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Wednesday, August 22, 2012

Greece's current account: January-June 2012

The table below shows the development of Greece's current account in the period January-June 2012 relative to the same period the year before (in BEUR):

2011 2012
Revenue from abroad

Exports 9,5 10,4

Services (e. g. tourism) 11,7 11,5

Other income 1,6 1,6

Current transfers 3,1 3,2

---- ----------

Total revenue from abroad 25,9 26,7

Expenses abroad

Imports 23,7 21,5

Services (e. g. tourism) 7,2 6,5

Other expense (e. g. interest) 5,9 3,8

Current transfers 2,1 2,1

---- ----------

Total expenses abroad 38,9 33,9

Net foreign deficit (current account) -13,0 -7,2

The improvement continues: the current account deficit declined 45% (!) and the rate of decline has gone on up from 35% back in March! Imports declined 9% whereas exports increased 10%!

Regarding the income/expense relation, Greece as a country is still spending 1.270 Euros abroad for every 1.000 Euros earned abroad. That is a 27% excess of spending over income. This is much worse when only considering the trade account where Greece is importing 2.070 Euros for every 1.000 Euros which it is exporting!

Note: in the month of June alone, the current account deficit delined by an incredible 83%! Interestingly, though, revenues from incoming tourism declined 7% whereas expenses due to outgoing tourism increased 11%. This is unusual because it would imply that the reverse of the desired goal is happening --- it is foreign tourists who should increase their spending in Greece and not Greek tourists abroad.

Previous analyses: March, April, May.


  1. Improvement indeed. What an achievement. You get poorer and you spend less.


    1. I take it from your comment that you are unclear what a current account deficit means. A current account deficit makes a country poorer and not richer!

      A current account deficit is the transfer of wealth from the country to the rest of the world. Contrary to a budget deficit which puts money into the economy, a current account deficit takes money out of the economy. In the case of Greece, not money which Greece had but which Greece borrowed.

      The current account deficit is the result of a country's importing too much. If you import products which could just as well be produced in Greece, you are exporting jobs. My toothpaste is imported from Brazil. The manufacturing job for that toothpaste is thus in Brazil and not in Greece (as well as taxes, etc.). If Greece wants to bring those jobs back to Greece, it will have to become obsessed with import substitution.

      If Greeks were to continue to buy much of what they consume abroad, they will have to borrow to finance that. If they no longer get loans, the imported living standard will go down. It has to be substituted with domestically generated living standard.

    2. Technically you may be right.

      Practically, you are dead wrong.

      A current account deficit isn't loss of wealth. Unless you consider small pieces of paper to be wealth. No, quite the opposite. It is gain of wealth, as can be seen by the vast number of cars, smartphones, expensive clothes etc in Greece.

      Yes, if they no longer get loans, the living standard of Greeks will have to go down.

      So are we to rejoice that the account deficit shrank?

      No. Not at 24% unemployment.

      One of my favourite quotes regarding economics is the following:

      "Money has no real value; it can be created or destroyed at any time.

      The real currency is GPEC , which is made up of sustainable Growth, Productivity, Employment and social Calm.

      GPEC is gained by using policy to manipulate the supply of money to and from the private sector (via the banks) to ensure that resources are mobilized in such a way to create sustainable growth, productive gains, employment and social well-being."

      It comes from this article if you are interested:

      It must be clear now to even the most ardent neoliberal that the private sector, banks and the central bank did a horrible job at mobilizing these resources.

      What is unforgivable is that while the circuit that connects the private sector, the banks and the central bank is now broken, the powers-that-be are turning a blind eye and refuse the one entity that can mobilize resources in the economy - the government - to do so, on the grounds of dogma and ideology.

      So, while for all intents and purposes we relive the 30's, allow me to not participate in your celebration that the account deficit got smaller.

    3. I am thankful for your comment because it helps me explain the point more clearly.

      My brother-in-law has had his own small business in a village for about 30 years now. It started as earthmoving and expanded into construction materials. Since the Euro, his business grew phenomenally because there was suddenly much money available at local communities etc. which gave him orders. I should add that all his customers are local. He could buy quite a bit of larger equipment. He never had debt. My brother-in-law has always been a workaholic; kind of 24/7. He could raise 3 wonderful children, all of whom he financed an excellent education, etc. In general, a show case for a Greek family.

      If I told my brother-in-law that he has contributed to Greece’s foreign debt, he would justifiably hit the ceiling. The truth is, he did.

