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Monday, July 21, 2014

A 30% Reduction in Total Public Sector Payroll?

"According to the figures, in 2009 the number of people working in the state sector either as permanent employees or on fixed term contracts came to 952,625 people. In December of 2013 that number had fallen to 675,530 - a drop of 277,095 or about 70,000 per year". See original article.

Now, I must admit that this small detail had escaped my attention... if one can consider a 30% reduction in total payroll a small detail. On the contrary, one of the angry comments which I heard frequently from Greeks was that "so far, they haven't fired one single public sector employee". And the Troika is making a big fuss out of sending 12.000 public sector employees into the mobility scheme.

How does that square with the above numbers? And, furthermore, how come that there has been so much discussion about a few thousand lay-off's and no reporting at all about the reduction of a few hundred thousand?

Friday, July 11, 2014

Greece's Trade Statistics --- Huge Differences Between Bank of Greece and ELSTAT!

There must be a very significant difference in the reporting of foreign trade between the Bank of Greece (BoG) and ELSTAT. As an example, I show below only the figures for 2013 (EUR; 000's omitted) but the same differences occurred in previous years.



Exports 22.535,0 53.014,0
Imports 39.764,0 57.815,0

----------- -----------
Trade deficit -17.229,0 -4.801,0

Differences of such magnitude must mean that the BoG and ELSTAT follow totally different rules for reporting Greece's foreign trade. I have inquired several times, even at the BoG, but I have not been able to get a satisfactory explanation.

It would all be alright if the differences netted out and resulted in the same trade balance. However, they don't. And it does make a difference whether a trade deficit is 17,2 BEUR or 4,8 BEUR.

Post Scriptum
Thanks to an ELSTAT link provided by one of the commentators below, I have now been able to shed a bit more light on this issue. When the BoG talks about exports/imports, they only include goods. When ELSTAT talks about exports/imports, they include goods, services and cross-border personal spending. That, of course, is not quite proper because exports/imports are goods and nothing else. But even when looking at the export/import of goods only, ELSTAT's figures differ from those of the BoG by a few billion.

The way ELSTAT calculates 'their' exports/imports, the balance is more affine to the current account balance. However, it is NOT the same as the current account balance because that also includes things like other income, current transfers, etc.

Bottom-line: it would be a lot more convincing if ELSTAT and the BoG reported the same figures when it comes to exports/imports of the country.

Monday, July 7, 2014

Not All Foreign Investors Are Good For The Greek Economy!

"Greece’s successful return to international capital markets in April has boosted confidence in the country’s medium-term prospects, encouraging hedge funds and private equity groups to take a closer look at Greek companies that have survived the crisis".

This comes from a FT Special Report on Greece. I would argue with vehemence that what the Greek economy definitely DOES NOT need is hedge funds and private equity groups.

Private equity groups are financial investors. When PE companies invest, they do so with the explicit purpose of achieving a financial return, preferably within a 5-year time frame. The real business activities of the acquired company are not an end per se but instead only a means towards an end, whereby this end is the financial return.

Hedge funds have the same interests as PE companies with the only difference that they don't even give a damn about the real business activities of the target. Their sole objective is to achieve a quick financial return regardless of the methods applied.

Both, private equity and hedge funds are legitimate business activities. They wouldn't exist if they didn't serve a purpose. My only point is that the purpose they serve is not a purpose which serves the well-being of the Greek economy.

There can be no question that the only long-term solution for the Greek economy is foreign investment, both as a source of capital as well as a source of know-how transfer. Whoever disagrees with that is disagreeing with common sense. However, there are different types of foreign investments and investors and the challenge for Greece will be to pick the right ones.

The 'right' foreign investor for an economy like Greece's is an investor in the real economy who takes a long-term commercial view when making the investment. He doesn't invest only because taxes or labor costs are low because taxes and labor costs can quickly become high again. He invests because he sees an opportunity to expand his global business through a presence in the Greek economy and, ideally, because he sees Greece as a good location to serve other markets in the region. He invests because he sees resources in the Greek economy which are only waiting to be tapped (like talented and well educated human resources; like natural resources; like logistic advantages; etc.).

There is one aspect of overriding priority which I would advise every Greek official who decides over foreign investment to follow: "Know thy partner!" One has to understand what the foreign investor's culture and his motives are. The answer to that question can almost always be found in the investor's track record. And, at the end of the day, it comes down to a judgment about the investor's owners and managers.

