I have commented on budget statistics for 2011 before. Those interested in national accounts are recommended to visit the website of the Bank of Greece which publishes excellent statistics about the Balance of Payments as well as the banking sector. Some excerpts are below.
1. The current account deficit declined 8% to 21 BN EUR in 2011. That is wonderful news! Or is it perhaps not? Actually, it is quite impressive when comparing it to the current account deficit of 35 BN EUR in 2008, but one has to take a closer look at the numbers.
2. Exports increased 18% to 20 BN EUR. How about that for a country which, according to all wise men, has lost its international competitiveness?
3. And imports? Well, imports couldn't be curtailed but at least their growth rate could be cut to 5%. So when exports increase by 18% and imports only by 5%, one should expect that things are going real well. Are they?
4. Well, it is certainly more promising to have export growth than not to have one. Particularly when exports grow that much faster than imports. But the absolute level of imports was still excessively high in 2011.
5. Imports were 48 BN EUR in 2011. That is 2,3 times the level of exports! Put differently: for every Euro which Greece receives from exports she spends 2,3 Euros on imports. Mathematically, this translates into "spending more than one earns".
6. Exports covered only 43% of imports. To understand why Greece is so much different from all other PIIGS-countries: in troubled Italy, exports still cover over 90% of imports (and Italian exports are almost 2 times the entire GDP of Greece). Even in the USA, the world's import champion, exports still cover imports by almost 80%.
7. Greece has the advantage of having foreign income from other sources than only exports: Greece has tourism, shipping services, etc. However, the net contribution from these sources is "only" 6 BN EUR. Thus, the trade deficit of 27 BN EUR is reduced by those other sources to a current account deficit of 21 BN EUR.
Conclusions
Without continued funding from abroad, Greece would nearly overnight have to reduce her spending abroad by about 21 BN EUR. How could that possibly be accomplished?
Well, Greece could stop paying interest on all existing foreign funding (about 10 BN EUR). The argument would be: "If you don't fund us any longer, we won't pay you interest either". But that still leaves a hole of about 10 BN EUR.
I doubt that increases in exports and/or tourism could do all that much to cover this remaining hole. Thus, here comes the bad news and this is the worst-case scenario in the case of a disorderly default.
The bad news is: Greece would have to impose radical import controls. At least 10 BN EUR would have to be cut out of the present level of 47 BN EUR of imports. Since there are essential imports such as energy, medicines, etc. which could not be "touched", so much more has to be cut out of other imports. Greece would certainly survive without imported luxury goods, smartphones and the likes but still: since the living standard of Greece is imported, a cut in imports translates into a cut in living standards.
I recently read in the Ekathimerini that, despite billions of EU-grants for agriculture in the last 3 decades, Greece is still a major importer of agricultural products and foodstuffs. One thing is for certain: once the point is reached where Greece may not have sufficient funding to pay for those kinds of imports, then the crisis will have reached its peak!
1. The current account deficit declined 8% to 21 BN EUR in 2011. That is wonderful news! Or is it perhaps not? Actually, it is quite impressive when comparing it to the current account deficit of 35 BN EUR in 2008, but one has to take a closer look at the numbers.
2. Exports increased 18% to 20 BN EUR. How about that for a country which, according to all wise men, has lost its international competitiveness?
3. And imports? Well, imports couldn't be curtailed but at least their growth rate could be cut to 5%. So when exports increase by 18% and imports only by 5%, one should expect that things are going real well. Are they?
4. Well, it is certainly more promising to have export growth than not to have one. Particularly when exports grow that much faster than imports. But the absolute level of imports was still excessively high in 2011.
5. Imports were 48 BN EUR in 2011. That is 2,3 times the level of exports! Put differently: for every Euro which Greece receives from exports she spends 2,3 Euros on imports. Mathematically, this translates into "spending more than one earns".
6. Exports covered only 43% of imports. To understand why Greece is so much different from all other PIIGS-countries: in troubled Italy, exports still cover over 90% of imports (and Italian exports are almost 2 times the entire GDP of Greece). Even in the USA, the world's import champion, exports still cover imports by almost 80%.
