Wednesday, November 23, 2011

Appeal to Greek brainpower!

This is an attempt to motivate Greek brainpower to apply their resources for the good of their country. Start with the following consultants’ slogan:
“The most expensive work performed in a company (country) is work which is performed flawlessly and perfectly but which is essentially superfluous”.

Or, if you are religious, think of the Serenity Prayer:

“Lord grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”

What is presently happening?
Greek brainpower (professors, economists, journalists, etc.) is very impressive but is seems exclusively focused on Europe’s debt problem. Proposals offered by Greek brainpower seem even better than much of what EU-elites have come up with so far (see Prof. Varoufakis’ Modest Proposal).

Unfortunately, Greece’s possibilities to influence the outcome of the European debt problem are practically nil. If a borrowing country wants to influence how its foreign debt is handled, it needs to do that from the start. Greece, instead, put herself from the start into the arms of the EU (instead of negotiating directly with creditors). Once that initiative is given away, it cannot be taken back.

So you have all the perfect and flawless Greek brainpower dedicated to things which Greece can no longer change. Put differently, a classic superfluous activity.

What should be happening?
Greek brainpower (professors, economists, journalists) should primarily be applied towards figuring out ways what Greece and Greeks themselves can do on their own to get out of the present dire straits. The discussion should not be about issues like Eurobonds. The discussion should be about ways how to jumpstart domestic economic activity.

What, now, is the appeal to Greek brainpower?
Come up with proposals and action plans what Greeks can/should do in order to return to a positive future perspective. There should be no limits on creativity. Below are some proposals which may be good or not, but at least they are proposals.
  1. Develop plans to reduce imports and to substitute them as much as possible with new domestic production (even if this entails some temporary protection of “infant industries”. The EU will have to agree to this!).
  2. Start with the substitution of consumption import products which could easily also be produced in Greece.
  3. Develop plans for attracting private foreign investment to Greece, perhaps by formulating a new Investment Law which you ask the EU to guarantee. The Investment Law must assure the foreign investors the same security which they have, say, in Switzerland but better return potential than in Switzerland.
  4. Develop plans for how foreign investors can achieve attractive returns on their investment in Greece. They will require an internationally competitive business framework for their operations.
  5. Propose how official capital flight via bank accounts can be stopped (even if this entails capital controls. The EU will have to agree to this).
  6. Take, for one, the McKinsey Report which proposes how 500.000 new jobs can be created in Greece in the next 10 years (and 50 BN EUR new GDP). Analyze what part of it makes sense and, possibly, what part doesn’t. Prod decision-makers to implement the recommendations.
  7. Take the 1st Report of the EU Task Force and comment on what part of it makes sense and, possibly, what part doesn’t. Work with the EU Task Force to implement the recommendations.
  8. Finally, communicate as much as possible with the public about this so that Greeks understand that there can be light at the end of the tunnel --- if only one goes for it!
And if you now want to read further, please do, but it is not necessary. The text below only highlights the most important issues in greater detail.


Greece is being forced to give up her sovereignty!
This is not true! Instead, over 10 years ago, Greece and 16 other European countries decided to give up a very important part of their sovereignty by giving up the right to print their own money. When one gives up the right to print one’s own money, one becomes dependent on those who print it.

Common sense and cash flows
I am not an economist but I do have common sense and I know something about cash flows. These 2 ingredients are always a good start when trying to solve financial problems.

Follow the cash!
First, to all those who want Greece to repudiate her foreign debt and to stop paying interest; to return to the drachma and to lead a good life in their own country within their own means --- before you do that, please figure out how you get, at minimum, 10 BN EUR cash from abroad annually because that is the minimum current account deficit even when not paying any interest abroad.

What is the “current account”?
The current account shows the cash flow from all external transactions of a country out of its ordinary course of business (not including financial capital transactions like borrowing/repaying debt, investment, etc.). Put differently: the current account shows how much a country earns abroad and how much it spends abroad (exports, tourism, etc. are earnings from abroad; imports, interest, etc. are expenses abroad). From 2001-10, Greece spent 199 BN EUR more abroad than she earned abroad. Take out the interest and you are still talking about 10 BN EUR annually, at least.

Greece has (and must have!) a structural current account deficit!
If an economy wants to increase the standard of living of the people, it needs to grow. In order to grow, the economy needs cash for investment. If no cash from abroad should be used, then economic growth (i. e. the growth of the standard of living) depends on the generation of domestic savings. As a still developing economy, Greece generates domestic savings at a rate which would not allow for significant growth (in fact, in the last 2 years the savings rate was enormously negative due to capital flight). 