      Just like the fellow who has no debt at all and buys a smarthphone with his own salary is contributing to Greece’s foreign debt.

      Why is that so? Because the equipment my brother-in-law and the smartphone the fellow bought had to be imported. Imports are expenses outside the country. They have to be financed with revenues from outside the country. If there are not enough such revenues, then the country has to increase its foreign debt. Just as simple as that.

      Now, perhaps I have left the wrong impression that current account deficits are bad per se. No, they are not! Just like debt is not bad per se. It all depends, always, what the deficit/debt is used for. If it is used for investment in activities which generate future revenue, a current account as well as debt are wonderful. If it is used for consumption, they are terrible.

      “It is gain of wealth, as can be seen by the vast number of cars, smartphones, expensive clothes etc in Greece” --- I couldn’t have formulated the problem of Greece’s current account deficit better than you just have. Yes, a family with little income could live well over its means if some bank lent them the money (in this example, the “family” is Greece as a country). In that case, they could buy a vast number of cars, smartphones, expensive clothes, etc. At the end of the day, the family could tell the bank to go fly a kite about its loans. If it got away with that, the family would now be the owner of a vast number of cars, smartphones, expensive clothes, etc. That could also be called theft or fraud.

      When some Greeks buy SUVs, even with their own savings, they still increase the foreign debt of ALL Greeks.

      Let me try from a different standpoint. A current account deficit means that financial capital is imported (primarily as loans). When you increase your debt, you don’t increase your wealth unless to invest it wisely. If you spend it on consumption imports, you transfer national wealth offshore.

      A country needs savings in order to finance growth through investment. Particularly developing economies need much more funding to finance growth than their own savings generate. Thus, they have to use the savings of other countries (import of financial capital; loans). There is absolutely nothing bad in that per se.

      If Greece had only used a much larger portion of the 199 BEUR current account deficit from 2001-10 for investment instead of consumption, Greece’s situation today would be totally different. When debt finances investment, the investment generates future revenues to service the debt. When debt finances your vacation, your pleasure is gone after you return but the debt is still there.

      I attach a couple of links below. The one you may find most useful is Warren Buffett’s tale.

      Greece relives the 30s for one simple reason: the gasoline which fired the Greek economy since the Euro was foreign debt. When that slows down, the economy stutters. When that stops, the economy stops. Foreign debt can never grow forever!

    4. Thank you, Mr. Kastner, for pointing out that the numbers are improving in Greece.

      "Excellent figures", as another commentator points out below.

      Too bad these numbers are improving at the expense of people's lives, particularly those that had very little to do with the increase of foreign debt, while those that had everything to do with the increase of foreign debt are left unscathed.

      Governing groups shall be held responsible for Greece's current inability to mobilize resources within it's economy.

      And not just Greek governing groups. European governing groups also, to whom - foolishly - the Greek governing groups handed over monetary and - as an extension - fiscal policy.

    5. I would have preferred to see you take up the factual arguments. Instead, you retreat into the standard pity routine. What a shame!

      I agree with you that the burden is primarily been shouldered by those who had the least to do with the Euro-party. But please to remember: the ones who had the most benefit from the Euro-party are also your fellow Greeks. Any idea where those 70 BEUR plus are which were withdrawn from Greek bank accounts in the last 2-1/2 years? Any idea where the 3-digit billion figures in foreign bank accounts came from?

      The sad truth is that over the last decades, but particularly since the Euro, one part of Greek society has taken the other part for a brutal ride.

      From 2001 to now, Greece absorbed close to 500 BEUR in savings from other countries. Any idea what happened to them?

    6. I have no "factual" arguments to make. Like I said, technically you are right. Private credit has vanished and as a result government credit is driving the economy. However due to constraints that have to do with Greece's participation in the Eurozone, both monetary policy and fiscal policy have been of very little help, and soon - with the demise of fiscal policy - no help at all. And then what? The only comfort I take when it comes to the monumental stupidity of the European "elites" is that soon the whole world will be in a shitstorm, the result of which will be the demise of globalization and the resurgence of protectionism. Like in the good old days.

    7. Well, then let me try to make a few factual arguments (or policy suggestions) which you (and Greece!) should make:

      "We have to immediately start a drive to substitute imports with domestic production wherever possible".

      "We have to make imports of luxury goods more expensive (special taxes)".

      "We have to promote foreign investment for the new production in Greece".

