"It is for you that we all embark on this struggle! To put shoes
on your feet, food in your children's mouths! We are fighting to change
your life, to raise you up from poverty and humiliation, to make you
men!"
Greek patriot in early 1940s
I had to think of the above when I read through SYRIZA's new Economic Manifesto (n. b.: I used Google translation, so I may have misunderstood details of the Manifesto but I think I got the overall message pretty well).
In general, I found Alexis Tsipras' presentation an arousing document. It included all the right soundbites which a domestic audience suffering pain and humiliation likes to hear. The presentation could have aimed at arousing people against some new enemy, for example foreign powers. It didn't do that and this deserves a compliment.
Mr. Tsipras begins by explaining in detail what SYRIZA means by an Economic Manifesto, by a program. They mean values, principles, clear guidelines, fixed lines, etc. He contrasts that beautifully with, say, Mr. Samaras' habit of shouting out 18 action steps or the like. And he even used the famous Churchill phrase "Who, if not us? When, if not now?"
If Thomas Jefferson had held in impromptu speech early on during the formation of the American Union, he would probably have used some of the same soundbites which Alexis Tsipras used.
The problem with soundbites is that they are never tangible. By defininition, soundbites consist of sounds and not of specifics. The Economic Manifesto is extremely short on specifics. Actually, specific measures are not even included in the presentation but, instead, only in the short Annex 1.
Soundbite 1 - a public register on all properties. SYRIZA deserves 100% agreement and support as regards the absolute necessity of a complete, nation-wide electronic real estate cataster. That is the minimum standard required if one wants to assess property taxes. A society which has administrative problems with the assessment of income taxes must also use the instrument of property taxes.
Where SYRIZA is wrong is when they call for a registry of ALL properties. To declare all personal properties beyond real estate is a confidential matter between the individual and the tax authorities. A property tax form requires the individual to list all his properties and the tax authorities are charged with verifying that.
Soundbite 2 - "internal devaluation". The Google translator suggests that Mr. Tsipras considers internal devaluation as wrong. If this is a correct translation, then it is Mr. Tsipras who is wrong. A country which still as a significant current account deficit after 3-4 years of recession has a massive problem with its real exchange rate. There are only 2 ways to solve that problem: either internal devaluation (the long and drawn-out adjustment) or external devaluation (return to the Drachma). There is nothing in between. And SYRIZA has ruled out a return to the Drachma.
Soundbite 3 - government revenues/expenditures. SYRIZA proposes to reign in expenditures at a maximums of 45% of GDP (presently around 50%) and to increase revenues to about 45% of GDP (presently slightly under 40%). Should SYRIZA accomplish that within the 4 years they say they need, they would deserve a Nobel Prize for Public Administration (n. b.: I suspect that the 45% of GDP expenditures do not include interest. If so, that 45% figure would be far too high and much higher than it is today)! SYRIZA does not explain how they plan to reduce expenditures by another 5% of GDP but they are specific as regards the revenue increase.
Soundbite 4 - tax reform. SYRIZA quotes the Greek constitution as saying that Greek citizens have equal rights and equal obligations to "contribute without distinction to public charges and in proportion to their means". Quite sensationally, SYRIZA seems to include even the Church among those who have obligations. A tax reform following this constitutional mandate could only be good. Details, however, are missing in the Manifesto.
Soundbite 5 - reform public administration. If all the mentioned soundbites were to become reality, Greece would have one of the most modern and efficient public administrations in the world. However, I hasten to add the following sentence which I found somewhere in the Manifesto: "The administration should organize an "invasion" of democracy, meritocracy and democratic planning in daily operations". That has a very bad sound to it (but perhaps it is poor translation).
Soundbite 6 - nationalizations, etc. Here, SYRIZA gets very ideological about how an economy works. There is a clear mindset that "the state" (or society at large, whatever that means) must play the role of the "visible hand" in the economy. Otherwise, more or less evil forces would begin to take over society. Thus, there can be no thought of privatizing companies which are still state-owned. Instead, the impression is left that one might even look at new nationalizations and in the banking sector they would certainly be planned.
Nationalizations as a tactical measure of necessity can become necessary (examples: the nationalization of AIG; or the partial nationalization of US banks in 2008/09). Nationalization as a strategic goal generally leads to disaster. And Greece is a country which has the advantage of being able to see already what disaster some of its nationalized companies have created.