7. Greece has the advantage of having foreign income from other sources than only exports: Greece has tourism, shipping services, etc. However, the net contribution from these sources is "only" 6 BN EUR. Thus, the trade deficit of 27 BN EUR is reduced by those other sources to a current account deficit of 21 BN EUR.
Conclusions
Without continued funding from abroad, Greece would nearly overnight have to reduce her spending abroad by about 21 BN EUR. How could that possibly be accomplished?
Well, Greece could stop paying interest on all existing foreign funding (about 10 BN EUR). The argument would be: "If you don't fund us any longer, we won't pay you interest either". But that still leaves a hole of about 10 BN EUR.
I doubt that increases in exports and/or tourism could do all that much to cover this remaining hole. Thus, here comes the bad news and this is the worst-case scenario in the case of a disorderly default.
The bad news is: Greece would have to impose radical import controls. At least 10 BN EUR would have to be cut out of the present level of 47 BN EUR of imports. Since there are essential imports such as energy, medicines, etc. which could not be "touched", so much more has to be cut out of other imports. Greece would certainly survive without imported luxury goods, smartphones and the likes but still: since the living standard of Greece is imported, a cut in imports translates into a cut in living standards.
I recently read in the Ekathimerini that, despite billions of EU-grants for agriculture in the last 3 decades, Greece is still a major importer of agricultural products and foodstuffs. One thing is for certain: once the point is reached where Greece may not have sufficient funding to pay for those kinds of imports, then the crisis will have reached its peak!
Klaus - indeed the Greek central bank publishes excellent and credible statistics. I wonder why this was not picked up by EU authorities when the row over budget reporting broke out... In regards to the content of your post, I thought it was very sensible to highlight the process currently under way in regards to Greek export performance. This is something that is often overlooked in public debate - foreign and domestic. Imagine how things would look with lower oil prices as well...
ReplyDeleteThe 10bn funding gap "apres haircut" you highlight is indeed a major issue which I don't know how it can be meaningfully managed without adding to the problems already experienced on the ground down there. The way I see it, the recently agreed haircut should have been higher because, as things stand, it doesn't look enough. On the other hand, if the economy enters into recovery registering the growth rates of the not too distant path, things will become much more manageable. But all this is speculation.
Who knows what will happen? In my view there has been a devious conflation of two separate (yet interrelated) issues, that of the trade balance and that of public finance. Although both of them are in the red, it is not entirely evident or clear that addressing the one will help automatically resolve the other. Derogation from the Single Market is impossible, so I don't see how any policy aimed at addressing the disequilibrium in the trade balance could be implemented without causing fundamental problems in the EU as a whole (by virtue of the precedent set). The same applies to infant industry protection, which I think is a solution you tend to advocate.
You missed the changes recently put in place regarding wage bargaining. A very tough (or brave depending on one's point of view) set of reforms has been set in place that
reduces the wage bill across the board. It is fairly evident Greek policymakers think that this will lead to depressed demand and therefore to lower import levels and their associated growth rates. In this way the target of addressing the 10 bn gap could be met; frankly I think this reform may lead to some results towards that direction, but not of the magnitude expected. This is due to the fact that those who predominantly consume the luxury goods you identified are not covered by wage agreements at all, and feel the effects of depressed demand for their services with a significant time lag (if at all). I have not touched on the distributive implications of this lopsided austerity at all and what it could mean for the political system as a whole...
As for agriculture, I agree that it could do better albeit the demand and income elasticities for foodstuffs (processed or raw) clearly set some limits. Something different came to mind when reading your comment: Juxtaposing the sums disbursed to Greek farmers throughout the years (or indeed any other farming constituency across the EU) with the local food import bill, deflects attention from the objectives of the CAP itself and the way it has been set up to operate. Who can honestly say that the cultivation of intra-member-state food import dependence is not the corollary of the CAP's drive to achieve EU-wide food autonomy and competitive export in global markets? I am just raising this point because the Greek newspaper you quoted has repetitively mentioned these monetary flows without however connecting them with EU-wide processes at all. This does not necessarily imply a Euroskeptic disposition - far from it actually...