      "We have to find a way - together with the EU - to cover the convertibility risk for new foreign investments"

      "We have to implement measures to constrain the capital outflow from banks".

      Etc. etc.

      Credit has vanished? If so, that is not a special Greek characteristic. Whenever an economy gets into trouble, banks stop lending whether they have the liquidity or not. Banks all over the world are typically umbrella salesmen who disappear when the first rain drops fall.

      I was a commerical banker in Germany in the early 2000s when the economy was in trouble. German banks had liquidity coming out of their ears but they didn't make loans to the German mid-market. Instead, they bought sub-prime, sovereign bonds and similar stuff thinking that they would be much better risk than the German mid-market.

      I agree with you that it was the incompetence of EU-elites to allow a Greek problem to become the kind of Euro-crisis we have today. That's why, should I ever lose my savings in a crash, I would blame EU-elites for it and not Greece.

      What Greece is accountable for, however, is that the Greek powers that be allowed the country become such an enormous mess. This goes back 3-4 decades and the process of disintegration would have taken place in any event. The Euro only accelerated it massively.

      I saw an interview with Prof. Varoufakis from 1993 where he referred to the "terminal decline of the Greek economy which started in the 1970s".

      Before you get too enamored with the good old days, you should remember that so good they weren't. My first trip to Greece was in 1977. I was baffled how there could be such a poor country (once you got away from major urban areas) in Europe. Maybe the older generation would be happy again to live in the "old Greece". The younger generation and particularly the high performers would emigrate.

      Bear in mind that what changed is not so much Europe. What changed is the rest of the world, that is mostly the emerging world. Until a few decades ago, Europe could act as the master continent living off a franchise of education, work ethic, engineering skills, etc., all advantages which the emerging world did not have. Now the emerging world not only has them, in some areas they even got better than Europe at it.

      What I am saying is that the threat is not within Europe but, instead, without.

    8. You make import substitution sound easy.

      Well, it isn't. In fact, it's impossible while Greece is part of monetary union.

      You repeat your case for tariffs, ignoring the fact that they're illegal within the single market (EEA).

      Foreign investment is good, but doesn't have much to do with import substitution. Ireland had a lot of foreign investment. It didn't do them much good either, but it did the foreign companies (and their tax obligations) a lot of good.

      Measures that constrain capital outflows are illegal within the EEA as well.

      So we're in a situation where all of your suggestions are inapplicable and, instead, Greece has to attempt import substitution by investing with punitive interest rates (when compared to the North), which pretty much is a lost case from the beginning since these high interest rates are gonna be transferred to prices.

      And what sort of monetary union is this where one area has one interest rate and another area has another?

      PS - I know it's not a Greek characteristic. It is why the world will slide back into recession, as the latest data from the UK, Japan, China and the Eurozone show. But it's not because banks don't lend. That was in the beginning, in 2008. It's because the private sector doesn't borrow. And that is the limit of monetary policy, which effectively has run out of ammunition, regardless of how low interest rates are, or how many refinancing operations are being done. Only a monetary system in the vein of the US, Japan et al will do the trick. But the Europeans are too smart for that.

    9. It seems to be a human trait to not worry too much about laws and rules when one pursues what one likes to do but to quote laws and rules when it comes to doing things which one doesn't like to do.

      Yes, the EU would have to temporarily waive two of the four EU-freedoms for Greece (free movement of godds and capital) if it really wanted to "help" Greece. I have written at length about that. One has to bear in mind, however, that this would happen automatically in the case of a Grexit (imports would collapse, capital controls would be imposed by the market). So what makes you think that the EU would so totally object to something temporary when they know that that something would happen permanently in the case of a Grexit?

      Nevertheless, a formal waiving of EU-freedoms would not even be necessary. The EU has shown for over 2 years now how laws and rules can be bent when they wish to bend them. One can allow Greece, practically any time of the day, to establish Special Economic Zones with special laws and rules. There are several such SEZ in the EU.

      Let me just give you a couple of examples how Greece could benefit from import substitution without changing anything; only by doing it. In 2011, Greece imported oranges (3 MEUR), lemons(19 MEUR), apples (18 MEUR) and potatoes (77 MEUR), beef (382 MEUR), pork (354 MEUR), lamb (39 MEUR) and fish (348 MEUR). Any chance of these products being produced domestically in Greece? Obviously, these numbers are peanuts when compared to the big picture but I just wanted to give an example.

