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Tuesday, October 4, 2011

The importance of foreign investment

Let me emphasize, one again, the importance of foreign investment as the only solution for Greece's economic problems. If you studied Economics, think back of Economics 101.

A country's current account shows the balance of its external transactions. Exports and services (tourism, shipping, etc.) are inflows of money from abroad; imports are outflows of money. If a country, like Greece (or the USA), has a substantial current account deficit, it is importing capital (and exporting jobs).

A current account deficit is not necessarily bad per se. An economy, like Greece's, which generates little domestic capital needs to import capital in order to finance its growth. The question is what the imported capital is used for. If it is used for consumption, it ends up as foreign debt without any counter-value (like in Greece). If it is used for investment, it will generate future returns in order to repay the debts abroad.

Greece will have a structural current account deficit for many years to come because she imports so much more than she exports and the resulting gap is far too large to be closed through services.

The conclusion is as simple as it is obvious: going forward, Greece must import the foreign capital which she needs in the form of equity and not debt. Why not debt? Because Greece will for a long time not be in a position to take up new foreign debt (except for the so-called rescue loans).

Thus, there are only 3 solutions for Greece: foreign investment, foreign investment and, again, foreign investment.

Foreign investment does not come by mandate. It comes because foreign capital sees interesting investment opportunities in Greece. Today, only a fool would transfer capital for investment in Greece. As a result, Greece has no choice but to evaluate all possible ways how she can create a business environment which foreign investors will consider as attractive from a security and return standpoint.

2 comments:


  1. Foreign investment does not come by mandate. It comes because foreign capital sees interesting investment opportuntities in Greece. Today, only a fool would transfer capital for investment in Greece. As a result, Greece has no choice but to evaluate all possible ways how she can create a business environment which foreign investors will consider as attractive from a security and return standpoint.


    I really enjoyed the paragraph above. In just a few sentences, you spotlighted one of the largest problems -- if not the largest -- Greece has. And yet this issue seems to be completely absent in public debate. It would appear as if politicians were much more concerned on mitigating damage done instead of focusing on preventing even more.

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  2. I have to agree with your point, Christian! Let's go back to the basic rule: prevention is better than cure. Although the damage has been done, Greece should also think of preventing the crisis from going out of control. And I agree with you, Mr. Kleingut. They need foreign investments to keep moving forward.

    Regards,
    Sabrina

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