If the Hellenic Financial Stability Fund has to recapitalize Greek banks, it should certainly get shares for it. However, it would have to pledge these shares to the ECB/ESFS which are refinancing these recapitalizations.
What reactions can be expected to SYRIZA's Economic Manifesto?
Some will undoubtedly throw it out the window without reading it simply because it comes from the Left. If Mssrs. Samaras and Venizelos did that, it would be a shame because they could adapt some of the soundbites for their own purposes.
Those who are still doing rather well despite the crisis will definitely object to it because the Manifesto would require a greater future contribution from them. And those who have a vision of Greece as a an attractive place to do business; as as well-functioning economy which is not dependent on subsidies from abroad; as a mature partner in the European Union - well, I regret to say, those should object to it.
And, finally, those who are in the lower half of today's totem pole of Greek society will fall for the soundbites. They will read into the soundbites all those wonderful things which Greeks back in the early 1940s read into soundbites like the one I cited at the beginning of this post. Without wanting to de-motivate those Greeks, I would only alert them to the following Greek wisdom:
"Any fool can throw a stone into the sea, but once he does, a hundred wise men can't pull it out!"
Greek patriot in early 1940s
I had to think of the above when I read through SYRIZA's new Economic Manifesto (n. b.: I used Google translation, so I may have misunderstood details of the Manifesto but I think I got the overall message pretty well).
In general, I found Alexis Tsipras' presentation an arousing document. It included all the right soundbites which a domestic audience suffering pain and humiliation likes to hear. The presentation could have aimed at arousing people against some new enemy, for example foreign powers. It didn't do that and this deserves a compliment.
Mr. Tsipras begins by explaining in detail what SYRIZA means by an Economic Manifesto, by a program. They mean values, principles, clear guidelines, fixed lines, etc. He contrasts that beautifully with, say, Mr. Samaras' habit of shouting out 18 action steps or the like. And he even used the famous Churchill phrase "Who, if not us? When, if not now?"
If Thomas Jefferson had held in impromptu speech early on during the formation of the American Union, he would probably have used some of the same soundbites which Alexis Tsipras used.
The problem with soundbites is that they are never tangible. By defininition, soundbites consist of sounds and not of specifics. The Economic Manifesto is extremely short on specifics. Actually, specific measures are not even included in the presentation but, instead, only in the short Annex 1.
Soundbite 1 - a public register on all properties. SYRIZA deserves 100% agreement and support as regards the absolute necessity of a complete, nation-wide electronic real estate cataster. That is the minimum standard required if one wants to assess property taxes. A society which has administrative problems with the assessment of income taxes must also use the instrument of property taxes.
Where SYRIZA is wrong is when they call for a registry of ALL properties. To declare all personal properties beyond real estate is a confidential matter between the individual and the tax authorities. A property tax form requires the individual to list all his properties and the tax authorities are charged with verifying that.
Soundbite 2 - "internal devaluation". The Google translator suggests that Mr. Tsipras considers internal devaluation as wrong. If this is a correct translation, then it is Mr. Tsipras who is wrong. A country which still as a significant current account deficit after 3-4 years of recession has a massive problem with its real exchange rate. There are only 2 ways to solve that problem: either internal devaluation (the long and drawn-out adjustment) or external devaluation (return to the Drachma). There is nothing in between. And SYRIZA has ruled out a return to the Drachma.
Soundbite 3 - government revenues/expenditures. SYRIZA proposes to reign in expenditures at a maximums of 45% of GDP (presently around 50%) and to increase revenues to about 45% of GDP (presently slightly under 40%). Should SYRIZA accomplish that within the 4 years they say they need, they would deserve a Nobel Prize for Public Administration (n. b.: I suspect that the 45% of GDP expenditures do not include interest. If so, that 45% figure would be far too high and much higher than it is today)! SYRIZA does not explain how they plan to reduce expenditures by another 5% of GDP but they are specific as regards the revenue increase.
Soundbite 4 - tax reform. SYRIZA quotes the Greek constitution as saying that Greek citizens have equal rights and equal obligations to "contribute without distinction to public charges and in proportion to their means". Quite sensationally, SYRIZA seems to include even the Church among those who have obligations. A tax reform following this constitutional mandate could only be good. Details, however, are missing in the Manifesto.