      Austria, for example, has a 20% surcharge on imported cars. A tariff? No way! It is defined as a charge for "environmental protection" and since Austria doesn't make cars, it only applies to imported ones. Greece might as well make that charge much higher and stagger it depending on the type of car.

      Capital controls are illegal in the EU? Indeed, they are. But hey, this is a national emergency. One requires emergency laws in such a situation! If deposit flight is not stopped and if the ECB stopped replenishing the liquidity, the Greek banking system would overnight be insolvent. You then would not only have natural capital controls but lost savings altogether!

      Is it not obvious that Greece's number one priority should be to see that new jobs come into existence? If there is no new demand justifying new jobs, then you have to "steal" market share, i. e. produce domestically what so far has been produced elsewhere.

      I haven't mentioned exports yet. Yes, the high Greek costs work against Greek exports but, again, that shouldn't be used as an excuse for everything. If Greece developed an obsession with exports, a lot of good things would happen, particularly at a time when the common currency is as cheap against third currencies as it is now.

      Why can Greece not develop more intelligent ways of exporting. Exporting in bulk to Italy and leaving it up to Italy to package and distribute leaves the bulk of the margin in Italy. Why couldn't Greece do that on its own.

      I could go on and on (and in my blog I have been going on and on about it). At some point it becomes tiresome if one only encounters sometimes riduculous resistance to help oneself. Everyone who is out to prove that Greece will turn into a failed state and failed economy will definitely turn out to be right if the mindset is not to even think about how failure could be avoided. I guess the old American movie was called: "Don't just stand there! Do something!"

    10. Your views are still inapplicable..

      The EU has not gone to that direction at all so far. Why would it go now?

      The fact that it has bypassed a few rules (say, the no-bailout rule) doesn't mean much. If one country gets the benefit of protectionism, then another is gonna ask for it too, and then the single market will collapse.

      These fruits and vegetables ARE being produced domestically. They're just too expensive when compared to the imports, and so people buy the imports instead.

      Sometimes your arguments are just plain bizarre. If this, if the other. Yes, if the ECB stopped providing liquidity, the Greek banking system would collapse. But it hasn't. And why would it when half of Europe is in the same hole as Greece is?

      Why does Greece sell oil in bulk to Italy? Because it is Greece.

      Greece already is a failed state.

    11. You may not know that Greece has had for some time now an application for Special Economic Zones sitting at EU-desks. Very half-hearted measures and very obviously no sense of urgency to get anything done.

      Half of Europe is NOT in the same hole as Greece. Spain and Ireland are in that hole because an otherwise well-run state felt it had no choice but assume the liabilities of private sector banks which had overspeculated recklessly. Italy has a huge industrial sector and a reasonably strong trade position. Once they get reforms through, their economy can take off again. France is probably, in my opinion, closest to Greece. A statist mindset where bureaucrats (and politicians!) exercise enormous influence in the economy, where the competitiveness is going out the window and the money is running out. If France were not the Grande Nacion, it might already trade near the level of Greece's.

      So Greek fruits and vegetables are more expensive than those produced in Holland, Denmark etc.? You know what happens when two businesses are next to one another and one is more expensive than the other one. The more expensive one goes out of business and no one feels sorry for them. Since no one likes going out of business, people normally adjust their prices to market. Or are you perhaps suggesting that Holland, Denmark & Co. conspired to make Greek producers more expensive? Wouldn't have worked very well. Only Greeks themselves could make themselves more expensive.

      My views may not be applicable. I don't insist that they are but I do insist that if someone thinks they are inapplicable, he/she should feel obligated to come up with better solutions or not participate in a debate. Just criticizing and taking the can't-do approach is not very impressive.

      You conclude with the statement that Greece is already a failed state. So? You think the best thing to do would be to leave it right where it is, in failed condition? If you have other things in mind, I have so far failed to discover what they are or might be.

    12. I don't think so.

      I've long maintained that the position of Ireland, Portugal, Spain and Ireland is well comparable to the one of Greece, even if Greece is the worst of the bunch. Greece's government debt (per GDP) had remained stable since the early 90's. It was private debt which more than doubled during the Euro decade.

      The same old story.

      So you think that if these nations do reforms, that their economies will boom?

      Think again. The latest troika report on Ireland stated that they did a stellar job when it came to reforms, and yet the policy didn't bring the desired results because of suppressed domestic demand (due to austerity) and because of suppressed external demand (due to European austerity).