Should this comment get published, many thanks for hosting me. Keep up the sensible commentary on what is an issue of major concern for all of us in Europe,
Petros
Petros, as opposed to the export improvement which I think deserves great respect (frankly, I would like to know how that was achieved; no one talks about important things like that…), I am very skeptical about the import decline. I fear that this decline is exclusively a function of lesser domestic demand and not a reflection that consumption patterns may have changed from foreign-sourced to domestic. If that is the case, imports will explode again as soon as there is more domestic demand.
DeleteRegarding the interest expense in the current account, one as to keep in mind that this is only interest expense paid on offshore debt. Put differently, it includes only that portion of public debt which is held abroad but it includes all other foreign debt (mostly the foreign debt of the banking sector). Thus, the haircut on sovereign bonds will only marginally impact the interest expense in the current account (it will have the far greater effect in the budget).
Somewhere I read that Greece does not have much of an export lobby but a very strong import lobby. Well, it should be exactly the other way around!!!
What can drive me to despair that no one in Greece seems to worry about very simple and basic questions like: how can we export more? How can we import less (and hopefully produce more domestically)? How can we attract foreign investment? Instead, there are seemingly endless debates about things which are beyond Greece’s control, anyway (like Eurobonds, etc.). Six months ago, the German Minister of Economy visited Greece with a delegation of 70 business people. They wanted to explore investment possibilities; all sorts of excitement was raised and agreements were signed. Today, the Ministry announced that probably nothing would come out of it because there seems to be no interest from the Greek side to follow-up on anything.
Do I need to say more?
Not surprised at what you mention in your last paragraph. I was involved in something similar in the past and the outcome was the same. Export-oriented lobbies do exist down there, but they have focused on low value-added commodities (agriculture, un- or semi-processed minerals, textiles, cement). I was puzzled as well by the revived export performance and tried to look into it a bit more. First off the initial export levels are relatively low, so anything over and beyond those levels would appear in the figures as a major increase. As things stand it seems that wage compression and debt deleveraging by many companies (that took advantage of the low interest rates following the ECB's initial reaction to the US credit crisis) are the reasons for the observed export spike. Of course this set of conditions was not meant to last as the credit crunch that ensued following the spread of fears for a Greek default amply demonstrates. Now many companies, even well-managed ones, are facing the squeeze - to what end I simply cannot say. It will be interesting to see whether there will be any mergers or acquisitions, there does seem to be anecdotal evidence of sectors undergoing rapid consolidation that should also explain greater efficiency and improved competitiveness. But its still too early to tell, presumably by fall when most of the reforms will have kicked in a clearer picture will be available...
Deletehow about the following approach to turn Greece around?
ReplyDeleteFirst, cut 20 billion/year government spending by:
- abolishing the state medical system
- abolishing the state school system
- retrenching 90% of the government official and government employees, and at the same time remove complexity from the administration by simplifying or entirely abolishing administrative restrictions
- abolishing all government subsidies to industries and private individuals
- raising retirement age to 65 for all receivers
and increase government income by 20 billions/year byÖ
- introducing a flat tax of 12% on all and every income derived in Greece
- abolishing all deductions from the taxable personal income
- introducing a fine of 400% on any evaded tax
Put this to practice and Greece will become
- a thriving business place within an unbeatable leisure environment
- a country where patients from the neighbouring countries will come to seek medical treatment
- a country where parents from the neighbouring countries will send their children for education
- a place where family and home have a value of utmost importance
- a place where everyone will want to be
If it works here, why not in Greece?
greetings from Singapore!
yes, Martin, but first Greece has to leave the Euro-System. No choice!
DeleteOtherwise, the Eurocrats will destroy all these efforts with their Fiat Money currency politics, corrupting the fresh government again.
How about the following?
Greece gets the independent Drachme again, and puts all your suggestions in into place and she starts bartering the Greek citizenship against old Greek Euro bonds.
Especially to Swiss people who cannot stand their rotten government anymore.
Greece will be flourishing and even most of those who are poor today will have a great future!