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Monday, July 8, 2019

Mitsotakis Clear Winner, Tsipras Not Too Big A Loser And Pollsters Discredited

In January 2015, riding on a wave of unforeseen popularity, SYRIZA registered 36,34% of the vote. In September 2015, after some of the most dramatic and economically damaging months in Greek history caused by SYRIZA, the party - despite broken promises and defections of radical leftists - still registered 35,46% of the vote.

In May 2019, after 4-1/2 years in government, SYRIZA faced broad voter disaffection and registered only 23,76% of the vote at EU elections. They had lost roughly one-third market share (!) relative to 2015. To make matters even worse, ND - who had been kicked out of office by SYRIZA back in 2015 - came out at 33,12% of the vote, almost exactly 10 full percentage points ahead of SYRIZA.

At that point, Alexis Tsipras took the flight forward and called early elections, presumably fearing that the longer they waited, the worse the situation would get for them.

Since the EU elections, media discussion did not even focus on SYRIZA's chances for a recovery. Instead, the discussion focused on the margin by which ND would win (10-12% were the most frequently quoted margins) and whether or not SYRIZA (and Tsipras) might even be sent to the dustbin of history. I do not recall a single poll showing SYRIZA at 25% or more, prompting a headline in the Ekathimerini a day before the election of "Tsipras eyeing more than 25%", essentially suggesting that Tsipras had unrealistic hopes. That commentary by Angelos Stangos included the following paragraph:

"In short, after all the despicable things this government has done under the leadership and guidance of Alexis Tsipras (there should be no doubt on this point), it will not bode well for the country’s future if, say, ND gets 40 percent and SYRIZA gets around 30 percent. This would make the leftists the absolutely unchallenged opposition and would strengthen Tsipras’ position beyond any possible reproach from detractors in the leftist camp. He would even be able to gloat about not suffering a real defeat."

ND getting 40%? Didn't sound unrealistic at all. SYRIZA getting around 30%? What was the man smoking?

Well, SYRIZA ended up getting 31,53% of the vote, 'only' 5% less than at its peak in January 2015. If one were to add the 3,44% which Yanis Varoufakis' party registered (after all, Tsipras and Varoufakis were on the same team back in January 2015), one comes to 34,97% of the vote, only fractionally less than in January 2015.

It is clear that the predictions of SYRIZA's and Tsipras' impending political death were greatly exaggerated. On the contrary, those SYRIZA party members who had believed the polls must have celebrated a victory party on the night of the election.

ND's win with 39,85% of the vote was most remarkable but not a total surprise relative to expectations. The winning margin over SYRIZA of 8,32% was certainly a disappointment to those who expected 10-12%.

And what can one make of that?

After worst-case scenarios before the election, SYRIZA came away from the election still standing. Actually still standing strong. When considering all the (unnecessary) pain which SYRIZA's policies inflicted on the Greeks and particularly when considering the complete disappointment which Tsipras must have been to his religious followers, a loss of 5% in market share is certainly a loss but not a defeat.

ND, in its direct battle against SYRIZA, was not all that successful. It could have obliterated SYRIZA but it did not. ND's remarkable win seems more the result of having obliterated smaller parties.

Yanis Varoufakis, after 4 years as an international media star, has returned to the nitty-gritty of domestic Greek politics. His 3,44% were undoubtedly an achievement which many would not have considered him capable of. Whether Mera25 will indeed be "the only ray of hope in this bleak setting" (Varoufakis) remains to be seen. It would be better for the country if ND succeeded in becoming that ray of hope which many Greeks so urgently wait for.

Sunday, June 30, 2019

Greece Is Flush With Cash!

The Ministry of Finance's Annual Report about Borrowing and Debt for the year 2018 provides very interesting information about the solidity of Greece's public financing.

The bad news is that Greece's public debt now (at December 31, 2018) stands at 359 BEUR or 181% of GDP. Those are numbers which would, under normal conditions, signal a near-term catastrophy.

The good news is that those numbers currently present no problem at all. Very little of that debt will mature in the next few years and 83% of it is owed to the official sectors of other countries. One cannot think of a more stable financier than such official sectors. Last but not least, since the debt owed to the official sectors of other countries comes at extremely low interest rates, total interest payments in 2018 amounted to "only" 6,2 BEUR, which is less than 3,5% of GDP. Such a low ratio of debt service costs would normally represent a solidly financed public debtor.

And as a footnote: the 3,5% of GDP of interest expense just happens to be the same as the 3,5% primary surplus requirement which Greece's creditors have required. Put differently, Greece has an overall balanced budget (if not even a slight budget surplus).