So Greece needs “the savings of other countries” in order to grow and to increase her standard of living. This is a perfectly normal situation for an economy in development!
What are the savings of other countries needed for? They are needed to finance investment, imports and, regrettably in Greece, the budget deficit. Since the Euro, the savings of other countries were used almost exclusively for imports (above all consumption imports) and the budget deficit. Only insignificant amounts were used for investment.

How do the savings of other countries enter Greece? They enter as payments for exports, revenues from tourism and other services provided to foreigners; as loans; as grants (such as EU-grants); as remittances from Greeks working abroad; or as foreign investment. Since the Euro, cash inflows from exports, services, grants, remittances and foreign investment covered only little over half of what was required for payments abroad. The large difference came in the form of debt.

The role of debt
Debt, be it foreign or domestic, is not bad per se. It all depends what it is used for. If it is used for investment projects which will generate the revenue needed to repay the debt, debt is a wonderful accelerator of economic growth. If it is spent on consumption, the pleasure of consuming passes by but the debt remains. Greece’s debt was heavily used for consumption.

Why does Greece import so much?
The short answer is: because Greece has no oil and doesn’t build cars. The longer answer would be: because Greece buys a lot of consumption products abroad (where they are cheaper) instead of producing them “at home”. And the even longer answer would be: because Greece buys a lot of products abroad which she doesn’t really need.

What are imports?
Goods have to be produced somewhere. Imported goods are produced outside Greece. Wherever they are produced, that is where the production jobs are; the employees’ income and income taxes and the employers’ corporate taxes. Imports of goods which could just as well be produced “at home” are exports of jobs. There are goods which definitely cannot be produced in Greece (and must be imported) but there are many other goods which could just as well be produced in Greece (and should be!).

Example: every time some Greeks buy luxury cars, they increase the foreign debt of all Greeks for the benefit of their own luxury. It would only be fair to require them to pay special taxes on such imports.

Why does toothpaste need to be imported from Brazil? All one needs for the production of toothpaste are the necessary machines and ingredients. Should Greece not have those machines/ingredients and should she not be able to import those, then she should look for products which could be produced within present Greek resources (extreme case in point: olive oil! In 2010 Greece imported even some olive oil!).

Simple algebra for simple solutions
Greece must reduce her dependence on savings of other countries because other countries no longer want to send Greece their savings as easily as they did in the last 10 years. Simple algebra allows only 2 alternatives: (1) reduce the need for foreign savings by reducing the gap between cash spent and earned abroad; and (2) get the savings of other countries which you still need in a way so that you don’t need to repay them.

Regarding point (1): gaps can only be reduced either by reducing cash outlays abroad; by increasing cash revenues from abroad; or (3) through a combination of the two.

Regarding point (2): the only foreign savings which do not need to be repaid abroad are grants from abroad, remittances from Greeks working abroad and foreign investment.

Quick tactical growth vs. sustained long-term growth
Sustained long-term growth requires long-term planning: identification of competitive advantages; development of new industry areas and business lines; etc. That is, of course, necessary for Greece but it takes time. Greece needs to, parallel to the above, achieve some quick economic growth.

Quick economic growth is achieved by stealing market share. Greece has to steal market share from those who presently produce products abroad and sell them to Greece. Greece has to steal their market share by producing the very same products on her own and “at home”. To achieve that, some “infant-industry-protection” may be necessary (special taxes on imports ranging from 0% on necessary imports to 100% on luxury imports. The EU will have to approve that!).

The risk of “infant-industry-protection” is that it might be misused by clever entrepreneurs. That, however, can be – and must be! – managed!

Finance growth with private capital and not with debt!
Both, Greece’s public and private sectors already have more foreign debt than they can handle. Thus, it is of utmost priority that the new savings of other countries which Greece will continue to need come primarily in the form of private capital (foreign investment). 

Private capital does not move by mandate; it moves by incentives. If the right incentives are offered, private capital moves very quickly.

Greece should implement a new Investment Law particularly aimed at foreign investment. It should offer foreign investors the kind of security and internationally competitive business framework which will incentivate foreign capital to move to Greece. Since foreign investors are unlikely to have confidence in Greek laws at present, Greece should request the EU to guarantee compliance with that law.

New investment and exports
It would, of course, be ideal if new investment would also stimulate export growth. That, however, cannot happen overnight in a significant way because foreigners will not buy Greek products only because they are cheap. To build up export cultures and structures is necessary but, again, it requires time.

Under no circumstances should Greece become an “elongated workbench” for foreign multinationals because multinationals tend to come and go. What Greece needs is sustained growth and development.