      So austerity, when everybody is doing it, is self defeating. Why can't we agree on this?


      Not exactly. More often than not, it is Egyptian potatoes or Argentinian lemons that force out Greek products. But sometimes I've been to the supermarket and, say, Belgian tomatoes were marginally cheaper than Greek tomatoes. Never on the street market though. But you rarely get a tax receipt there.


      Here's my better solution: leave the Euro. Then not only will import substitution become feasible, but it will also become profitable again.

    13. Fair enough. Now I know what you stand for by way of solutions. A Grexit. As I said, even though I personally still think that there are better ways for Greece's future than a Grexit, I am having second thoughts about it. When there are deep feelings in a society that self-determination is the most valuable objective of all, regardless of its costs, then it would be imprudent to oppose it simply for dogmatic reasons.

      In my wild fanatasies, a Grexit might work. It could set free an avalanche of new energies in a society. Sort of: "We have made a choice and it will be extremely rough going in the beginning. But we are determined to get through that and, at the end of the day, we will prove to everyone - above all to ourselves - that we can make it on our own!"

      It's anybody's guess whether Greek society would react that way or not.

      I must correct you, however. Greece is indeed a totally unique case. None of the other countries you mention had a big problem with government overspending and excessive debt before 2008/09. It was the bubble-speculators (and the governments' decision to bail them out) which got them into the mess. Iceland, in contrast, did not bail out the banks; the losses were taken by those who had originally taken the risk (and, of course, Iceland had the benefit of having its own currency). If I haven't said it in this post before, let me repeat: the greatest mistake was that the EU opted for using Greece's balance sheet to bail out banks (and calling that "help for Greece") and, similarly, that Greece allowed the EU to do that.

      If you really want to know where Greece is unique, check the World Bank's "Doing Business 2012" report and Transparency International's "Corruption Index". In both rankings, Greece ranks by far at the bottom of all EU-countries.

      Mind you, a Grexit would solve the price problem of not being internationally competitive. It WOULD NOT solve those problems which led to the corrupt, crony-driven, largely planned economy which Greece has today. With or without the Euro, if Greece doesn't reform that, the future will be brutal. You will have the economic elite continuing to usurp society at large. Greece will continue to be a fantastic country for those who have money and it will get more and more painful for those who don't.

    14. No, Mr. Kastner. Like I said, government debt as a percentage of GDP had remained stable since the early 90's, while private debt more than doubled during the euro decade.

      So who overspent exactly?

      I fully accept your critique over the dysfunctions of the Greek economy. Let me quote you however in saying that to change that is the project for a generation, not for 3-4 years.

      Unemployment is the most pressing problem. It is simply unacceptable that Spain has had 25% unemployment for the past 4 years, and Greece is on a par. It is a problem that Europe is causing by forcing fiscal consolidation during private deleveraging.

      Here is Warren Mosler's post regarding the failings of the gold standard.

      The Euro of course is comparable to the gold standard.

      You want maximum economic performance, you have to deficit spend, period. It is just a question of who deficit spends.

      It's time we got past fairy-tales such as deficit phobia and limits when it comes to sovereign debt. We have fiat money. There are no limits, especially when the economy is sub-performing in such a horrible manner. When the economy starts performing again, we can have fiscal consolidation in order to have balance. But not because of ideology and dogma. Not because "government spending is bad and private spending is good".

      PS - It is good to see that the European Commission has reprimanded Germany over it's huge account surplus as a destabilizing factor in the European economy. Germany's response was entirely predictable though. "The surplus is not a problem, only deficits are a problem. It is up to the deficit countries to become more competitive, blah blah".

    15. 1 of 2

      At December 31, 2001, before the Euro began, Greece's sovereign debt was 130 BEUR. At December 31, 2009, before the crisis exploded, that debt was 299 BEUR. That is an increase of 169 BEUR, or 130%, or more than double. Whichever way you slice it, a gigantic increase in less than 10 years!

      To look at debt as % of GDP can be misleading. Greece had the most massive deficit spending program one can imagine since the Euro. Thus, GDP grew in an artificial manner (= debt financed). Some economists have estimated that Greece's GDP, before the crisis, was inflated by about 60% due to gigantic deficit spending. If you take an estimate for the artificial part out of GDP, then you see that debt not only increased phenomenally in nominal terms but also as % of GDP.