About 30 years ago, BMW acquired a small Austrian engine manufacturer. Today, more than half of all BMWs sold in the entire world are run by engines made in Austria, several thousand people are employed in Steyr and BMW is Austria's largest tax payer. After the opening of Central and Eastern Europe, BMW could have easily found cheaper places within the radius of a few hundred kilometers (several car manufacturers went to Hungary, Slovakia, etc.). Instead, BMW expanded in the more expensive Austria because they were happy with Austria's infrastructure and labor resources. BMWs Austrian website states the following: "Of particular importance to us are good relations with the people and the region which is their working and living home. Also the dialogue with employees and neighbors, customers and partners and the respect for shared values and ideals. BMW engages itself publicly, culturally as well as socially". Clearly, BMW has been an ideal foreign investor for Austria.

In the late 1990s, BAT acquired the Austrian monopolist tobacco company as part of a privatization program. During the first years, investments were made into Austrian production and output increased substantially. Today, the Austrian company is owned by a Japanese company. All Austrian production has been closed and transferred to more efficient locations (economies of scale). Consequently, there is no longer R&D in Austria. Job losses in Austria were substantial. Clearly, BAT has not been a good foreign investor for Austria.

I sincerely hope that Greece will not fall for PE companies and/or hedge funds!

Greece's Capacity to Repay Foreign Debt

John Maynard Keynes wrote in 1919 about Germany's capacity to pay indemnities to the Allies as reparations. Below is a brief excerpt whereby I replaced 'Germany' with 'Greece'.

"Estimates of Greece's ability to repay foreign debt depend on the assumption that she is in a position to conduct in the future a vastly greater trade than ever she has had in the past. It is only by the export of specific commodities that Greece can pay. It is certain that payments can only be made by Greece over a series of years by diminishing her imports and increasing her exports, thus enlarging the balance in her favour which is available for effecting payments abroad. Greece can pay in the long run in goods, and in goods only, whether these goods are furnished directly to Eurozone partners, or whether they are sold to others and the other credits so arising are then made over the the Eurozone partners".

Well, not quite. Keynes only talked about the product side of the current account. Particularly with regard to Greece, the services side of the current account is equally important because it generates large revenues from abroad (tourism, shipping, etc.).

But still: a country's ability to repay foreign debt depends on the country's ability to generate a surplus in its current account. One can, of course, achieve that surplus by radically cutting imports (as Greece did). However, cutting imports is of no sustained value because once they are cut, the end of the line is reached. In consequence, only through an increase in revenues from abroad (exports, services) can Greece entertain the hope of ever repaying at least part of its debt to foreigners. And the nice thing about increasing exports and services is that it creates domestic employment, domestic wage/income taxes and domestic social contributions --- all revenues for the state.

I am presently celebrating the 3rd anniversary of having repeated the above points over and over again.

An Anglo-Saxon Version of Prof. Hans-Werner Sinn?

"There were many factors that together triggered the original euro crisis in late 2009 and early 2010. Chief among them was growing doubt that European economies and their governments would be able to service their enormous debts. Added complications were the lack of enforced (or even enforceable) fiscal rules for the eurozone, a severe banking crisis, huge differentials in productivity across the continent and the resulting balance of payments and trade imbalances – all of this coupled with a palpable absence of political leadership, both at the national and the EU levels".

This is one of the most concise summaries of the origins of the Euro crisis which I have read. It comes from the economist Dr. Oliver Marc Hartwich whom I had never heard of before. Given his name and his location (Australia), I thought that he probably was an economist of the Anglo-Saxon tradition. In the 'about me' section of his blog, he has two captions: 'love me.... or loathe me...'. No doubt, the man is controversial. He reminded me a bit of an Anglo-Saxon version of Prof. Hans-Werner Sinn. I looked up Dr. Hartwich's s background in the interenet and --- he is a German! Germans simply can't win in this game...

Still, his article is very interesting and his conclusion is as follows:

"We are likely to see renewed doubts about Europe's fiscal viability and speculation on Euro periphery debt. This would then also trigger questions about the future of the Euro as a currency. Of course, the European Central Bank can (and will) try everything to stop a new crisis from escalating, just as it has done so far. It can create more money to pass on to banks which lend it to goernments. Similarly, fiscal policy can also invent new bailout schemes or extend existing ones. Such policies can continue as long as there is the political will to do so. But the required interventions to keep a dead currency alive and bankrupt banks and governments solvent will need to become more exterme over time".

Academic Degrees and Common Sense!

Sunday, June 29, 2014

The Wrong Multiplier --- Again!

Below is an interesting article about the never-ending issue of the multiplier used in the Greek memorandum by the IMF:

Original article (in Greek)
Google translation (in English)

Thursday, June 26, 2014

About Time To Read Up On Franklin Delano Roosevelt?

This very interesting paper (in German) outlines the measures which FDR took, starting in 1933, to get the US economy out of its depression. FDRs first priority was, as any leader's should be, to kindle spirits, courage and optimism in the society ("the only thing we have to fear is fear itself"). He used the instrument of 'fireside chats' to bring his message across. Secondly, FDR stigmatized the financial sector as 'unscrupulous money changers' that needed to be brought under control. And, thirdly, he stressed that investment, and only investment, would get the US out of its dire straits.