Soundbite 5 - reform public administration. If all the mentioned soundbites were to become reality, Greece would have one of the most modern and efficient public administrations in the world. However, I hasten to add the following sentence which I found somewhere in the Manifesto: "The administration should organize an "invasion" of democracy, meritocracy and democratic planning in daily operations". That has a very bad sound to it (but perhaps it is poor translation).
Soundbite 6 - nationalizations, etc. Here, SYRIZA gets very ideological about how an economy works. There is a clear mindset that "the state" (or society at large, whatever that means) must play the role of the "visible hand" in the economy. Otherwise, more or less evil forces would begin to take over society. Thus, there can be no thought of privatizing companies which are still state-owned. Instead, the impression is left that one might even look at new nationalizations and in the banking sector they would certainly be planned.
Nationalizations as a tactical measure of necessity can become necessary (examples: the nationalization of AIG; or the partial nationalization of US banks in 2008/09). Nationalization as a strategic goal generally leads to disaster. And Greece is a country which has the advantage of being able to see already what disaster some of its nationalized companies have created.
If the Hellenic Financial Stability Fund has to recapitalize Greek banks, it should certainly get shares for it. However, it would have to pledge these shares to the ECB/ESFS which are refinancing these recapitalizations.
What reactions can be expected to SYRIZA's Economic Manifesto?
Some will undoubtedly throw it out the window without reading it simply because it comes from the Left. If Mssrs. Samaras and Venizelos did that, it would be a shame because they could adapt some of the soundbites for their own purposes.
Those who are still doing rather well despite the crisis will definitely object to it because the Manifesto would require a greater future contribution from them. And those who have a vision of Greece as a an attractive place to do business; as as well-functioning economy which is not dependent on subsidies from abroad; as a mature partner in the European Union - well, I regret to say, those should object to it.
And, finally, those who are in the lower half of today's totem pole of Greek society will fall for the soundbites. They will read into the soundbites all those wonderful things which Greeks back in the early 1940s read into soundbites like the one I cited at the beginning of this post. Without wanting to de-motivate those Greeks, I would only alert them to the following Greek wisdom:
"Any fool can throw a stone into the sea, but once he does, a hundred wise men can't pull it out!"
Klaus,
ReplyDeleteCertainly a few pieces of the plan can be salvaged, and in a coalition negotiation, a small benefit might emerge for the country, if the good is separated from the overwhelming mass of old socialist-style policy flotsam presented here.
Pending further study on my behalf of the document (and the weekend is too nice to waste on Tsipras), my soundbite on this package is that it doesn't approach McKinsey report's value in detail or utility as a roadmap.
We will probably agree whatever is salvaged from this would not be new Syriza "economic" ideas. It would likely be the repackaged concepts Syriza stole, like completion of the cadastral survey, something ND is pushing hard as well.
Good weekend!
Hallo Klaus.
ReplyDeleteYou mention (Soundbite 3) that expenditures are "presently around 50%" and that revenues are "presently slightly under 40%" (of GDP).
Weisbrot (http://www.cepr.net/documents/publications/greece-2012-02.pdf, page 6, Table 1) lists the respective figures for 2011 as 42.9% (primary+6.8% interest) and 40.6%.
Which one is correct? Could it be that your data are somewhat outdated?
Note also that, even if you consider overall expenditures, post-PSI+ interest is lower (1.9% less according to Weisbrot), so overall expenses are midway between 50% and the "target" (?) 45%.
Re Soundbite 5: The translation of the sentence is pretty correct, although not 100%. My (amateurish) shot at a better translation would be "In the state (=government?) and the administration, an 'invasion' of democracy, meritocracy and democratic planning must be organised in its (=their) daily functioning". It's bad English (but also bad Greek in the original), but I don't see what sounds so bad about it (other than the fact that it's the goal and not the solution). In fact, this is exactly what almost every Greek wishes for (and, I guess every "European" for Greece).
Re Soundbite 2: I could not find Tsipras' personal opinion in any part of the manifesto (and rightly so, since it is the manifesto of SY.RIZ.A. and not of Tsipras). Internal devaluation is primarily described in the manifesto as inefficient: "The therapy of (=treatment prescribed by) the Memorandum proved to be more disastrous than the crisis itself. The policies of the memorandum, with 'internal devaluation' in their core, proved to be a weapon of mass social destruction, a lethal experiment to the detriment of the Greek people, which must stop now, before the damage becomes irreversible".
