Travelling through Greece

My wife and I have been travelling the Northwest this week and we still are. Larger cities were/are Kastoria, Ioannina, Igoumenitsa but we went through many smaller ones. There were some wonderful sites overall but particularly in the Zagoria!

To be sure: I am fully aware that Greek unemployment exceeds 20% by now (with about 50% unemployment among the young). I am fully aware that Greeks have experienced brutal austerity with incomes going down and expenses going up. I am fully aware that this kind of social cost is absolutely unacceptable in a country of the First World.

Having said this, our trip is baffling me. We have seen nothing but busy and bustling life in the cities. The coffee shops and tavernas are full and everyone seems to have at least one smartphone. People are in good spirits as far as a stranger can tell.

We had lunch at a taverna in the Zagoria. The weather was bad and there were only a couple of other guests. My Greek wife felt like she had to talk with the owners to brighten up their spirits. When a young girl, their daughter, came along, my wife probably remembered her own modest upbringings in a village and picked up the iPad from the car to show it to the girl. The girl said "oh, that's the old one; I already have the new one". My wife then asked for the bill which came to 23 Euro for 2 stuffed tomatoes, 1 salad, 1 water and 1 beer. She paid but didn't get a receipt. My wife then told me that she never wanted to go back to that place...

I later chatted about this with the waitress in the dining room at our hotel (140 EUR/day; compared to Vienna or Salzburg, that's ok when considering that breakfast, dinner and 5 stars were included; but still not a give-away in times of crisis). The lady told me to forget what I saw. Yes, the Greeks may be sitting in cafes and, yes, they may all show off their iPhones but those Greeks don't have money to eat. Why do they do that? Easy, she said, they are Greeks.

Whatever the case may be, for a society where so much proven suffering is taking place, I see far too much good living, be it fake or real. I am reminded of Europeans criticizing the USA for not having universal health insurance ("what kind of a society is this when they are so wealthy but do not offer health insurance to everyone?").

What kind of a society is Greek society when there are still so many people quite or very well off while so many others are in most dire straits? Where is the solidarity of those who have wonderful homes in Panorama, Chalkidiki, Spetses, etc. with those who don't know how to get food on the table the next day?

I don't have answers to these questions but I feel pretty certain that ancient Greeks would not be happy if they could see the lack of solidarity in modern Greek society.

Where Prof. Krugman is wrong!

Just like Ron Paul is totally consistent in his critique of "big government", Prof. Krugman is totally consistent with his message that austerity will kill Europe and only spending can save it.

Prof. Krugman wouldn't be a Nobel Prize winner if he meant by "spending" nothing other than undifferentiated government spending. He certainly knows that it depends on what money which has been borrowed from lenders is spent on. If it is spent on something which generates a return greater than the cost of borrowing, spending is a wonderful idea --- that idea is called investment.

Still, even undifferentiated spending might help to lessen the pain of a recession. I believe it was Keynes who suggested that in a recession it might be smart to pay a fellow for digging a hole and then pay him for filling it up again. As long as he spends his income in the domestic economy, that might generate some benefit. More examples could be given.

Prof. Krugman - when talking about sovereign debt and when suggesting that countries could easily borrow a lot more - hides one fact from the public. That fact can be summarized in one expression: debt capacity.

Every borrower - be it an individual, a company or a state -  has a debt capacity. One doesn't really know beforehand what the limit of that debt capacity is but when one reaches it, one finds out brutally quickly that it has been reached.

Maastricht defined debt capacity as 60% of GDP. Greece has increased that definition to 120%. Japan is closer to 200%. I don't know where the limit is but it is somewhere!

Once the debt capacity has been reached (as percentage of GDP), additional debt is limited to the percentage increase in GDP (i. e. growth). It's great fun to go from 0% to 60%, from 60% to 120% or from 120% to 200%, but it's not a lot of fun having to stay at 200% when GDP growth is only 2%.

There is allegedly no such thing as a free lunch. Except: the debt capacity is indeed a free lunch, a free lunch which is also a scarce resource. The question is who should be allowed to use this scarce resource over what period of time.

If the debt capacity is at 200% of GDP and a society goes in one generation from 0% to 200%, this generation has eaten up the entire free lunch and there is only little left for next generations. There is no way the US debt as a percentage of GDP can increase forever at the rates at which it has increased in the last generation.

So Prof. Krugman, shouldn't one leave at least a bit of the fun for the next generation?

Greece to grow 7-8% annually!

The NZZ published a very interesting article about a conversation with Anne O. Krueger (78; former World Bank Chief Economist and former First Deputy Managing Director of IMF).

Krueger is convinced that Greece could grow 7-8% annually for at least a decade if the public administration could be brought up to par, if administrative hurdles for private sector economic activity would be eliminated and if the private sector could operate in an investor-friendly, level playing field.

