It is almost mind-boggling to hear these surprise announcements that recession in Greece is higher than expected and that it will continue for longer than expected! Aren’t there sensible people left, in Greece as well as at EU-levels, who remember what they learned in Economics 101???
From 2001-10, Greece’s imports were 446 billion EUR and exports were only 146 billion EUR. The current account deficit during this period was 199 billion EUR. This “party of the Greek economy” was financed through external debt (which increased by 288 billion EUR during this time).
When you have a go-go period where the go-go is so obviously financed by external debt, it is the most natural thing in the world that the go-go period is over the moment external debt no longer flows voluntarily!
Remember the following: while Greece has become significantly more expensive relative to Germany during the last 10 years, the Greek Euro maintained the same international purchasing power as the German Euro. Thus, Greeks were better off buying products and services abroad than domestically. This is why the Greek economy, today, has become a zombie-economy.
You don’t believe this? Well, take note of the fact that Greece imported even olive oil during 2010! Why? The General Confederation of Greek Agrarian Association said the reason for the high level of imports was that domestic olive oil production has slumped below demand due to the drop in price.
How could that happen? Very easily, because foreign olive oil became cheaper than Greek olive oil.
Unless the zombie-economy can be converted into a real economy, Greece has absolutely no chance!
Intellectuals may argue about this, that and the other but the simple mathematic fact is that Greeks will become about 30-40% poorer unless they start generating some value on their own (instead of importing value).
If Greeks want to be driven by proud emotions and revert to slogans like “we don’t need the Euro; it has only brought us bad luck; let’s get out of it!”, well, these Greeks should ponder the following:
A Euro-exit would devalue domestic Greek financial assets (savings!) overnight by 30-40% in terms of foreign currency. If you were planning a trip to, say, Germany, that trip will cost 30-40% more overnight. If you were proud to have saved 100,000 Euro in your bank account, those savings will overnight be worth only 60,000 Euro or so.
If you were used to buying imported goods at cheap prices, forget it! You may no longer be able to import them at all, but if you can, they will cost you a fortune.
The good news would be that the government no longer has cash flow problems. They could pay all their domestic bills (salaries, social transfers, etc.) on time by printing more of the new local currency. Just wait to see what impact that will have on domestic inflation (and on the future value of your own net worth!).
What is the lesson of all of this? It is: START MANUFACTURING!!! Start manufacturing many of those products which you are presently importing!!! Imports are equivalent to the export of jobs. If you import less, you have more domestic jobs. More jobs which will generate tax revenue for the government and more manufacturing businesses will generate more corporate taxes for the government.
How can you accomplish that? Well, just tell your government that they should explain to you what needs to be done. They will probably tell you that imports will have to be reigned in through special taxes on imports and domestic production (for the substitution of those imports) will have to be incentivated by a new Investment Law which assures investors that their investment has high security and good profit potential. And since no one in Greece will believe that the government will honor such a law, the government should ask the EU to guarantee compliance with it. Once that is in place, investors won’t have to be begged to invest. Instead, they will do that at their own initiative!
And you will live happily ever thereafter!