I used to think that FDR was the champion of deficit spending. Far from it!

FDR embarked on the celebrated ‘New Deal’ after taking office in 1933. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP rose 43%. Unemployment declined from 25% to 14%. However, the government’s share of the economy – contrary to all myths – remained flat during this time (revenues, expenses, budget deficit)!!! Public spending on consumption even declined from 59% to 56% of total public expenditures! What really prompted the turn-around was private sector investment which grew by 140% during the period in real terms. Obviously, government policy and FDRs fireside chats had a lot to do with the optimism which prompted the private sector to invest, but psychology is half the game in the economy.

The generally accepted school of thought nowadays is that, when in depression, no one other than the state can trigger the stimulus required to get the private sector going again. That may be true when there is no leadership around. 

If there is leadership à la FDR around, the private sector will undoubtedly live up to the role which it is supposed to play in a market economy --- not as a predatory tiger to be shot. Not as a cow that is to be milked. But, instead, as a healthy horse, pulling a sturdy wagon (paraphrasing Churchill).

Wednesday, June 25, 2014

Radical Views of a Benedictine Primate

Notger Wolf, 66, is, since 2000, the Abbots Primate of the Benedictine Confederation. His recent interview with the German magazine STERN suggests that he has strong political views and is not afraid to voice them. Below are excerpts.

STERN: How much support would you give long-time unemployed in Germany?
Wolf: In any case less than Hartz-IV (the government's unemployment insurance).
STERN: But that is only 345 Euros per month!
Wolf: I am sure that there are jobs for many which are unemployed in Germany today. I would ask each one of them: 'are you really ready to take on a job even if it doesn't earn you much more than Hartz-IV? Just to protect your dignity?'. Man is similar to a muscle. If it isn't used, it wastes away. People often don't realize how much psychological damage they do to themselves through their inactivity.
STERN: Suppose as 45-year old metal worker, head of a family, just fired, comes to ask for your advice. Would you advise him to take a cleaning job?
Wolf: Yes. That may sound cynical but changes in life offer opportunities.
STERN: But his friends and colleages would declare him as stupid!
Wolf: Of course, that requires self-confidence. But he could reply: "Don't make fun of me. The same thing might happen to you tomorrow. Now I have more time for my family".
STERN: Again, how much support would be adquate?
Wolf: There is a fatal socialist pattern in our mentality which suggests that politics is only good and human if it puts social justice and social equality above all practical reason. That is nonsense. To offer everyone the same opportunties is correct but we have to stop this ridiculous equality doctrine. Men are different. If I give one person 100 Euros today, he might turn them into 200 Euros by tomorrow. Another person might spend the money in a bar. The unstoppable expansion of the welfare state is the best example how one can turn social equality fanatism into one's own prison.
STERN: You also coach managers. What can managers learn from a Primate?
Wolf: They can learn that, in the long run, only humane management will be successful. An exclusively profit-oriented environment destroys the corporate culture. It undermines motivation of employees. It reduces performance.
STERN: What is your anser to those who believe that our economies are on the wrong track?
Wolf: We have subjected ourselves to the desire that the state should solve all of our problems. Society is under the tutelage self-annointed virtuous politicians who chase the myth of social justice. These politicians sell us the state as a make-you-feel-good institution. We force them to try the impossible.
STERN: What must happen?
Wolf: Three proposals. First, let us release the state from its responsibility for our personal happiness. That is our own responsibility. It is sufficient when the state intervenes where real need is. There is no human right for a comfortable life. Secondly, let's stop the centralist efforts to legislate happiness for everyone. And, thirdly, those who govern must demonstrate the moral competence to protect the basis of a human society which finds itself threatened by new technologies and economic pressures. We are talking about eternal values here.
STERN: You are extremely frank. As the Abbots Primate, don't you have to act politically correct?
Wolf: No one has to do that; honesty is much more important! What disturbs me about political correctness is that it puts everyone under the suspicion of being anti-foreigners or anti-women. Political correctness is a great nebulization, a program to achieve moral slavery.

Are the Chinese Smarter than the Europeans? (follow-up)

I take the liberty of publishing below the comment which the reader Lennard made to my recent article "Are the Chinese smarter than the Europeans?".

"Are the Chinese smarter than the Europeans?

They may well be in the long run, for sure they are a lot smarter than the Greeks. The crafty Greeks are considered to be master wheelers and dealers, but they can't hold a candle to the Chinese. I have during the last week's visit of the Chinese trade delegation watched and admired the virtuosi way the Chinese played the Greeks.

