Follow by Email

Saturday, August 13, 2011

No way out of the Greek recession?

A deep recession in Greece? So what else did one expect? A state reducing its (ridiculously high) expenditures and a private sector where capital flight substitutes for new investment? Perhaps it would be an idea to look up the notes which students of economics made during "Economics 101"?

The only way out of a recession is new investment in revenue-generating projects. Consensus seems to be that there are presently no revenue-generating projects in Greece? Who says so?

Revenue-generating projects do not announce themselves in newspaper ads. Potential new demand does not do that, either. Both have to be found and developed. If a government wants to play a role in this (which is normally a very questionable endeavour), then the government must abstain from any mandatory measures. No private "economic agent" will ever act the way a government tells him to act.
A government, however, has the most effective tools available. It can create a legislative environment which motivates investors and private capital to deploy their creative energies. This only works if the new legislative environment has the credibility of investors. As Friedrich von Hayek so convincingly argued, not only a state of law is required but, above all, a shared belief in the state of law by its economic agents.

Economic agents presently do not believe that any law in Greece is to be taken seriously. The Greeks themselves no longer trust government. 

The power of the stronger EU-states should not primarily be used to transfer money to a country where its people no longer trust the state of law. That power should be used to transfer to Greeks the confidence they should have in their state of law. How could that work?

The EU can not only guarantee national debt instruments (which, so far, it has done for lack of better knowledge). The EU should foremost guarantee compliance with certain national laws which are deemed of prime importance for economic agents. 

Potential domestic and foreign investors would invest their equity in Greece (like in any other place) if the economic environment were “right”. Thus, one should ask those potential investors what they consider as the “right” economic environment. Investors would likely answer in the following manner: (1) we need to know reliable rules of the game (an investment law); (2) we need to have assurance that those rules remain in place (a EU-guarantee of the investment law); (3) we need to have the freedom to establish an internationally competitive cost structure which allows us to operate profitably; and (4) we need to see market potential for the products of our new investments.

The government can any day implement a new Investment Law. Whether or not the EU is willing to guarantee it will be a matter of negotiation. If the EU refused to guarantee it (and prefer to send good money after bad), the EU would totally disqualify itself. One of the most critical aspects of the new Investment Law would be to incorporate control mechanisms which assure compliance with the law (“good corporate citizenship”). If the new investments fell victim to Greek habits of cronyism and tax evasion, the purpose of the new law would be undermined. Strict supervision by credible external auditors would be a condition precedent.

To impose an internationally competitive cost structure on the entire country would lead to revolution because it would mean that all Greeks would practically overnight have to accept a decline in income of 30-40% (or even more). The unions would never go along with that. Thus, the “internationally competitive cost structure” would have to be limited to new investments under the new Investment Law. Those Greeks who happily earn good income in the present situation would not have to make a sacrifice. The Greeks who suffer from the present situation (foremost the unemployed) would benefit from it. 

Finally, the market potential. The “Greek problem” began when the highly valued Euro made Greece expensive and when imports became cheaper than domestic production (resulting in a de-industrialization and a loss of manufacturing jobs). If the substitution of domestic manufacturings through imports started the problem, the solution is to substitute imports with domestic manufacturings. There are undoubtedly many products which simply cannot be produced competitively in Greece. However, there is undoubtedly a multitude of products which could be competitively produced in Greece if the economic conditions were “right”. That those economic conditions are “right” is the object of the new Investment Law. That the new Investment Law leads to the desired results is the responsibility of entrepreneurs. Entrepreneurs always live up to their responsibility if the equation of “risk/reward” is attractive for them. All the government has to do is to make this equation attractive.

“Greeks are lazy”; “Greek mentality prefers the easy-going way of life to the results-driven way of life of, say, Germans”; “Greeks are by nature crooks”; “Greeks cannot be trusted”; etc.

Well, such prejudices have indeed been ventilated by Germans and Austrians in the recent past. But they defy the experiences which Germans/Austrians have made with Greeks in the decades of “guest workers”. Anyone living in Germany or Austria remembers that of all the guest workers, the “Greeks” were the most respected ones. They worked hard and honestly; they raised wonderful families; their objective clearly was to take advantage of the working opportunities in other countries in order to improve the well-being of their families at home (and that at great personal sacrifice). After all, the Greek guest workers inspired Udo Juergens to compose his song “Griechischer Wein” which has maintained popularity to this very day (and which has become a sort of “hymn to the Greek guest worker”).

Thus, Greeks themselves must be the first ones who start to believe in themselves (again)! The government – with the support of the EU – must provide the framework which allows the Greeks to leverage up on their talents which have been proven over the last few millennia!!!

No comments:

Post a Comment