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Friday, September 16, 2011

Endgame for Greece!

The endgame has begun. Even if Greece manages to arrange the disbursement of the next tranche under Plan I and even if Plan II becomes approved by the EU, Greece has absolutely no chance to comply with the austerity requirements on a sustained basis because the economy of Greece is a basket case and because there seem to be no plans whatsoever (neither on the part of Greece nor on the part of the EU) how the economy could get going again.

There is no industrial development plan how to convert a corrupt and crony-driven economy into a value-generating market economy. This is not a project for a few months, nor even for 2-3 years. This is a project for an entire generation and it has to be planned accordingly.

Economists have calculated that Greece, since the Euro, has become roughly 40% more expensive relative to Germany. However, the Greek Euro has maintained the same international purchasing power as the German Euro. Consequently, Greece has imported products and services from abroad instead of producing them domestically. The Greek economy has become a zombie-economy which had lost its business model long before the financial crisis of 2008: 80% of the economy consists of services, i. e. “selling each other souvlaki at inflated prices and paying for them with money borrowed abroad”.

From 2001-10, Greek imports amounted to 446 billion EUR compared with exports of only 146 billion EUR. Despite the present recession which brought imports down and even increased exports, exports still only cover 40-45% of imports (compared with 78% in the USA and even 93% in Italy). The current account deficit during this period was 199 billion EUR! This luxury of the Greek economy was financed through foreign savings.

From 2001-10, the gross external debt of Greece increased from 121 billion EUR to 409 billion EUR; representing a net increase of 288 billion EUR. Most importantly, the foreign debt of the private sector (212 billion EUR) is higher than the foreign debt of the public sector (187 billion EUR). Even if all of Greece’s sovereign debt were forgiven and even if the budget could be balanced, the problem of the Greek economy would remain.

The Greek economy literally “burns” money. The current account deficit for 2011 can be expected at no less than 25 billion EUR. And continued capital flight will probably amount to another 25 billion EUR. In the past, the ECB has filled this “hole” by lending money to the Greek banking sector. Picture the following: the ECB sent tax payers money to the Greek banking sector so that wealthy Greeks could – perfectly legally via bank accounts – transfer their own money abroad and so that the Greek economy could import goods instead of producing them domestically! How much longer will the ECB be able to do this? (presently, they have lent roughly 100 billion EUR to the Greek banking sector).

Greece is not a bottom-less pit. However, she is a pit with 3 big holes: budget deficit, current account deficit and capital flight. Quite a bit has been done already with regard to the budget deficit but more needs to be done. Nothing has been done yet as regards the current account deficit and capital flight.

If Greece does not get a handle on the current account deficit and on capital flight, she has absolutely no chance!!!

An industrial development plan needs to aim at reducing the current account deficit and at eliminating capital flight. Exports can probably not be increased at a significant rate because Greece does not have all that much to export (yet). Revenues from tourism can probably not be increased significantly, either, because they are already very high and because Greek tourism – objectively speaking – isn’t really all that competitive (Greek tourism lives very much on cult).

Consequently, it is imports and capital flight which are the two factors left which could make a difference, and a big difference they could make indeed! Imports must be drastically reigned in (and replaced, as much as possible, with domestic production) and capital flight must simply be stopped outright.

If Greece left the Euro and returned to the Drachma, all of the above would happen automatically: the new Drachma would devalue by at least 30-40% making all imports more expensive accordingly; capital flight via bank accounts would no longer be possible because banks would not have the necessary local currency.

A Euro-exit, above all an uncontrolled one, would probably be the worst of all evils in the present chaos. Financial assets of Greeks (savings) would overnight become 30-40% worth less in terms of foreign currency. Bye, bye social peace!

If a Euro-exit is the worst of all evils and if Greece cannot make it with the present Euro-structure, then Greece must hold on to the Euro and simulate a situation – at least temporarily – as though she had returned to the Drachma.

Temporary measures: special taxes on imports in order to make imports altogether 30-40% more expensive (on a staggered scale, however: 0% for priority imports; 100% for luxury imports); selective Free Trade Zones where internationally competitive business conditions are allowed so that new domestic production for import substitution can be started; and capital controls.

This would violate EU-treaties (free movement of goods/services) but treaties can be amended, if only temporarily. This is an emergency and an emergency requires emergency legislation. For the EU it would clearly be more beneficial to approve such amendments so that Greece can build up a value-generating economy instead of continuing to send tax payers money to Greece so that a zombie-economy can be kept up.