Irrespective of economic theory, this assessment is in line with what was expected to happen (the Troika foresaw recession, albeit underestimated it) and what actually happened (someone must adjust their models).
A question from an ignorant non-expert about the two alternatives you mention (internal/external devaluation): could a third option be to simply try to decrease the current account deficit? I know that ID is supposed to do that by suppressing salaries to third-world levels, but isn't there another way? Salaries are important for unskilled workers, but specialisation is better suited for a developed country and Greece has certainly the potential (=human capital) to provide such specialisation. I heard Kotzias (who, btw, must be part of SY.RIZ.A.'s team of political economists) argue that there is a lot of (world-class) specialised scientists gathered in certain places in Greece (Ioannina, Heraklion, etc.) that would justify the establishment of several centres of expertise (orthopaedics, polymers, etc). There are many ideas in that direction that do not require third-world salaries. All in all, Krugman et al may not be that wrong, when they claim that one must grow its way out of a crisis.
Sorry for the long comment (I actually meant to ask about the figures) and thanks for hosting it.
Well, I guess one shouldn't believe any statistic which one hasn't forged oneself... My source was/is the IMF Country Report as per December 2011 summarizing 2010-11. Figures on pp. 53-55.
Deletehttp://www.imf.org/external/pubs/ft/scr/2011/cr11351.pdf
Expenditures were 50%+/- and revenues 40%+/-. Based on these figures, a balanced 45% would be a miracle. But then: SYRIZA did not publish any supporting statistics. Essentially, SYRIZA is saying that they would balance the budget (after interest) within 4 years!!!
"Invasion" of anything, above all of democracy, scares me a bit.
Well, if SYRIZA considers internal deflation as a weapon of mass destruction which must be stopped, then I interpret this to mean that they are against internal deflation.
Krugman, of course, is well aware that just “spending” is silly to talk about. Personally, I think he pursues ulterior motives when he simplifies “spending”. As with debt, spending is not bad per se, in fact, both can be very good! It all depends on what debt is spent on. If it is spent on higher salaries & pensions so that people can buy more imports, then it is self-defeating. Yes, only growth can solve the debt problem long-term but there is a huge difference between debt-financed consumption-driven growth and investment-driven growth (hopefully also financed with some equity and not only with debt). About a year ago, I had written up a proposal which I link below.
Thanks for your interest and good observations!
http://klauskastner.blogspot.gr/2011/09/endgame-for-greece.html
Boy, are you fast! I want to be like you when I retire. :-)
ReplyDeleteRe figures: You both have the same source (IMF). I do not know if Weisbrot has more recent figures than Dec 2011 (are there?), but the figures for 2011 are very close (40.6% vs 40.5% and 49.7% vs 49.5%). So, no discrepancy.
Re invasion: it's a question of personal taste, so no comment there (just wanted to provide a more accurate translation).
Re ID: you must have been a lawyer in a previous life :-) In the original text (which is why I provided the translation), there is a (rudimentary) reasoning before reaching the WoMD (actually *social* destruction) conclusion: basically that ID hasn't worked in Greece, but it has brought a lot of social pain (look, e.g., at the suicides and the medicine shortage) with limited gain (if at all). It's not like they ideologically oppose ID a priori (maybe they do, but not in the text).
I guess I agree with your theory on targeted spending, Keynes' import-buying hole digger and investment-driven growth. I have noticed the importance you assign to the current account balance and, since you are available and eager (thanks), I would really appreciate some tutoring on how it relates to the government deficit/debt. The reason why Greece's borrowing interest rates skyrocketed (and it was practically cut off from the "markets") appears to have been that the *public* deficit exploded to 15%GDP and the already high *public* debt of 97-107%GDP rose to 129%GDP within two years. There has been no mention of the current account as the reason for the crisis; it was a question of *public* finances. So, if the current account had anything to do with the crisis, either it indirectly affected government finances or it was downplayed in the official narrative. Which one was it?
Thanks again.
You are right in observing that I consider the current account as THE most important indicator of what’s wrong, much more so than the budget deficit. In my blog inventory (first post) is a whole section on current accounts.