      I would have thought that a decade of deficit spending in Greece with the well known results (unreal increases in salaries/wages/prices) might have taught you that deficit spending is not a good idea if the spending goes into consumption and not investment. Now you really want to continue that kind of deficit spending?

      Think of this: an unemployed hits a jackpot and decides that he will spend it all on consumption. He may live very well for, say, 10 years. Once the money is spent, he has to return to the standard of living of 10 years ago. The same for Greece except that Greece has not hit a jackpot but taken up debt instead and that debt is still there.

      What really matters, though, is not so much the debt in total but, instead, the debt which is borrowed offshore; the foreign debt which represents the savings of other countries. If all of Greece's debt were borrowed domestically (like Japan's), there wouldn't be so much excitement between Paris, Brussels, Frankfurt and Berlin these days.

      Total foreign debt of Greece went from 121 BEUR in 2001 to 404 BEUR in 2010, an increase of 283 BEUR. So you are right --- the private sector also borrowed an awful lot abroad.

      I agree that unemployment is the no. 1 problem. This is why I recommend import substitution (in whichever way you do it) as the fastest way to improve that. But you have to explain to me how the EU can do much about Greece's unemployment problem. I don't see how. The Greek economy simply cannot employ its people at this stage. It could in the last 10 years because so much debt was thrown at the economy. The only sustainable solution for the Greek economy to employ its people is to become so competitive that one attracts investment. There are simply no sustainable jobs without investment. This is why I tirelessly argue for Special Economic Zones for new (foreign) investment.

      Whoever told that that you only get maximum economic performance when you deficit spend is unlikely to offer good solutions. Towards the end of the Clinton years, the US economy had consistently operated at maximum performance and the US government recorded record budget surpluses.

    16. 2 of 2

      Those who always quote Keynes quote only half of his theory, the part about deficit spending. What they intentionally ignore is the other part where Keynes said deficit spending only works over the economic life cycle which implies that surpluses are achieved in good times.

      You think the limit to sovereign debt is a fairy tale? So why is it that, for over 2 years now, Greece has not been able to raise sovereign debt in financial markets??? You probably have the ECB in mind when you think of no-limits. But the role of the ECB simply cannot be to finance budget deficits of member states.

      I normally don't do this because I think it is important not to say anything which someone else might consider as derogatory about his own country, but I guess I have no choice in your case because you do not get my subtleties: Greece has become a totally inflated zombie-economy with the result of inflated salaries/wages/prices/GDP/...everything! The cause for that was not so much the Euro but, instead, the tsunami of cheap loans which banks - thanks to liquidity-flooding by Central Banks - had thrown at Greece (and others).

      Something unreal happened to the Greek economy in the last 10 years or so. But, as Warren Buffett says, you only see who is naked when the tide goes out. When the Greek tide went out, it turned out that the whole economy was naked.

      A friend of mine is dealing with the top Troika officials. He told me that a "very senior Troika official" once told him that Greece would hit equilibrium if and when national income had declined to the level of Bulgaria's. Now, I am the last person who could competently comment on that but it shows a general trend. That trend is that, I am sorry to say, Greece will have to adjust to a living standard which is much, much lower than the inflated living standard of the last 10 years. It will have to be a living standard which corresponds to the value generation of the Greek economy. If that goes up (and this is why I tirelessly argue in favor of Special Economic Zones and private foreign investment), then the Greek living standard will go up.

      Two years ago, plans were discussed for the first time that Greece would establish a special bank for financing investments along the lines of the German KfW. The Germans had offered know-how. Nothing has come out of it so far (they Germans claim that Greece showed no interest). As far as I know, there are well over 10 BEUR sitting in structural funds in Brussels waiting for disbursement to Greek investment projects. Where are those projects?

      I apologize for being so blunt!

    17. I disagree with almost everything you say.

      Who are you to say that Greece's GDP was artificial, whereas Germany's GDP was not artificial (when it's driving force was that it was selling to countries like Greece)? These are two sides of the same coin. It can't be that one side is artificial and the other isn't.

      The simple truth of the matter is that the Greek GDP would've kept growing had it not been for the banking crisis of 2008. That is, had the ECB taken adequate measures soon enough to stop the crisis from transporting to the real economy. But it didn't, and the rest is history.

      You stubbornly emphasize on government debt (which was stable), and ignore private debt which more than doubled in a decade. Whether you like it or not, private debt was the driving force of the Greek economy during the Euro decade.