To top off the good news: the Greek public sector is literally flush with cash: the Central Government has 27 BEUR in cash reserves and state entities have another 24 BEUR, bringing the total to 51 BEUR. Those reserves would cover interest payments and debt maturities for many years to come.

Wednesday, May 22, 2019

Greece's Current Account On A Dangerous Path?

Arguably the most important economic variable of the Greek economy is the country's current account. The current account measures how much an economy spends outside its borders compared with its revenues outside its borders. If a national economy spends more outside its borders than it has revenues there (i. e. a current account deficit), it needs to import capital either by way of borrowing or attracting foreign investments. Since the Greek economy does not have a tradition of substantial and sustained foreign investments, any external gap caused by the current account deficit must typically be closed with loans from abroad.

Traditionally, Greek consumers' demand for products has exceeded the supply of products generated by the Greek economy by far, i. e. Greece had to import substantial amounts products resulting in a trade deficit. Greece has the benefit of substantial foreign revenues from services, mostly tourism service. However, the positive balance in services has never been able to completely offset the negative balance in trade. Thus, the Greek economy was always short of foreign capital; it always had to borrow offshore.

The absolute record was set in 2008 when the Greek economy spent 37 BEUR (!) more outside its borders than it earned there, i. e. a current account deficit of over 15% of GDP! Probably a world record among developed economies. In 2008, Greece imported 47 BEUR of 'other goods' (Greek exports other than oil and shipping). This was roughly 3 times the amount of exports of 'other goods'!

The financial crisis limited access to foreign capital and austerity cut down domestic demand, leading to a continuous decline in imported goods and an improvement in the current account balance. By 2015, the current account deficit was reduced to 1,5 BEUR, the lowest level since 2008. Since 2015, imports and current account deficits have increased again, reaching 5,3 BEUR in 2018. The first 3 months of 2019 show a 13% deterioration in the current account balance over the previous year.

To determine whether or not there is a dangerous trend in the making, one can compare imports of 'other goods' in the period January-March since 2008. The numbers are:

2008 11,0 BEUR
2009   9,1 BEUR
2010   9,5 BEUR
2011   8,1 BEUR
2012   7,2 BEUR
2013   7,2 BEUR
2014   7,2 BEUR
2015   8,0 BEUR
2016   8,1 BEUR
2017   8,9 BEUR
2018   9,5 BEUR
2019 10,0 BEUR

The numbers would suggest that there is a dangerous trend in the making: from January-March 2019, imports of 'other goods' were 10,0 BEUR and the trend line suggests that the record of 2008 of 11,0 BEUR will be reached soon. Put differently, Greece is back on a track towards setting records in the import of goods.

The situation is not as dramatic as back in 2008 because exports have increased as well but one has to bear in mind that, in 2019, Greece is on a trend line towards an annual current account deficit in excess of 6 BEUR, which is more than 3% of GDP. When comparing that to the 15%+ of GDP of 2008, it might look like peanuts but peanuts it is not!

A current account deficit in excess of 3% of GDP implies that Greece will have to import capital in excess of 3% of GDP every year. A current account deficit of 3% of GDP also implies that the Greek economy is spending 3% of GDP more outside its borders than it earns there. And, finally, a current account deficit of 3% of GDP can also be interpreted as meaning that Greece lives 3% of GDP above its means cross-border-wise.

Living above its means cross-border-wise is what got the Greek economy into trouble in the first place.

Tuesday, May 7, 2019

Corfu In Decline

The Irish author Richard Pine, who lives on the island of Corfu, wrote this devastating piece in the Ekathimerini: "The destruction of the real Corfu". Pine blames primarily unchecked tourism for what he calls the island's destruction.

Having just spent 10 days over Easter on Corfu, I can confirm the destruction but I am not sure that it is tourism, at least not tourism alone.

There is one word which, in my opinion, describes today's Corfu (particularly, but not only, Corfu-town) best: decadence. Wherever one looks, one sees decline: run-down buildings, roads in terrible condition, huge garbage piles all over the island, etc. In between, of course, one runs into 5-star luxury resorts here or there.

When one asks people in the Old Town of Corfu about this situation, one gets a uniform answer: it is all because of UNESCO which does not allow any structural changes. That may well be the case but I am sure that UNESCO does not disallow the maintenance of substance. In fact, there are a few traditional buildings in the Old Town which have maintained their original character to the fullest extent and, yet, they have been maintained and kept up (banks, for instance).

