Tuesday, August 9, 2011

Greece's crisis forgotten?

Anyone who has spent a great deal of time over the last months making comments and/or offering possible solutions about/for the "Greek problem" could feel unemployed at the moment: Greece no longer appears to be the problem which she appeared to be only a few days ago; Italy has moved to the front pages of the media; the down-grading of the US has initiated a world-wide run on equities; and the run on equities has caused plunges on stock exchanges world-wide. So why even worry about a small economy like Greece's?

The contrary is true! Any chain is no stronger than its weakest link. Greece certainly is one of the weakest links in the chain of the world-wide sovereign debt crisis. The basis of confidence in the chain of the world-wide financial system depends on a confidence that the chain itself is getting strong again. At the moment, the prevailing perception is that the "can is being kicked down the road". Not only as regards Greece but, foremost, as regards the world-wide financial system.

Such a self-destructive process requires, above all, a "case-in-point" which signals that this process has reached bottom and that, from now on, things are moving into the right direction again. Right now, everybody seems to be waiting for the next half-hearted and futile measure which only proves that financial Armaggeddon is unavoidable.

The US economy cannot be that case-in-point because it is far to large and its political leadership is far to divided to provide hope for a near-term perspective that things are under control.

Italy is a prime example of the short-term thinking of capital markets (one could also consider Italy as a prime example of the behavior of capital markets: identify the next possible weak link and speculate against it in the hope that the speculation achieves the desired results).

One can criticize Italy and her politicians for many things but one cannot ignore the fact that Italy is the world's 7th-largest economy. In the last 12 months, Italy exported 361 billion EUR, 18% more than in the previous 12 months. Yes, imports exploded by 25% during this period and caused a huge increase in the trade deficit, but bear in mind that exports still covered 93% of imports. Thus, Italy's economy (the source of revenue for the state) is far from being a basket case. The state may be a basket case because of its expenses but the expenses of a state (as Greece has shown) can be much more easily corrected than the problems of an economy.

Greece, during the same period, exported a grand total of 21 billion EUR and that covered only 40% of her imports. This reflects the present hopelessness of the Greek economy (which pains so much more at a time when the state is actually taking draconic measures to cut expenses).

The Greek economy is small enough to quickly show positive results if the right measures are taken. If one of the weakest links in the world-wide chain of sovereign debt problems started showing that the crisis is manageable after all, the positive impact on the whole process cannot be underestimated.

As a result, more than ever Greece now has a chance to assume a lead role; to implement measures which inspire confidence that financial Armaggeddon can be avoided.

On the other hand, if Greece, now that the focus of attention has shifted elsewhere, leans back and thinks that somehow her problems will go away by themselves, then Greece will accelerate the chances of a financial Armaggeddon.

What should Greece do? In simple terms, Greece should shift focus from the public deficit and debt (without retreating from the cost-cutting measures already under way!) to possible ways to stimulate growth in the economy.

Economic growth requires investment. Investment requires money. And there is presently no money around which is eager to be invested in Greece (for all the well-known reasons). To bank on new cash from EU structural development funds is an illusion. First of all, one is talking about only 1 or 2 billion EUR out of those funds (equivalent to about 1/2 a month's capital flight!). And, secondly, the bulk of such funds are likely - under the present system - to find their way into private offshore accounts of Greeks instead of landing where they should land.

Greece must offer investment opportunities which are interesting enough so that private capital flows voluntarily. Private capital will only flow voluntarily if there is a safe legal framework and if there are internationally competitive business conditions. Neither of the two are presently being offered in Greece.

It is inconceivable that a corrupt and crony-driven economy can be converted into a legally secure and economically competitive economy within a short time frame. Any government which aims to accomplish that is doomed to failure.

Once can, however (and one must!), start with "pockets". Instead of changing the entire economy (which is impossible), one must start with selective new situations from scratch. One must establish "pockets" within the overall economy where "perfect conditions" are offered to start new businesses from scratch. If that works within the new pockets, it will eventually "rub off" on the rest of the economy.

This requires a new Investment Law. While it should not discriminate against domestic investments which are financed with equity, it should aim at foreign investments because foreign investments are equity per definition. The overriding objective is that the economy be jump-started with equity and not with debt. Domestic equity will be hard to come by these days. Thus, it is the foreign equity of Greeks (i. e. financial assets in foreign bank accounts) at which the new Investment Law must be directed.

The idea is to attract equity for investment. The investment must go into manufacturing in order to create jobs. The new manufacturing must initially focus in import substitution. The only reason why these products are being imported (instead of being produced domestically) is that imports are of better quality and/or cheaper in price. The new investment cannot aim at manufacturings where Greeks cannot procude the quality of imports. However, there is a multitude of products which Greeks could produce in the same quality as imports but which are presently not produced in Greece because of price.

For the manufacturing of such products, Greece must implement a new Investment Law of constitional rank. That law must guarantee the investor the security and competitive business conditions which the investor requires in order to manufacture these products profitably. The law must be specifically aimed at foreign investors because that is where the potential investment funds (the foreign financial assets of Greeks) are located. In order to give investors the necessary confidence into the new Investment Law, Greece should ask the EU to guarantee it.

The new Investment Law could not be applied to all of Greece because the "internationally competitive business conditions" which it must offer cannot be imposed on the entire economy without causing a revolution.  It would have to be applied to selected Free Trade Zones or investments under that law would have to be "marked" regardless where they are made.

The net result would be increased domestic manufacturing; increased domestic employment; inceased domestic value-generation with the respective tax generation; etc. - all of this at the expense of imports which drain the national cash. And if the new investments really turned out to be competitive, they might even increase exports.

There would have to be accompanying measures. Who would want to invest in new production when he sees that imports are so easy to come by? Which Greek would want to return his offshore financial assets to Greece when he sees that Greeks transfer their financial assets offshore?

Necessary temporary measures would be: special taxes on imports ranging from 100% on luxury goods to 0% on absolutely necessary goods; and capital controls to prevent continued capital flight. These measures would be in violation of EU-freedoms but EU-treaties can be temporarily amended (if the EU were not willing to temporarily amend them, then Greece might just as well say good-bye to the EU and the Euro).

If Greece embarked on a course suggested above (and if that course could be implemented successfully), it would be a tremendous signal to the rest of the world that sovereign debt problems are indeed manageable if the underlying economies become value-generating!

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