      What can the EU do about the South's problem? It can start by forcing the surplus countries not to go into austerity mode. Remember, somebody has to spend. And yet you keep forgetting that.

      The surplus countries are so full of themselves that just when their private sector takes advantage of the super-low interest rates and starts borrowing, they are taxing it heavily to choke this extra demand from stimulating their economies. They want to keep their surpluses so badly. Well, congratulations Europe, welcome to the new recession.

      Yes it is a fairy-tale. A myth. Greece has been shut from the markets because it borrows in a foreign currency, the Euro.

      Why can't the role of the ECB be to finance budget deficits when the private sector doesn't borrow? Says who? The only thing that needs to be done is for it's mandate to be changed so that it includes full employment, FED style.

      You're missing the point. The point isn't that Greece shouldn't lower it's living standard according to the value it generates. The point is how to generate more value. It won't generate more value if the private sector doesn't spend, if the government doesn't spend, and if the external sector doesn't spend.

      Your suggestions (special economic zones and foreign investment) have one thing in common, they don't increase living standards.

    18. I regret that you can't be convinced with facts about the Greek sovereign debt, facts which come from the Greek Ministry of Finance (debt per capita increased from about 12.000 EUR to about 27.000 EUR in the period I referenced previously. Do you not consider that as an increase???).

      From 2001-10, on average a net of 30 BEUR flowed annually into the Greek economy from abroad as debt. That external flow - and nothing else - generated high GDP growth. Check with Greek economists instead of me; perhaps they carry more credibility with you. Domestically, manufacturing declined from levels which were never high. Allow me to be a bit cynic after all this flak from you: Greece had degenerated into an economy (80% services) where people sold each other souvlaki at inflated prices and paid for it with money borrowed abroad. Somewhat similar to what the US did during the housing bubble.

      The banking crisis of 2008 left Greece virtually unharmed. Banks were still lending money to Greece like mad until the new government of late 2009. In the 12 months preceding, Greece could increase its foreign debt by about 60 BEUR; a record! When the new government revised the budget deficit dramatically, Greece's credibility went out the window and that's when something hit the fan.

      In 2008, Greece's current account deficit was a record 35 BEUR; close to 15% of GDP. A world record, I believe. Think about that!

      Yes, as I agreed with you before, private foreign debt increased in the 2000s in similar amounts as public debt. Bear in mind, however, that - at least so I have read in several analyses - the indebtedness of Greeks is far lower than that in other countries.

      The North is in austerity mode? Please name me one country where government expenses are not increasing!

      The one point which you blame me as missing is one of the most important points I always make: Greece must become a value generating economy so that as much as possible of its current living standard can be maintained. I am afraid you willfully refuse to accept the fact that without investment, there are no jobs nor growth. Just ponder the following question: what good does spending do for the Greek economy if it cannot deliver the products which Greek consumers want? All it does is increase imports. If you don't accept that new investment eventually leads to higher living standards, then I truly think that you would be happier with a Drachma-Greece.

      Let me once more attach the paper which I recommend you read carefully, unemotionally and - if that is possible - without prejudices. Thank you!

    19. Let's examine the validity of your statements.

      Obviously the debt increased in absolute numbers.

      Most of the Western economies are primarily services. In your own Austria, services comprise 70% of the economy.


      No, the banking crisis did not leave Greece unharmed. You (once again) are referring to government debt. Private credit tells a different story though. Already in 2009 it is scaled down to a 4% increase (compared to a whopping 16% increase the previous year, and a 22% increase in 2007). In 2010 it shrinks to zero. No expansion. In 2011 we have full-blown contraction (-3%). Ditto for 2012 (-5,5%).

      What happened is the following. The lack of this money slowed down the Greek economy. Then, as a result of the automatic stabilizers, the government deficit increased. The timing coincided with the arrival of the new government. Sadly, a whole story was built about how Greece was manipulating the numbers. As if. How many times have the budgets of practically every country on the planet been revised because of the great recession?

      What will it take for people like you to understand that the government deficit can't be predetermined because it is a direct result of the economic cycle? It's called automatic stabilizers and it works as a shock absorption.


      About the current account.

      World record? Oh please.

      In fact, the current accounts of Greece, Portugal and Cyprus seem pretty comparable to me.


      Indeed, compared to the ridiculous indebtedness of other countries' private sectors, the Greek private sector isn't in too much debt. However this tells more about the double standards of economists rather than the figures themselves. I am talking about the fact that they consider a, say, government debt of 80%/GDP to be a problem, but a private debt of 400%/GDP to be normal. Simply stunning.