DeleteA current account is something like a “cash-flow from operations statement” of a country. It shows how much a country spends overseas and how much it earns there. Mathematically, a surplus in the current account must be offset by a minus in the capital account, and vice versa. If you have a current account surplus (Germany), you have to export capital to other countries (loans, investments, etc.). If you have a deficit (Greece), you have to import capital. It is the cross-border debt (and not so much the sovereign debt) which is causing panic for everyone. If all of Greece’s sovereign debt were held domestically by Greeks, there would be much less excitement between Paris, Brussels, Frankfurt and Berlin. If you want to get cross-border debt under control, you need to get current accounts under control. Nevertheless, there is a bit of a chicken-and-egg situation between foreign debt and current account deficits.
Mind you, even if all of Greece’s sovereign debt were forgiven, the Greek economy would still have the same problems as before!!!
All trouble begins with flow of cheap money which is not spent wisely. A government can intend to waste all the money in the world, if money is not lent, it cannot be wasted. The tsunami of cheap foreign capital can destroy entire economies. Some countries (like Switzerland) manage to remain frugal despite of it; most other countries (like Greece) spend the money which is offered to them cheaply.
Ever since Alan Greenspan decided to kick the IT-bubble can of 2000 down the road with unlimited liquidity, the world was flooded with cheap money. This is why I would argue that Greece would have had the same problems even without the Euro. Money lent to Greece would perhaps been a little less and a little more expensive, but it would have been lent.
So how does foreign capital end up in the pockets of Greek consumers so that they can spend it on imports, run up a current account deficit and destroy the national productive capacity (and employment)?
Foreigners could have lent directly to Greek consumers but that generally does not happen. So you need a recycler. One recycler would be Greek banks: foreign capital is lent to them and they, in turn, lend it to consumers to that they can waste it. That has happened in Greece but not in undue amounts. As far as I know, the Greek private indebtedness is not at all out of whack. So maybe Greeks have a fair amount of respect for debt.
The most wonderful recycler is, of course, the state. When the state borrows foreign capital to shower the money on Greek consumers in the form of salaries, pensions and what have you, no consumer will reject that. He thinks he is spending his well-deserved income whereas in actual fact he is spending borrowed money.
So here you have the connection between budget deficit and current account deficit. If the state had not been over-borrowing and over-spending, it would have been much harder to get so much money into the hands of Greek consumers who apparently don’t like debt all that much.
The state can be the opposite of a family. When, in times of trouble, the state spends less, it tends to cut into its revenue base. The country is exactly like a family: when it can no longer borrow money from abroad, it needs to reduce its expenses abroad. Greece really hasn’t had to do that because the ECB has continued to finance Greece’s expenses abroad.
http://klauskastner.blogspot.gr/2012/03/plea-for-right-kind-of-austerity.html
http://klauskastner.blogspot.gr/2012/03/eurozones-two-killing-killer-apps.html
http://klauskastner.blogspot.gr/2012/01/four-eu-freedoms-two-too-many-for.html
http://klauskastner.blogspot.gr/2012/05/greeces-current-account-jan-mar-2012.html
This is very instructive, albeit mind boggling.
ReplyDeleteYou refer to Trade Deficit, External Debt, State Deficit, Household Debt, etc almost in the same breath and the associations are not very easy to assess. Now, if I understood correctly, your theory is that the CA deficit is due to private (basically household) consumption, which is financed by the state in the form of higher salaries, which come from foreign borrowing. Plausible thesis, but I have trouble finding the right data to back it up, namely data that show the composition of the CA deficit (couldn't it be a matter of the state directly spending abroad, e.g., for arms deals?) and the correlation between CA balance, public deficit and salary increase.
This thesis describes yet another chronic illness of the Greek economy (like corruption, inefficiency, etc), which is certainly bad, but I cannot associate with the facts that cut off Greece from the markets. Up until 2007, the deficit was high, but within "acceptable" limits; it was compensated by growth and debt/GDP was pretty stable between 97% and 105%. Then, the public deficit suddenly rose to >10% and it was all over. This does not seem to have been due to any sudden raise of salaries, corruption, arms deals etc (which would indicate that it was spent on imports). The only thing that correlates and could be considered a trigger for the deterioration was the banking crisis of 2008. So, I still do not see any actual data that would back the thesis that government borrowing to subsidy the citizens buying imports was the cause of the cut-off of Greece from the markets.