A new Investment Law of constitutional rank must be established which assures the potential new investor all the internationally competitive business conditions which he desires. Since no one seems to trust any Greek law any more, the EU should guarantee compliance with this Investment Law so that investors do not have to carry any political risk (economic risk they have to carry!).

The investor would find an economic nirvana: he can produce competitively and he already has an assured market demand. And he is covered against all sorts of Greek political risk.

Wealthy Greeks hold hundreds of billion Euros in foreign bank accounts. The new Investment Law must aim at the voluntary return to Greece for new investment of parts of those funds. Greeks are good businessmen and they recognize a good business opportunity quickly. Why should wealthy Greeks prefer to earn 2% in Switzerland when they could earn a multiple thereof in Greece with the same security?

Why selective Free Trade Zones and not the whole country to begin with? Because one cannot restructure a country’s economy from A-Z at one and the same time; that would lead to a revolution. Instead, the objective has to be to make the Free Trade Zones work well and to hope that their economic framework will rub off on the rest of the economy over the years.

Of foremost priority is good business governance in the Free Trade Zones; everything must be on correct and transparent footing. If the Greek way of doing business (tax cheating, corruption) set foot in the Free Trade Zones, the project would be doomed from the start. There would have to be efficient control mechanisms such as regular audits by reputable auditing firms. Perhaps even periodic EU-inspections (after all, they guarantee compliance with the Investment Law).

The great risk associated with import controls is always that this protection of the domestic economy is misused by domestic manufacturers. Suppose an imported tooth paste costs 1 EUR per tube and the new internationally competitive conditions in the Free Trade Zones allow the domestic manufacturer to also operate profitably at that price. Assume further that a 100% special tax will temporarily be imposed on the imported tooth paste so that the domestic manufacturer can start up his business. Thus, the imported tube will now cost 2 EUR. The risk is that the clever Greek businessman may now want to sell the domestically manufactured tube at 1,99 EUR.

This is not how the system can work! The objective of the Free Trade Zones is to build up sustained domestic manufacturing. They cannot be misused by clever Greek businessmen to produce competitively but sell at twice the price. The benchmark always has to be the international price!

All of this sounds very much like a planned economy, but it isn’t. It all depends on the new Investment Law is formulated. The law has to establish firmly those rules within which entrepreneurs can act freely and to their profit. An effective Investment Law will offer the investor an attractive relationship between security, risk and reward. If that is accomplished, the investors will come on their own.

Chile showed in the late 1970s how a good Foreign Investment Law turned a formerly communist and planned economy in a short time into the „darling“ of foreign investors. Why should Greece not be able to accomplish the same? (particularly with the EU-guarantee, of which Chile had no equivalent).

Argentina has attempted several economic stabilization plans over the decades and for a limited period of time they all seemed to work. The foreign money of Argentines always returned quickly to the country and accelerated the recovery. However, as soon as the first clouds appeared on the economic horizon, that money left the country as quickly as it had come. Greece must accomplish the “trick” to create the kind of economic framework so that the foreign financial assets of Greeks stay in the country on a sustained basis.

The government must assure that many investment opportunities are always on offer for investors. They must be well presented and accompanied by base case business plans, and they must be publicly tendered. The government could even involve some PR-coverage to stimulate a “run” on such new investments (based on the theme: “let’s get in before the door perhaps closes again”).

The issue of Greece’s sovereign debt was purposely not addressed here because that problem is, in comparison, the smaller problem. A foreign debt problem can be solved with a few hundred people in a conference room (provided that they can agree on something). However, to develop an industrial development plan for the Greek economy and to successfully implement it, that requires the best brains not only of Greece but also of Europe.

But: once there is an industrial development plan for Greece, the sovereign debt problem will be much easier to solve because the country’s creditors could, for once, have the hope that there could be light at the end of the Greek tunnel!

12 comments:

  1. This is a great thinking out of the box article

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  2. A very well executed plan ..... providing that you also accept some small revisions that are considered crucial for ongoing success:

    “Of foremost priority is good business governance in the Free Trade Zones; everything must be on correct and transparent footing. If the Greek way of doing business (tax cheating, corruption) set foot in the Free Trade Zones, the project would be doomed from the start. There would have to be efficient control mechanisms such as regular audits by reputable auditing firms. Perhaps even periodic EU-inspections (after all, they guarantee compliance with the Investment Law).”

    Perhaps the best idea would be to comprehensively introduce Pay As You Earn (PAYE), tax collection as we have it here in the UK for all employees. Stress; ALL employees, even the company directors.