Stop official capital flight via bank accounts!
As pointed out, the challenge for Greece is to attract the savings of other countries for her own growth. Against this background, it is absolutely unacceptable that the savings of Greeks could – completely legally – be transferred to bank accounts abroad. Capital controls will have to stop that (and the EU will have to approve that).

Accept advice from others!
McKinsey, for one, has prepared a report showing how 500.000 new jobs (and 50 BN EUR new GDP) could be created in Greece over the next 10 years. That should be one basis for preparing a longer-term development plan!

The EU Task Force has issued its 1st Report full of recommendations how to improve efficiencies in Greece’s public sector and in the economy. That should be an action plan which should be given full support!

Do good deeds but also talk about them!
Greeks, like most other people, are likely to make sacrifices if they only know that this serves a longer-term good for themselves and for their children. Communicate with the population! Explain to the population where you have been, where you are now and where you are planning to go, and why all of this makes sense and is for the better! Create ways how the population can feel that they can contribute! Trigger excitement and emotions! (“Ask not what your country can do for you. Ask what you can do for your country!”).

The crux of the matter: the young generation
Bear in mind that, if you do not succeed, a good portion of today’s well-educated young generation will not spend their adult life in Greece. Instead, other countries will be thankful to Greece for having educated that young generation so well. And the drain will not be limited to the young generation. The drain will encompass all those Greeks who can get those rewards for their skills and talents in other countries which they would prefer to get in Greece but which they cannot get here.


  1. Dear Mr Kastner,

    of course the lack of will of the Greek elite to change the structure of Greek economy is a true problem. Nevertheless, even if there was brainpower in the political system of Greece, capable and willing to change things, still there are not many things than can be done.

    Greece currently is governed by its creditors. No serious and strategic decision can be made without the approvals of Merkozy. When Mr Papandreou came up with the poll idea. Immediately, Mr Sarkozy & Ms Merkel called him for a meeting in Cannes, where he was forced to 'change' his mind.

    The same occurred when Mr Samaras (probably next Greek priminister) was speaking about re-negotiation and change of the current economic measures taken. He was forced to send a written approval to the EU.

    You could say that of course Greeks should be willing to take matters in their own hands and get rid of those politicians. You are right, but it is not that easy, because of the propaganda.

  2. First, each of the 8 points which I listed could be initiated by Greece on her own. A couple of them would require EU approval (like the EU guarantee for an Investment Law) but I would like to see an EU which refuses Greece to implement policies which are good for the country. And even if they did refuse, Greece could march on with the others (or chance a fight with the EU).

    To me, the idea of a referendum as a negotiating ploy was one of the best ideas one could have come up with. That opportunity was passed over. Note: the idea of a referendum as a referendum was silly because even if you get 51%, there are still 49% against you. See my post on this.

    Finally, I am not naïve to suggest “if you have incompetent politicians, just elect others”. That would obviously be phantasy. Waiting for politicians to take the right initiative may by a long wait. But if others take the initiative; if their proposals become public and generate support from the public; etc., then it will become increasingly difficult for politicians not to react to such initiatives.

    And who would be the others? You got it --- Greek brainpower!

  3. Dear Mr Kastner,

    your point is valid, if we were living in an ideal democratic world, but this is often not the case.

    Usually, in small countries the politicians are obliged to care for the interests of great powers FIRST and then to look for the national interests. Look at now, that the EU is almost blackmailing Mr Samaras to commit to implement a program, which for the time being is a total failure.

    Nonetheless, I agree than change can come outside the political world. For instance, current account deficit was -16.5% in 2008. Now it is close to -8%. Imports are decreasing & exports are increasing.

    Entrepreneurs, workers & consumers could become the solution.

  4. I am glad you noticed the decline in imports, the increase in exports and the improvement in the current account. But -- that happened more or less by itself. Imports declined because there is less money around and less economic activity. Mind you, a decline in imports without compensating new domestic activity translates into a declining standard of living. That process could easily be "managed" by reducing imports even more and substituting them with domestic acitivity.

    Why exports increased in such impressive percentages like in the last year I don't know. But look at the export numbers. They are relatively small so that even high percentage increases don't make make all that much difference in the shorter term. Now just imagine how much more profitable exports would become to Greece if Greece did not export bulk but, instead, consumer-ready products. It shouldn't be such a great challenge to put olive oil into bottles. And it shouldn't be all that difficult to market Greek products directly to individual European countries instead of distributing them through Italian distributors (who thus keep much of the margin).

    These are just a couple of ideas offhand. If you really want to see interesting improvement challenges/projects, look up the 1st Report of the EU Task Force. If Greece manages to implement all that is listed there, it will take a number of years but at the end of this process would indeed be a new and prosperous Greece!

  5. I don't know whether you have seen the posting linked below.