The impression one gets on the entire island is that its residents simply don't care about the inherited beauty of landscapes and structures. I have come to Greece for over 40 years and I have seen many places, above all villages, which seemed medieval 40 years ago and which are now very nicely maintained towns. The last time I was in Corfu was over 25 years ago and there has been a dramatic deterioration since then.

Our 10-day stay was overshadowed by the shame which my Greek wife expressed about most of the things she saw. That was not, that could not be 'her' Greece, she felt. Sadly, it was.

Sunday, March 17, 2019

Athens - Far Too Large A City?

In a recent commentary, reference was made to the fact that nearly half of the Greek population lives in Athens. I used to think that it was a lot less than that but let's just assume for the purpose of the below argument that this is so.

If the same ratio were applied to other European capitals, here are some examples:

* Paris would have a population of 34 million (instead of 2 million)
* London would have a population of 33 million (instead of 8 million)
* Berlin would have a population of 41 million (instead of 4 million)
* Madrid would have a population of 23 million (instead of 3 million)
* Rome would have a population of 30 million (instead of 3 million)

Etc., etc.

Of all the structural weaknesses of the Greek economy, the undue concentration of the population in the capital of Athens seems definitely one of them. Permit me a naíve question: what are so many people doing in the capital? What are the productive venues they can pursue there?

The definition of the problem is always the easy part, the difficulty begins when one starts looking for solutions. Still, it would seem high time for a Greek government to study alternatives for 'de-centralizing' Greece's population in an economically profitable way.

Thursday, February 21, 2019

Current Account 2018: A Forebearer Of Bad News?

Below are the figures for Greece's current account during 2018 as compared with the previous year (in BEUR).



2018 2017
Revenue from abroad
Exports 32,4 28,0
Services (e. g. tourism) 37,2 33,7
Other income 6,4 6,6
Current transfers 2,0 2,0
-------- --------
Total revenue from abroad 78,0 70,3
Expenses abroad
Imports 54,9 47,9
Services (e. g. tourism) 17,8 15,6
Other expense (e. g. interest) 8,0 7,4
Current transfers 2,5 2,5
-------- --------
Total expenses abroad 83,2 73,4
Net foreign deficit (current account) -5,2 -3,1
Trade balance -22,5 -19,9
Services balance 19,4 18,1
Other balance -1,6 -0,8
Current transfer balance -0,5 -0,5
---- ----
Net foreign deficit (current account) -5,2 -3,1


What stands out are: (1) a very significant jump in exports to 32,4 BEUR, the highest level of exports ever and over 50% above the pre-crisis levels; (2) an even more significant jump in imports to 54,9 BEUR, which comes close to the pre-crisis record imports; leading to (3) a deterioration in the trade balance from minus 19,9 BEUR to minus 22,5 BEUR; and (4) a drastic deterioration in the current account from minus 3,1 BEUR to minus 5,2 BEUR.

Does that sound familiar? Yes, it does!

We remember that Greece got into its foreign debt predicament primarily because of huge current account deficits. Current account deficits which were the result of the national economy's not producing enough of those products which national consumers wanted and which they, therefore, bought offshore. In simple terms: Greece purchased from Germany and Germany provided the buyer's credit. A game where everyone seemed to win, at least as long there was an unlimited supply of buyer's credit.

I have argued for many years the following: if we really want to know if the Greek economy has been structurally reformed, we have to wait until purchasing power returns to the national economy. If the return of purchasing power is matched by significant increases in imports, we know that the structure of the Greek economy has not changed very much.

Greece will continue to import capital for the purpose of financing imports. Economic value creation, jobs and profits will be in those locations where those imports are produced. Job growth in Greece will be slow and the foreign debt load will increase significantly. At least as long as foreigners provide the capital required by Greek importers.

Saturday, February 9, 2019

Andreas Papandreou In The Context Of Juan Domingo Perón And Bruno Kreisky

Prof. George Kassimeris of the University of Wolverhampton wrote this article about Andreas Papandreou, Greece's first socialist Prime Minister who would have turned 100 this month. I have to take Prof. Kassimeris' opinion at face value because my own knowledge of Andreas Papandreou and his policies is superficial, at best. Thus, intuitively (and not scientifically) I always associated Papandreou with 2 other political figures who have left their marks on their respective societies.