This is essentially the argument of this blog. Let me restate my reasoning why Greece could grow so fast and become, as I have called it, the "economic tiger of the Eastern Mediterranean":

1) The reasons why Greece is such an unattractive place to do business are so obvious and well known that one can immediately start fixing them (instead of having to first research the nature of the problems).
2) Greece is in a catch-up position; a lot of lost ground must first be recuperated. A catch-up position always facilitates above-average growth.
3) Greece has never really made a serious attempt to really take advantage of its own resources and competitive advantages.
4) If Greece managed to "turn the corner" in the right direction, an enormous self-reinforcing momentum would develop among the Greek people.

Let me describe how I would envision such an "economic tiger of the Eastern Mediterranean":

Our balcony looks towards the harbor of Thessaloniki and I typically see a couple of ships there these days. In the future, I could see the whole Gulf of Thermaikos full of container ships waiting to be unloaded. The goods could be transported on excellent railways throughout Northern Greece and the entire balkans. Thessaloniki would - again - become the point of departure for all export products from this region. And, of course, the same goes for Peiraias. Greece could literally become for South Eastern Europe what Rotterdam/Hamburg are for Central Europe.

Driving across the country side, I would hardly see a square Km which is not put to some type of agricultural use. I would frequently come across sites where some form of raw materials is being mined (all in a perfect ecological way).

I would see small businesses around every village with the same density that one sees tavernas today. They would be small (5-50 employees) and they would do something other than just buying/selling. There is enough Greek ingenuity to figure out what products others might buy.

I would see Greece as the prime target for tourists from Europe and the rest of the world. This because word would have spread that Greece is unbeatable in terms of quality, price and service (that Greece is beautiful comes on top of that...).

I could see a Greek city (not necessarily Athens) become what Beirut once was for regional commerce and finance: the turn-table for the Eastern Mediterranean and the Near-East.

I better stop now because otherwise I will get carried away...

Painless adjustment in France? Good luck!

Quel plaisir! A pleasant new face as President of France and a charming wife next to him! Humanism will return to everyday life and life will again be very pleasant!

How can one avoid not getting caught up in such a new momentum? How could anyone not have been thrilled by Barack Obama's acceptence speech back in November 2008?

"He has raised such high expectations which he will never be able to fulfill", the critics said about Obama. And I criticized the critics for always killing the dream of a better world before it even has a chance to come true.

Sadly, the new President of France may be headed towards his own "Obama-experience". Here are some facts:

* the French public sector is like an overblown balloon ready to explode at the slightest puncture
* France today has 5,5 million public servants, 19% more than 10 years ago
* the state owns participations in more than 800 companies, mostly large ones
* France lives on debt-financed consumption to a larger degree than most EU-countries
* an overregulated labor market and 10% unemployment (25% among the young)
* an ever-growing number of people who are beneficiaries of state-protected sectors
* large sectors of the economy protected against EU market pressures (i. e. agriculture)
* an entrenched intellectual elite, left and right, still nurtures dreams of the Grande Nation
* a fixation on past glories which hinders recognition of present realities
* excessive centralization which hinders decentralized innovation
* last but not least: an enormous challenge with minorities/immigrants

Is anyone perhaps reminded of Greece?.

France, as opposed to Greece, has one big advantage going for itself and that is --- it is France, the second largest European country. But when the victory parties are over and when the new President wakes up to French realities, he will soon be in a position that no one should envy him for!

Painless adjustment not possible!

One can argue about the way EU-elites have handled the debt crisis in the last 2 years (and this blog has done so). One can argue about the Memorandum (and this blog has done so). One can argue about the way the Greek political establishment has handled the crisis so far (and this blog has done so). However, there is one point on which there cannot be an argument.

One cannot argue that there is such a thing as a painless adjustment! When things get out of whack financially, be that a company or a country, an adjustment is necessary and that causes pain. Steve Jobs is the genius who created Apple and thousands of jobs with it. However, when he started with Apple's turn-around, he first had to fire thousands of people. A country cannot fire its citizens; a country must adjust otherwise.

A cause-and-effect approach can make the pain more acceptable. In other words, if pain is required to clean out a mess, one should inflict the pain primarily upon those who caused the mess. If there were beneficiaries of the mess, it is wise to have them give up some of their benefits to clean out the mess.

I can only guess that the Greek political leadership opted for the opposite approach (i. e. pain was inflicted upon those where were least responsible for the mess) because that was politically the more comfortable approach: anonymous masses remain anonymous regardless how much they pain. Cronies and other clienteles, on the other hand, are not anonymous (and they can even endanger party leaders).