And a question about the current account data: in the category "Services (e. g. tourism)" of "Revenue from abroad", what kind of revenue is included? Is it, e.g., money TUI pays to Greek hotels for reservations or does it also include the souvlaki bought by the tourist from a local vendor? I would expect the former, since the latter is hard to calculate. If this is the case and assuming a modest average of €100 per tourist spent *while in Greece*, some €1.5b enter the country from abroad and has not been factored in (same for Greek tourists shopping abroad, but the number of tourists in the two cases are of different orders of magnitude).
Hope you haven't lost your patience with me and can fill the data gap.
1 of 2
DeleteOoops, I hope I haven’t set up any theory! My focus is always on looking at facts and trying to make sense out of them. Economic theories are not my cup of tea. Budget deficits do NOT necessarily lead to current account deficits (Germany has a budget deficit but huge c/a surpluses).
I think it’s easier to understand c/a in the old context of local and foreign currencies. The Drachma covered all internal transactions, foreign currencies all cross-border transactions. The Balance of Payments must balance because you cannot spend foreign currency which you don’t have. Actually, I think this tale of Warren Buffett’s describes c/a best of all.
http://klauskastner.blogspot.gr/2011/11/warren-buffetts-simple-wisdoms.html
Foreign currency enters a country but must leave it simultaneously because you can’t use foreign currency in your own banking system. Suppose a country were 100% balanced it its external accounts and yet, someone felt he had to transfer 1 MUSD to a bank in Greece. That money enters through the capital account. If it can’t leave the country through the c/a because there is no c/a deficit, it will have to leave through the capital account. I. e. the Greek bank will have to invest the 1 MUSD abroad. That is mathematics and not economics. The Balance of Payments must balance.
A c/a deficit is not bad per se. Particularly developing economies should have c/a deficits. Why? Because a c/a deficit means that one is importing capital and a developing economy needs to import capital to finance its growth since there are not enough domestic savings to finance growth. Again, it all depends what that capital is spent on. If it is spent primarily on investment, there will be a boom with the promise of a Golden Age. If on consumption, there will be a boom with the certainty of a bust once the money flow stops.
2of 2
DeleteIn Greece 2001-10, the c/a deficit did not only not lead to more investment/production; instead, it basically killed production because imported products had become so much cheaper.
http://klauskastner.blogspot.gr/2011/11/greece-current-account-and-foreign-debt.html
If you want to know who caused the current account deficit, get yourself a list of imports and check who bought them. If it was submarines, then the state caused the c/a deficit directly. If it was food, then consumers caused it.
Another very important aspect is how the c/a deficit is financed. In Greece, it was financed exclusively with interest-bearing foreign debt, and that is bad. It could have been financed with foreign investment, etc. From 2001-10, the accumulated c/a deficit was almost 300 BEUR. Suppose, for a moment, half of Greeks had been guest-workers in Germany and transferred that sum back to Greece as their earnings. Greece would not have any problems today.
That’s why one of my points is that Greece desperately needs to attract foreign investment at a time where foreign debt is no longer forthcoming.
In my opinion, Greece and the financial crisis (Lehman) had nothing to do with one another. In fact, the Greek financial sector ought to have been congratulated for not having been involved in any of the big bubbles at the time (sub-prime, Iceland, etc.). Greece didn’t have to increase its public debt due to having to guarantee banks. So from that standpoint, hats off to Greece!
You have to understand that when the tsunami of cheap foreign money hits the shores, the water finds its way to everywhere, to the last little hole. My brother-in-law has an earth-moving business in a small village. He is a true workaholic (i. e. he is not “lazy”). His business did very well since the Euro and he could spend a lot of money on his children and on investments in his business. He has no debts (on the contrary, his town owes him lots of money). You could not explain to him that, essentially, he was directly benefiting from the foreign debt which his country incurred. Well, the village could spend more money on public projects because it had more money from the state. People had more incomes because people did more spending. Etc., etc. However, at the bottom of all of this was money flow from abroad. When it stopped, the party stopped.