Juan Domingo Perón came to power in Argentina in 1946 and left a legacy for his country which is still alive today, 45 years after his death. Perón was a 'caudillo' (the gentleman equivalent of a 'macho'), a natural leader. Today, he probably would be classified as a populist. Perón, with the clever assistance of his wife Eva, could manipulate people's minds and seduce people's hearts. Perón's genius was to discover a simple truth: if, in a developing country, one aims to achieve a democratic majority, the most promising target group are the underprivileged. Not any particular kind of underprivileged but, instead, ANY underprivileged. And certainly in underdeveloped economies, there will always be multitudes of people who feel underprivileged. Perón coined a term for his underprivileged, the 'descamisados" (the shirtless ones) which, in retrospect, can be viewed as a genial marketing gimmick. There was no objective definition of what identified a shirtless one. Instead, a shirtless one was one who felt underprivileged for whatever reason. In marketing terms: that broadened the target group.

In the first decades of the 20th century, Argentina was among the world's 10 largest economies, the peso was considered like a reserve currency and Buenos Aires was often called 'the Paris of the rest of the world'. Argentina was truly a rich country and yet, millions of Argentines were truly shirtless. Progressive policies aiming at an evening out of wealth and incomes, providing social security and strengthening a middle class were certainly called for. Classic politicians have to struggle to achieve parliamentary majorities for their progressive policies. A 'caudillo', on the other hand, rouses the shirtless ones with fiery speeches. And Perón was the best among the many 'caudillos'. Progressive policies evolving from rational debate and parliamentary majorities generally have a fair chance of improving society overall. The manipulation of a 'caudillo' is much more prone to economic failure. The 'caudillo' Perón assumed government in 1946 of one of the richest countries in the world and when he died in office almost 20 years later (with one short interruption of governing), Argentina was considered a failed state. If Argentina is considered a failed state even today, the roots of that would go back to Perón who truly changed the paradigms of society.

Bruno Kreisky became the first socialist Chancellor of Austria in 1970 and he remained in that position (much of the time with an absolute majority) until 1983. Although of rather unattractive physical appearance, Kreisky magnetized people with his mind, his mouth and his mimic. He could explain complicated things in simple ways which everyone understood and he could articulate his views in such a way that it was easy to agree with him. Whereas Perón was a 'caudillo', Kreisky was referred to as the 'Sun King'. Having been rather revolutionary in his youth while coming from a family of industrialists, Kreisky had the ability to communicate comfortably with workers as well as with industrialists. He won the support of intellectuals and artists. Kreisky often replaced the term 'my government' with 'my team' ('team' was a revolutionary term back in 1970!). Kreisky proudly described his team as a collection of supreme competence and he promised that 'Kreisky and his team' would modernize Austria. Before I ever saw Kreisky on TV for the first time, I had been warned that he was a 'dazzler of the worst kind'. I definitely was not going to fall for his dazzles but, still, it did not take long for me to start enjoying being dazzled by Kreisky.

Like Perón, Kreisky set out to improve the lives of the underprivileged. He was a champion of nationalized industries (of which Austria had many at the time), of protecting the economy from too much (foreign) competition, of the Welfare State. Never in the history of Austria were so many social benefits spread throughout the population as during Kreisky's reign. When the conservative opposition warned that Austria was headed for bankruptcy if the state borrowed so much money to finance social benefits, Kreisky told the workers of Austria's largest (nationalized) steel company: "A few more billion in debt cause me less sleepless nights than a few thousand more unemployed." The workers cheered and that sentence is referred to even today whenever there are economic clouds on the horizon.

Why did Austria not go bankrupt? For one simple reason: Kreisky had indeed some competent people in his team whereby the key player was Hannes Androsch who became Finance Minister at the age of 29. As regards mind and mouth, Androsch was nearly on par with Kreisky. As regards physical appearance, Androsch was a movie star compared with Kreisky. As regards charisma overall, I would rate Androsch higher than Kreisky, particularly his appeal to the younger generation. While raised with socialism in his milk, by profession Androsch was a certified public accountant. In short: he understood numbers. He argued that, if the nationalized steel company had substantially higher production costs than foreign competition, this might offer some benefits in the short term but for the long term it spelled trouble. When Kreisky argued that Austria should devalue to become more competitive, Androsch held against that devaluation always leads to higher inflation. Against Kreisky's fiercest opposition, Androsch pursued a 'hard Schilling policy', i. e more or less pegging the Austrian Schilling to the Deutsche Mark. The resulting financial discipline pervaded the economy and was the major reason why Kreisky's free spending intentions could not lead to a financial crisis. Androsch forced the economy to begin the adaptation to international competitiveness. Joining the EU in 1994 was the second step and joining the Eurozone was the final step. Having managed these 3 steps successfully, Austria became one of the wealthiest countries worldwide but that might not have happened without successfully completing the first step.

