into Jail! Or Was He Not The Culprit?

The tragic train accident and the discussions around it have reminded me of a NYT commentator who recently observed in an article "the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad and the one he actually presides over.“

Well, it seems the country which he presides over (its institutions, its governance throughout the hierarchies, its administration and control, etc.) is indeed quite different from the country which Mr. Mitsotakis pitches abroad. Within days of the accident, all sorts of revelations reached the public about inefficiencies and incompetencies in the public sector. Mind you, not only at OSE (the Greek train infrastructure company) but in the public sector in general!

This just goes to prove, in my mind, how important Mr. Mitsotakis is for the image which Greece is now, after 4 years of his government, enjoying internationally. Yes, he is overselling his country. No thinking person would accept that a state which was not too long ago described as a "failed state" would, within only 10 years, become a near-perfect state. 

The question is whether Greece is really changing or whether the perceived change is only a PR-job of Mr. Mitsotakis. My sense is that in the private sector, there are indeed many positive signals of important changes and improvements. I cannot say much about the public sector because I know very little about the public sector. Or rather, I didn't know much about the public sector until a few days ago.

Now, I have read about the unbelievable scandal of OSE (that, I believe, is the company where the last PASOK finance minister, George Papakonstantinou, said that it would be cheaper for the state to transport all OSE's passengers by taxi than by trains). I read that everyone knew all along that Greece's railways were the most dangerous ones in Europe and that even the EU Commission was concerned about that. I read that the EU transferred about 700 MEUR for the betterment of OSE in recent years. I read that there have been multiple written warnings about the potential risk or a major accident; and, finally, I read that no one in a position to implement improvements really cared.

But yes, the master of a small train station had to be put in jail immediately because he committed such a grave human error. And yes, even Mr. Mitsotakis knew immediately that 'human error' was the cause of the accident (somehow suggesting that the culprit had already been found and put in jail). Why Mr. Mitsotakis bothered to announce the formation of an expert commission to look into possible causes of the accident is not quite understandable under that light.

For someone like myself, who has fallen for Mr. Mitsotakis' pitches, this is a great disappointment. Yes, I had started to believe that the Greek state was transforming from 'failed state' to 'near-perfect state' in a hurry. It seems I was wrong. 

So where do we go from here? How do we solve this problem? Well, certainly not by declaring the station manager as the culprit and sentencing him to life in jail and to declare the matter as closed. That, to me, would be about the most unethical and immoral strategy. Not to mention the fact that it would not work. 

The government now has the unique opportunity to show that they mean business when they talk about modernizing the Greek state. That they won't shy away from hot potatoes; that they will not fear any taboos. It is not sufficient for Mr. Mitsotakis to state that "we will do everything in our power that such accidents will not happen again." Those are words. Actions speak a lot louder than words.

If this huge tragedy does not provoke tough actions and improvements, measurable actions and improvements, then eventually Mr. Mitsotakis may be asked by foreigners why the country he presides over is so different from the one he pitches - and that would be the end of Mr. Mitsotakis' credibility.

And without credibility, you can achieve nothing!