They have praised the ancient Hellene culture and by extension modern Greece. They have compared the ancient Hellene culture with the Chinese and not found it wanting. They have expressed that Greece is (at least) as important to the world as China. They have proven their friendship and confidence in the Greek economy by signing investment deals for USD 4.6 BIO (3.5 being loans to Greek controlled shipping companies located in other countries, for ships build in China. The remaining being Letters Of Intent or confirmations of previous deals like the Hellenikon). They have hinted that Greece will soon regain it's well-deserved important role in world politics and economics. They have hinted that Greece will become the all-important middle man for all future large transactions between China and Europe. They have pledged that they will invest in Greek government bonds, a promise they have repeated once a year since they said it to G. Papandreou in 2010, an easy promise considering the anonymity of ownership.

And did the suspicious Greeks swallow that? Hook, line and sinker, flattery will get you everywhere. Watch out Frau Merkel, we have powerful friends"

Samaras Vindicated; Finally!

Joking aside, this was one of the most exciting games of the tournament so far. I watched it on German TV. Towards the end of the game, the German commentator clearly took sides with the Greeks. In the subsequent discussion, there was clear happiness for Greece's having won. That says everything!


PS: a commentator below pointed out that the text says: "New Dictatorship (with a swastica), we continue selling out (the country)". "We said we will raise the country higher. This is what we meant". Had I known this before, I would not have posted it (I just thought it was a funny picture). I apologize!

"Mikel" Coffee Shops Hit the News!

The first time I saw a Mikel coffee shop was about 2 years ago; in Katerini. A friend of ours, an interior designer, had shown it to us because he was doing the interior design for the franchise. The entire concept of this franchise seemed brilliant to me. From design to products to service - the whole package simply looked perfect. I then wrote this article about my Mikel-experience.

I now am happy to see (and most impressed!) that Forbes magazine has discovered this Greek franchise success. Two articles about one company in as many days is quite a feat:

In as much as I once owned and was running a franchise in the US, I think I know quite a bit about franchises. Mikel clearly is tops! The fact that the entire concept was developed and implemented by Greeks in Greece only goes to show that there are indeed great business talents in Greek society. The only trouble is that they don't get the attention which they should get so that other Greeks could learn from and be encouraged by them!

Tuesday, June 24, 2014

Without Austerity, Greece Would Be in an Obvious Recovery By Now?

"The EU-imposed austerity program is the reason that Greece and Spain are experiencing a Great Depression now, rather than the obvious (if fragile) recovery that is well underway in the US. It is a classic own goal by the mainstream-economics-obsessed bureaucrats in Brussels".

This is the conclusion which Steve Keen draws in this article in the BusinessSpectator. It is a keen conclusion because it suggests, by implication, that Greece would be today in an obvious (if fragile) recovery if there had not been the EU-imposed austerity.

The debate about austerity is as old as the crisis and, to me, it is a bit of a futile debate because a member of the Eurozone can only avoid austerity if someone else lends it the money for it. As long as the EU was not prepared to provide Greece with more bail-out money than they did, the debate becomes academic. The academics may be right but the real world does not give a damn.

Clearly, anyone who argues that all that's needed in a country like Greece to achieve an economic turn-around is government austerity is somewhat single-minded. There has to be a strategic recovery plan and government austerity can be part of that. If the overall plan is good, the negative consequences of government austerity can be alleviated.

I will revert to an oversimplified narrative to illustrate my point. That narrative, which is unrealistically extreme, would suggest that the Greek economy had ceased to generate value on its own account. There was decent growth and employment until about 2008 because staggering amounts of capital flowed into the economy which allowed the economy to import all the products it desired. When the capital flows decelerated, that recycling process (borrowing money offshore to spend it offshore) decelarated even more rapidly. Collapsing growth and rising unemployment are the obvious consequences.

Obviously, the Greek economy had not ceased to generate any value on its own account. However, one decade of the Euro had taken a lot of value generation capacity, never large to begin with, out of the economy. Had one avoided government austerity and had the capital flows been kept alive, the only thing which would have been kept alive would have been the above-mentioned recycling process.

My sense is that government austerity had such terrible consequences for Greeks because no capital was directed towards the rebuilding of the economy's value generation capacity. And, above all, if that value generation capacity is not re-built (or rather: built up) any time soon, Greeks are in for many, many years of economic suffering.

Any national economy has something which, for lack of a better expression, I will call the national economic value generation capacity. I cannot explain how exactly one measures it but common sense tells me it's there. Common sense also tells me that, over time, the country's living standards will be a function of that economic value generation capacity. Excessive capital inflows or excessive austerity can distort the living standards temporarily (whereby 'temporarily' can be quite a long time). The living standards may, temporarily, be far higher or far lower than what the economic value generation capacity would suggest but, at the end of the day, one cannot fool reality. And reality says that if you don't generate any economic value, you won't get any, either. At least over time.