How would I compare Andreas Papandreou with Juan Domingo Perón and Bruno Kreisky? In terms of leadership traits, similarities with both but a lot more similarities with Kreisky than with Perón because Papandreou, like Kreisky, was an intellectual and Perón was not. Where did they differ? Kreisky appointed a competent Finance Minister and allowed him to exercise his power where Perón and Papandreou did not (or had they done so, the question is whether they would have allowed the Finance Minister to exercise power). One could go so far as to argue that if Kreisky had not had Androsch as his Finance Minister, Austria would have, economically, followed the trend of Greece. There is no way to prove that but one could argue it.

I consider the year 1981 as one of the most crucial years in the history of Modern Greece because two events, each historical on its own, came together and they reinforced one another in such a way that at the end of the process which they initiated was Greece's bankruptcy in 2010.

One event was Papandreou's coming to power as the kind of charismatic, populist leader described above. The most important ingredient for implementing Papandreou's policies/visions was money and the Greek state's access to money, particularly in foreign markets, was limited due to Greece's perceived economic and currency risk. The other event was Greece's joining the EU because that brought, directly or indirectly, the money needed for Papandreou's policies/visions. Directly in the form of EU subsidies; indirectly as a result of Greece's increased standing as a borrower thanks to EU membership. Not only the state but all Greek banks found it easier to raise money offshore to finance a spree of domestic (mostly) consumer financing. The most fatal long-term aspect of EU membership was that the EU brought to Greece the famous 4 freedoms (free movement of products, services, capital and people). I have argued repeatedly that Greece was not ready and/or not equipped to handle 2 out of those 4 freedoms: free movement of products and capital. The radical increase on the domestic demand side as a result of Papandreou's policies could not be satisfied by Greece's supply side, neither in terms of quantity nor in terms of quality or price. Logically, the increased purchasing power would shift towards imports. Under normal conditions, external financing constraints act as a check on import explosion. EU membership loosened the external financing constraints and it is only natural that Greek consumers would prefer imported products of high quality and low price when such products where not even available in Greece or, if yes, at lower quality and higher price. At the level of Greek consumers, Papandreou and EU membership were a blessing. At the level of the national economy, Papandreou and EU membership initiated Greece's path towards eventual economic disaster. A national economy which is not yet ready for international competition will suffer extraordinarily if the borders are opened too quickly, particularly when open borders not only bring new products from abroad but, at the same time, the loans to pay for them. The products are quickly consumed but the loans remain. Parallel to that, domestic manufacturers fail as a result of foreign competition. They go bankrupt or are nationalized by the state (in which case public sector employment increases).

To sum up: the stage for eventual economic disaster was set under Papandreou (already back in 1993, Yanis Varoufakis described the Greek economy as being in a state of terminal decline), facilitated by concomitant EU membership. The Euro put a turbo on that development by expanding an increased flow of foreign debt into a tsunami of foreign debt (more than half of Greece's foreign debt was contracted from 2001-10). A one-sided blame on Papandreou/PASOK would be one-sided, indeed. The other large party (ND) was equally responsible because when they were in power, they only copied Papandreou/PASOK instead of correcting a wrong development and with their reckless financial conduct from 2004-09 they put the final nail into the coffin of the Greek economy.

The cases of Perón, Kreisky and Papandreou show how one person, literally alone, can shape the destiny of a country for a long time because such leaders can set in motion a long-term shift in paradigms. Shifts in paradigms are welcome (or even necessary) when they replace negative or wrong paradigms of the past. Kreisky correctly explained to Austrians that the fetish of balancing the budget can be bad for the economy when it is a fetish, but the paradigm shift was that Austria didn't balance its budget for the next 45 years and accumulated high debt. If, as Prof. Kassimeris argues, Papandreou replaced the nationalization of resentment with the nationalization of pride, that was most positive for society except when it leads to a paradigm shift towards a "search for national grandeur bringing about economic stagnation, double-digit inflation, a bloated public sector with colossal deficits."

Kreisky stands out in the group of 'caudillos' or 'Sun Kings' for having chosen a self-imposed check on one's follies by appointing a competent Finance Minister and giving him power, even power to oppose Kreisky' intentions. Now, almost 50 years later, Austria still benefits from the paradigm shifts which BOTH, Kreisky and his Finance Minister, had brought about albeit it in different ways. Perón and Papandreou did not self-impose checks on their follies which led to paradigm shifts which, like in the case of Austria, are still felt today. Only that they are felt in a negative way.