      I'll name an example. Finland.

      And I quote.

      ""Finland’s economy has been buoyed by domestic spending amid record low interest rates. The European Central Bank’s record- low 0.75 percent rate has fed through to the Nordic economy, where more than 93 percent of mortgages are linked to variable interest rates."

      But then.

      "The government plans 1.3 billion euros in tax increases and 400 million euros in spending cuts."

      So what the Finnish private sector adds. The Finnish government subtracts.

      Europe will never reverse it's imbalances that way.


      But let's move on to the more pressing matter, that of growth.

      Mister Kastner, what *you* must understand is that businesses and investors react to demand as well. It is not production that generates demand, it is the other way around. With Europe in austerity mania and characterized by lack of demand, who is going to invest and hire, and why? As we see by the current problems of the car industry in France, and the mobile-phone industry in Finland, nobody.

    20. The French car industry and the Finnish mobile phone industry are some of the best examples of mismangement one can find in the entire world today. Hollande plans to save the French car industry by making staff reductions impossible. Good luck!

      Let's bring this ping-pong to a close by saying that the two of us are in total agreement that we are in disagreement on many of the important issues. Fair enough?

      You argue that it is the job of a Central Bank to assure full employment. Print, print, print so that governments can spend, spend, spend. 10 years of massive overspending on the part of the Greek government have led to a situation which still doesn't make you think twice about your logic.

      "Demand" is a fickle thing. Part of it is real, part of it are expectations, part of it is created by manufacturers. John Kenneth Galbraith once wrote a book about the notion that "demand" is not there. Instead, he argued, it is created by manufactures in the minds of consumers so that they buy their products. Even though this is a fairly socialistic view, I could agree that it is applicable here or there.

      We spend about half the year in Greece and, while there, I could probably live only on the fantastic Greek salads and fruits. When I am back in Austria, I look for Greek produce in supermarkets. Guess what? I can't find any!

      I agree with the old Henry Ford who said that he paid his people so well so that they could afford to buy Ford cars. But Henry Ford must have done something right because people who were not his employees could also afford to buy his cars.

      Steve Jobs was once criticized for not checking demand before he invested so heavily in the iPad. His answer? "How can I check consumer demand for something which they don't even know that it exists yet and that they would like to have it?"

      If you have any doubt about Europe's preparedness to invest, just look at the investments which European companies are making outside the Eurozone. There is always money there for investment. Those who want to get the invesetment need to make a convincing case for it. Being, by far, the worst EU-country for doing business and the most corrupt one as well is not a convincing case to attract investment.

      Again, let's close by agreeing that we disagree. Ok?

    21. No, I'm just saying that in a period when the private sector doesn't spend, and wishes to be in surplus, then the government should spend to restore balance in the economy. Spending doesn't have to be useless. It can also be useful.

      Also, I'm saying that if we are to correct trade imbalances, then we should correct them. It's not just the deficit nations that need to spend less. That's not gonna do it. It's also the surplus nations that need to spend more.

      I am in favour of reforms, and the biggest reform that Greece must apply is compliance with the law. Anomie is like a woodworm. It eats the foundations of society, little by little, until the society collapses.

      Demand drives the economy.

      Apple might have made the initial investment, but it did so on the back of a booming period (the previous decade). Now that the ipad was a success, it will probably invest more in productive capacity. But if we enter a recession and demand shrinks, then the investment will turn sour and Apple will scale down it's investments in general.

      The economy is too complex and too important to try and present it as merely a decision to invest on productive capacity based on virtue.

      You are making the same mistake as the ideologists who promote globalization. They said that within globalization, each country would find something in which it is competitive, and there would be balance. You merely add one more input value, by saying that countries must make sure that they have an environment in which it's easy to make business in, and then there will be balance.

      But there won't be balance. The private sector is too undisciplined to apply balance, no matter what the input values are. That is the sad truth of the matter.

  2. Herr Kastner,

    these are excellent figures. The fall in imports tells a similar tale to the effect on imports to Germany - people are feeling the pinch and are not buying. Note that the more expensive supermarkets found in the Netherlands are being eradicated in Germany where Aldis abound.

    One other point is that the banks do still want the interest on their foolishly lent loans. That is the real issue here, and won't go away. By the time Greece is out of trouble economically, the banks will have calculated the compound interest ...