Only at election time do anonymous masses have their say and they have now spoken loudly and clearly in Greece. I fear, however, that they have been misled. My sense is that the so-called anti-Memorandum voters were led to believe that the Memorandum is the cause of all pains and that, without it, all pains will cease. Nothing is further from the truth!

Pain can only be mitigated if the recession is brought to a halt and relief will only occur when growth returns. When an inefficient and corrupt public sector has eroded a country's wealth over the years, it must be shrunk (be that direct government expenses or indirect public sector waste). However, when a public sector shrinks, there must be an offsetting growth in the private sector to maintain some form of equilibrium. Growth in the private sector requires private investment. Private investment requires business conditions which make the risk/return-ratio interesting for the investor.

So far, the Greek political establishment has enormously focused on shrinking government expenses but I am not aware of any significant measures which would improve private sector business conditions such that the risk/return-ratio becomes more interesting for the investor. A country which is so far behind as Greece is in many respects today has enormous future potential. It doesn't need to come up with a new revolution like Apple. It suffices to straighten out the public administration and to establish a level playing field which encourages private investment and fair and competitive economic activity.

The anti-Memorandum voters and their elected representatives are well advised to devote their energies less to the details of a Memorandum and much more to the question how Greece's public administration can be modernized and how a level playing field for value-creating economic activity can be established. That will get them re-elected the next time around and not the tearing up of a Memorandum!

"Move out of the sun!"

Interpretation by Peter Sloterdijk (Wikipedia)

According to Peter Sloterdijk, in his Critique of Cynical Reason, this is "perhaps the most well known anecdote from Greek antiquity, and not without justice". He states that "It demonstates in one stroke what antiquity understands by philosophical wisdom — not so much a theoretical knowledge but rather an unerring sovereign spirit [… T]he wise man […] turns his back on the subjective principle of power, ambition, and the urge to be recognized. He is the first one who is uninhibited enough to say the truth to the prince. Diogenes' answer negates not only the desire for power, but the power of desire as such".

The sun is out today in Greece and Greeks are voting about their future. Perhaps a miracle happens and they will elect a few people of Diogenes' measure!

Dostojewski on the side of Greeks

To the Greek readers of this blog, battered by foreigners for some time now, I would like to offer on the eve of the most important election this amateur translation of a section of Dostojewski's "The Player".

The young Russian (the player) said: “It is not a given which of the two is worse, the wild Russian way of life or the German style to accumulate money through honest work. I, for one, would rather travel around as a nomad with a tent all my life instead of praying to the German idol”.

“What German idol?”, the General asked.

“The German way to accumulate wealth. I don’t like such virtues. I walked around here yesterday and whatever I saw and observed is just like in German picture books. Every house has a house elder who is perfectly righteous and virtuous, so virtuous that one has to almost fear in his presence. Every such house elder, or house father, has a family and in the evenings they read instruction books to one another. Outside the house the trees blossom, the wind blows and the sun is about to set. Everything is just so cosy.

So here the family lives in total serfdom under the house father. Suppose the house father has accumulated financial wealth and intends to pass on his business to his elder son, then there is nothing left for the daughter who will become an old virgin. And the younger son they sell as soldier. And all of this happens in the name of righteousness, undue righteousness where even the younger son who was sold believes that he was sold out of righteousness. Isn’t that an ideal situation where the sheep is joyful on his way to the slaughter? But further. It is not easy for the elder son, either. He has this Amalia whom he loves but whom he can’t marry because they haven’t accumulated enough money yet. Now they wait in a chaste and faithful manner and they also walk to the slaugther with a smile. Amalia’s face gets old and her skin dries out. Finally, after about 20 years, they have accumulated the necessary wealth in a righteous and virtuous way. The house father blesses his 40-year old son and the 35-year old Amalia with her dried-out breasts and red nose. The house father holds a moralizing speech, cries a bit and then he dies. Now the elder son becomes the virtuous house father and the story begins from scratch. This goes on and on and after 5 or 6 generations, the result may be some Baron Rothschild or Hoppe & Co., or something like that. Now, isn’t this a moving spectacle? Centuries of inherited work, patience, cleverness, virtuousness, righteousness, perseverence, thriftiness and the stork on the roof! What else do you want? There is nothing more desirable than that! And with this conviction the Germans hold court over the rest of the world and whoever is found guilty, that is whoever is not like them, will be damned. Now I prefer to live the Russian way, to live an exuberant life and to increase my wealth in the casino, if necessary. I don’t want to be Hoppe & Co. in 5 generations. I don’t need money for myself. I am the purpose of everything and not just a factor to create wealth”. 

In the 1960s, American comedians were joking "vote for the Kennedy of your choice but vote for a Kennedy!" To Greeks I can only recommend in all seriousness "vote for the party of your choice but don't vote for those who remind me of the thugs which started crowding the Munich beer halls in the 1920s".