    “A new Investment Law of constitutional rank must be established which assures the potential new investor all the internationally competitive business conditions which he desires. Since no one seems to trust any Greek law any more, the EU should guarantee compliance with this Investment Law so that investors do not have to carry any political risk (economic risk they have to carry!).

    The investor would find an economic nirvana: he can produce competitively and he already has an assured market demand. And he is covered against all sorts of Greek political risk.”

    The only way forward is through the introduction of Free Enterprise and true free markets. It would be wise to consider that one of the primary reasons for all the corruption has been to seek a way around what has been feudalism, where the manager of the business has not been the owner of the business. Feudalism can have quite dramatic effects that are invisible to the feudal minded investor. And also remember that feudalism can come from both government and private sectors. The people of Greece, (let alone any other nation), are not a “Colony” to be relentlessly exploited. Form now onwards, they must be encouraged to embrace free enterprise; where they become entirely responsible for their success or failure.

    As for your point regarding the potential for over pricing of the toothpaste; overpricing is ALWAYS covered by simple competition. The whole idea of a free market is to permit ANYONE that wishes to compete; are enabled access to the equity capital; to permit them to try and compete. Competition is the absolutely necessary input to these excellent ideas.

    Greece has everything but access to the equity capital every citizen must have to enable such competition and free enterprise; a problem that extends right across the Western economies. That was why, years ago, I set out to describe a feudal mercantile economy in The Road Ahead from a Grass Roots Perspective.

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  3. "As for your point regarding the potential for over pricing of the toothpaste; overpricing is ALWAYS covered by simple competition. The whole idea of a free market is to permit ANYONE that wishes to compete; are enabled access to the equity capital; to permit them to try and compete. Competition is the absolutely necessary input to these excellent ideas."

    While i agree to the extend that i can understand ,and that because you make me reach my economic thought limitations ,i will comment only to what i perceive as an important part of perception manipulation.
    And that is Competition.

    I always disagree with competition or atleast the way it is used as a term.

    While the action ,the outcome we wish ,can be realized by competition ,the process has ,in my opinion ,a disadvantage for the majority ,even with the proper system.

    In a society of competition ,the time will come that those with no conscience will use every opportunity to gain ,bypassing the rules.
    In the second place ,come those businesswomen and men ,that are willing to advance having dignity.
    Last ,is everybody else ,even of better character.

    In time everything gets worst ,because of the obvious advantage the corrupted ones have over the normal people. And no change will come to these situations ,not until it is too late ,for everybody is using the same terms in a way that give advantage more to those that shouldn't have it.

    Todays world is an example.

    A simple change of words ,is enough for a better perception and clearer thought.

    When you compete ,you create anxiety.
    When you focus in advancement ,you do not.

    Great athletes better themselves. Winning the opponent is a "sideeffect".

    Focus ,cooperation ,discipline.

    A better process ,with the same practical outcome of competition ,but the advantage of a better internal outcome as well.
    The lack of confusion and the automatic placement of those that were wrongly first to the last place.

    Today our economic perception still accepts those that simply are no good.

    Find the logos ,create reality.

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  4. What relevance does the link/video on your Blog label "Greeks at their best" have ? Making sport / fun of the silly little people of Greece truly is not the solution ! I must admit it is a cheesy video.

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  5. I love this video. I admit that it can mean different things to different people. To me, it means that the Greek mentality is not so frustrated as the mentality of many “civilized” nations. It doesn’t complicate things; it – often – ignores reality. And, as you can see in the video, the tourist girls (Germans?) fall for it!

    You might as well read the book “Zorbas” or watch the movie. Here is the contrast between the man who represents “natural feelings” and the English professor who is inhibited because he thinks rationally. The Englishman wants to be as “free” as Zorbas is but, at the end of the day, he doesn’t have the guts for it. I admire those Greeks who have the guts to be the way they want to be!

    PS: it might be interesting to make an analysis of the tourists on Mykonos. My assumption is that many of those tourists who “let out their hair” (and other things) in Mykonos are very serious, adapted and successful individuals in their home countries.

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  6. Hi

    You hit the nail on the head, the current account deficit is the source of Greece's problems.

    The answer is very simple. Find out what things make Greece less competitive than Germany and eliminate them.

    The problem is government doing too much, so the government must do less. This saves Greek taxpayers money and at the same time makes Greece competitive. It is not rocket science.

