Greece - Living Beyond Its Means Again?

In a commentary published in the Ekathimerini on June 6, the well-known British journalist Hugo Dixon stated that "Greece is living beyond its means again." This prompted me to think because I have made similar arguments in this blog.

What does "living beyond one's means" really mean? That depends...

It is easy to define it on the level of a person or family. If a person (or family) has more expenses than income, he would appear to be living beyond his means. But that is not necessarily so. If that person has wealth like savings, he would not be living beyond his means because savings are part of his means. Correctly speaking, that person would be living off his substance.

If that person (or family) has no wealth, he needs to cover the hole with debt and that would clearly be living beyond his means because he is using other people's savings to pay for his expenses.

In both cases, one has to look at the composition of the expenses. If the expenses include a large portion of investment which will generate income in the future, the person (or family) may currently live beyond his means but he is investing into the future, which is good. The opposite is the case when the expenses are entirely for consumption.

At the level of the state, the analysis becomes more complicated because it is difficult to assess the wealth of a state (for example: real estate and other tangible assets). At the same time, a state may have a budget deficit not because the expenses are too high but, instead, because the tax revenues are far too low because of tax cheating. So while it may appear that the state is living beyond its means, it is not an expense problem but a revenue problem which could be solved through more efficient tax collection.

The ultimate level of living beyond one's means is the national level. The level of the national economy and of the country as a whole. And this brings me to the subject on which I have focused since I started this blog 13 years ago - the national current account.

The current account measures the revenues which a national economy generates outside its borders compared with the expenses which it has outside its borders. If the current account registers a deficit, it means that the national economy is living off the savings of other countries. On a cross-border basis, the national economy (i. e. the country) is living beyond its means. Those savings of other countries can take the form of foreign debt, foreign investment or foreign grants. Typically, it is the foreign debt which represents the bulk of the savings of other countries. 

My intensive readings about the history of modern Greece have suggested, that - since the foundation of modern Greece 200 years ago - there have only been very few years where Greece had a current account surplus. Put differently, Greece has a long history of living beyond its means on a cross-border basis. 

When the financial crisis erupted in 2010, the voluntary flow of foreign savings into Greece stopped suddenly. There was only an 'involuntary flow' from official institutions and the Troika made sure that this involuntary flow covered only the bare minimum of necessities. For once, Greece was forced to more or less live within its means. The economic pain for Greeks was dramatic (it was only 'more or less' living within its means because, despite all the austerity, Greece did not have one single year of a current account surplus during this austerity).

Have things improved under the Mitsotakis government?

With Mitsotakis's assumption of power, the voluntary flow of other countries' savings into Greece returned. It returned in huge amounts and it was necessary because the current account deficit exploded under Mitsotakis and it was approaching pre-crisis levels. On a cross-border basis, this was (and still is) clearly an enormous living beyond its means for Greece. It could only happen because of the enormous voluntary inflow of external debt, because of substantially increased foreign investment and because of substantial funding from the EU Recovery Fund. 

The most important point of interest: during Mitsotakis first tenure, the external debt of Greece increased by about 130 BEUR! That is more than 30 BEUR per year! And that is at least the level of external debt growth prior to the crisis.

Hugo Dixon stated that Greece's current account deficit was about 10% of GDP last year. Adjusted for the spike in energy prices, it was still about 6%. Those are VERY high figures. Red flags should typically show up when the current account deficit passes 3% of GDP. The pre-crisis peak in Greece's current account deficit was close to 15% but that included much more interest expense than Greece is having today.

Does that spell trouble for Greece's future?

That depends. Just like in the above examples of a person or family, it depends on what the money is used for. If it is primarily used for prudent investments into the future, it is actually very good news. However, it must be remembered that Greece's insolvency of 2010 was not à priori caused by huge amounts of debt accumulated in prior years but, rather, because that debt was primarily spent on consumption. Had it been spent primarily on investment, there would not have been an insolvency in 2010. 

So, the conclusion is very simple. If Greece now spends the enormous inflow of the savings of other countries primarily on prudent investments, a Golden Age lies ahead of the country. If the consumption spree of the 2000's is repeated, the next insolvency is already in the cards.

The verdict on the above is still out.