Banks are aggressive umbrella salesmen when the sun is out. In boom times, bankers see no risk. Let the first raindrop fall and the umbrella salesman disappears. From now on he only sees risk. Clouds had been over Greece’s skies just like there had been clouds over sub-prime, the bank speculations in Ireland/Iceland, the real estate boom in Spain, etc. However, while the sun is out, everyone thinks that there can be a “soft landing”, a “soft adjustment”. When Greece admitted to have misstated the budget deficit by about 100%, that was not the first raindrop. That was a tornado, hurricane and blizzard all in one. Greece immediately lost private funding from abroad and official institutions (ECB) had to replace it. It was the surprise deficit that triggered everything not the level of debt (the level of sovereign and foreign debt was known and had been stated accurately. One wonders why smart analysts who saw sovereign debt going up like mad wouldn’t have asked if the budget deficit was stated correctly…).
Regarding your last question, the c/a can only reflect cross-border transactions which go through bank accounts. TUI’s transfer is included. If the tourist draws cash at the ATM and spends it, it is included. If the tourist brings his own cash in his pocket and spends it, it is not included (but it shows up under economic activity in general).
We are diverging into different directions and losing contact. I'll try to sum it up.
DeleteYou spend several lines to explain that the balance of payments must be somehow balanced. This is undisputed. The USD/drachma example was unnecessary and, to be honest, it may be irrelevant, since in the post-2001 era the bulk of transactions (e.g., intra-EZ) was not in foreign, but in local currency (€). So much for math.
Financing the c/a deficit can be achieved by means of foreign debt, taken by households, corporations, banks or state. Another possibility, since € is the local currency, would be to use savings. Out of all these possibilities (are there more?), you single out the state foreign debt as the main debt broker ("recycler"). No math here. It's a theory that needs to be checked against the facts. If we accept c/a deficit=foreign debt (no use of savings), the actual figures you provide (http://klauskastner.blogspot.gr/2011/11/greece-current-account-and-foreign-debt.html) show that the "Financial Sector" (I take it to primarily mean banks) is responsible for half the foreign debt, i.e., as much a broker as the state.
You also claim that the money from the government's foreign debt was given away (e.g., salaries) to consumers. Now, that's not math. The money could end up in the consumers' pockets in a host of different ways, e.g., as support to the failed banking sector, which had given out consumer loans and credit cards, or the government paying Hochtief for a local project that employs Greeks. Or the money could go directly to EADS for defence projects and to Crédit Agricole for interest (I guess the figures do not include debt rollover, do they?) without reaching the consumers. If interest is responsible for half the 2001-2010 c/a deficit (96/197) and defence budget for the other half (conjecture), it would not be correct to demonise the salaries paid by the government.
You ask me to check the list of imports myself. If I had the list, I wouldn't ask you, would I? But I wasn't the one who claimed that salaries are to blame for the c/a deficit.
You state that EZ participation killed Greek production (=real economy). I fully agree. This, of course, does not mean it was necessarily €'s fault. It may have been that the recipe €+GR was like nitro+glycerin.
You state that Greece needs more foreign investment and less foreign debt. Sounds correct, but isn't debt a kind of investment (from the lender's point of view)? I guess you mean direct investment, where the capital owner has a say into how it is being used, instead of the irresponsible way of lending, e.g., via state bonds.
Equating crisis=Lehman is simplistic and you know it. The financial sector was on a lending spree for at least a decade and, in order to sustain it, bubbles were created. The sub-primes was only one instance of this rotten practise and Lehman was just the trigger, bringing down the bubble constructions in Greece, Ireland, Spain, etc (I think we agree on that). I'm not sure about bank guarantees and Greek public debt. The government did "support" the banks with €28b in 2008 (http://www.capital.gr/news.asp?details=597536). Whether this made its way into the budget, I cannot tell. The Greek banks may not have participated in the specific (sub-prime) party, but they certainly did push consumption in the form of consumer loans, credit cards, etc, i.e., they organised their own local party. I'm still trying to figure out how much impact their party had on government finances.
Thanks for the clarification on the c/a. On a funny note, one could see behind TUI's latest travel advice (http://www.mmnews.de/index.php/etc/10125-tui-raet-gr-urlaubern-zu-euro-reserven) a... devilish ploy to distort the Greek c/a! :-)
I intended to write a summary and I ended up writing a dissertation. I noticed I have kept you from posting at the usual rate. Please, accept my apologies. Thanks for the instructive exchange. I'll be looking forward to reading your future posts.