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  7. sorry my English are bad just like our politicians LOL
    the problem in Greece is the politicians!!!
    i stay in Greece i am 42 yo. do you know that we pay the electricity/water/natural gas ets every month and the government say that --i don't care if you pay 200-400 euro every 2 month, you don't have tax-free for these money you pay--
    Do you know that s/market LIDL has the same products in Greece 40%-100% more expensive than in Germany?? are we richer than the Germans??? I have a job as a delivery boy they give me 3 euro every hour, with the gas in the 3 euro and mechanical problems in the same price... i work 4 hours one week and 6 hours the next week??? this means i get 336 euro every month... i can't find an extra job, i don't have a health insurance the last 2 years... a car hit me 6 months ago i fall down from the moto i couldn't go to hospital because i had no money to pay there, so i take a box of painkillers because i had to go to job next day...
    any way i will find may way..
    The problem is that Greece is still paying the loans she take 80 years ago and we have paid them 4-5 times every one of theme... if we stop paying the old loans we will have more money than the Germans!!!is there someone here how knows how mysh money Greece have to pay to the old loans??? is there someone who know how many times we have paid the same loans???? can you find these answers???????????????????
    thank you fo r your time...

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    Replies
    1. Just yesterday I wrote a piece about the fact that incomes go down but prices seem to stay high (if not increase). Either there are still a lot of people not yet touched by the crisis and/or a lot of black money, or a combination of both: http://klauskastner.blogspot.com/2012/04/miracle-of-some-greek-prices.html.

      Yes, there was an article in a German paper recently that Lidl charges so much more in Greece than in Germany. Somebody must be paying those prices. Also, the last time I checked, the global concern Heineken made 7% of world-wide operating profit in the small Greek market.

      One could reduce the hardships affecting so many Greeks quickly and simply be implementing a luxury tax. That is a very defendable step in times of crisis (should be acceptable to left and right, and of course center) because it requires the well-to-do to show solidarity with the others (and it wouldn't reduce purchasing power because the wealthy ones will continue to spend what they want to spend).

      No, Greece is not paying loans which were taken down 80 years ago. The bulk of Greece's debt was incurred in the last 10 years.

      No, Greece will not have more money than the Germans if it stops paying the debt. Instead, Greece would hit poverty as a result of such a move.

      Yes, Greece could quickly become one of the wealthiest European countries. All that would need to happen is that Greeks living in Greece bring back to Greece all the money which they hold in foreign bank accounts. We are talking about 3-digit billion EUR figures there!

      Finally, if you want details about the debt, look up the website of the Bank of Greece (for foreign debt) and of the Ministry of Finance (for public debt).

      Delete
  8. dear kleingut:
    http://olympiada.files.wordpress.com/2010/05/cf80ceb1cf81ceb1cf81cf84ceb7cebcceb1-5.jpg
    the red line is Greek gross national product and the blue lines is Greek dept

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  9. "the ECB sent tax payers money to the Greek banking sector so that wealthy Greeks could – perfectly legally via bank accounts – transfer their own money abroad and so that the Greek economy could import goods instead of producing them domestically! How much longer will the ECB be able to do this? (presently, they have lent roughly 100 billion EUR to the Greek banking sector)."

    Für mich sehr interessante Informationen, die zugleich einen Rattenschwanz an Fragen aufwerfen:
    1) Meine Annahme war bisher: Griechischer Staat leiht sich Geld und verteilt das ans Volk. Daher die Probleme. Sie zeigen, dass die Transfers noch mehr über Bankenkanäle gehen (und das ohne Berücksichtigung der Kapitalflucht, wenn ich richtig verstehe).
    2) Frage: Wie können oder konnten dann die griechischen Banken als relativ solide gelten? Die Kredite müssten ja dann für Konsum verwendet worden, und die Kreditnehmer, da sie nichts produzieren, pleite sein. Griechische Banken müssten also auf gigantischem Berg an faulen Krediten sitzen? Oder? Bzw. ggf. wieso nicht? Bzw. warum hört man nichts darüber?
    3) Gängige Meinung/Berichterstattung sagt doch: Wir müssen griechische Banken nur insoweit rekapitalisieren, als die Verluste aus Haircut auf gr'e Staatsanleihen hinnehmen musste?

    ??? Ich bin verwirrt, wenn ich Ihre Infos mit meinem Wissen (das nicht detailliert ist, aber auf intensiver Verfolgung der Berichterstattung beruht) vergleiche.

    4)"ECB sent tax payers money to the Greek banking sector"? "Steuergeld" verstehe ich nicht: die schicken doch einfach Geld aus der Druckerpresse runter? (Was wir natürlich auch bezahlen müssen - Inflations"steuer")

    Klären Sie mich auf, oder sagen Sie mir ggf., in welchem Posting Sie den 'Bankentransfer' näher behandelt haben?

    ReplyDelete
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