Tuesday, February 28, 2012

Looking at Greek statistics...

I have commented on budget statistics for 2011 before. Those interested in national accounts are recommended to visit the website of the Bank of Greece which publishes excellent statistics about the Balance of Payments as well as the banking sector. Some excerpts are below.

1. The current account deficit declined 8% to 21 BN EUR in 2011. That is wonderful news! Or is it perhaps not? Actually, it is quite impressive when comparing it to the current account deficit of 35 BN EUR in 2008, but one has to take a closer look at the numbers.
2. Exports increased 18% to 20 BN EUR. How about that for a country which, according to all wise men, has lost its international competitiveness?
3. And imports? Well, imports couldn't be curtailed but at least their growth rate could be cut to 5%. So when exports increase by 18% and imports only by 5%, one should expect that things are going real well. Are they?
4. Well, it is certainly more promising to have export growth than not to have one. Particularly when exports grow that much faster than imports. But the absolute level of imports was still excessively high in 2011.
5. Imports were 48 BN EUR in 2011. That is 2,3 times the level of exports! Put differently: for every Euro which Greece receives from exports she spends 2,3 Euros on imports. Mathematically, this translates into "spending more than one earns".
6. Exports covered only 43% of imports. To understand why Greece is so much different from all other PIIGS-countries: in troubled Italy, exports still cover over 90% of imports (and Italian exports are almost 2 times the entire GDP of Greece). Even in the USA, the world's import champion, exports still cover imports by almost 80%.
7. Greece has the advantage of having foreign income from other sources than only exports: Greece has tourism, shipping services, etc. However, the net contribution from these sources is "only" 6 BN EUR. Thus, the trade deficit of 27 BN EUR is reduced by those other sources to a current account deficit of 21 BN EUR.

Without continued funding from abroad, Greece would nearly overnight have to reduce her spending abroad by about 21 BN EUR. How could that possibly be accomplished?

Well, Greece could stop paying interest on all existing foreign funding (about 10 BN EUR). The argument would be: "If you don't fund us any longer, we won't pay you interest either". But that still leaves a hole of about 10 BN EUR.

I doubt that increases in exports and/or tourism could do all that much to cover this remaining hole. Thus, here comes the bad news and this is the worst-case scenario in the case of a disorderly default.

The bad news is: Greece would have to impose radical import controls. At least 10 BN EUR would have to be cut out of the present level of 47 BN EUR of imports. Since there are essential imports such as energy, medicines, etc. which could not be "touched", so much more has to be cut out of other imports. Greece would certainly survive without imported luxury goods, smartphones and the likes but still: since the living standard of Greece is imported, a cut in imports translates into a cut in living standards.

I recently read in the Ekathimerini that, despite billions of EU-grants for agriculture in the last 3 decades, Greece is still a major importer of agricultural products and foodstuffs. One thing is for certain: once the point is reached where Greece may not have sufficient funding to pay for those kinds of imports, then the crisis will have reached its peak!

No future perspective without respect for State of Law!

I am amazed at the business-as-usual reaction so far to the proposed implementation of the so-called Collective Action Clauses (CAC) in Greek bonds. Mind you, to have a CAC in a public bond is indeed business-as-usual. In fact, I was surprised to see that Greek bonds apparently do not include CACs.

Where confidence in the State of Law starts shivering is when new laws/regulations are implemented with retroactive effectiveness, whereby it is immaterial whether it is a new law governing sovereign bonds or any other new law.

I have never heard anyone argue credibly that a civilized society can advance without a well-functioning State of Law. It is not only that laws must exist; there must be a shared belief in society into that State of Law.

Any retroactive effectiveness of a new law severely shatters the belief in the State of Law. Going forward, every potential foreign investor in Greece will have to ponder in depth to what extent he can trust laws which may be changed with retroactive effectiveness.

Personally, I think to "play around" with retroactive effectiveness of a new law is about as good an instrument to scare foreign investors away as any!

Wednesday, February 22, 2012

The Battle of Greece --- probably lost!

I remember the election campaign 2009. The face of a loud, well-fed ruling Prime Minister was on TV all of the time and I kept asking my wife where his opponent was. Every so often, she pointed to a quiet face on the screen. I told her that this man would never win an election. Mr. Papandreou won the election, nevertheless.

With Mr. Papandreou, I became a champion of the "Greek Cause". Perhaps it had to do with the fact that we both had been formed at the same university but, still: for once, here was a serious face with a serious demeanor and a very smooth and gallant way of handling himself. On one of his visits to Germany, I watched him in the company of Angela Merkel and the President of the German Chamber of Commerce. That President was the typical German professor; Merkel was the "Mutti"; and Mr. Papandreou showed class.

Perhaps showing class was all that Mr. Papandreou could do. There is ample evidence to that effect. However, whatever positive image he as a person could build up of his country, that image is gone. The price for having lost that image is something which future generations of Greeks will experience.

There are masses of Greeks who are going through extremely dire straits these days. There are, surprisingly, quite a lot of foreigners, sort of modern day Lord Byrons, who are discovering their passion for the Greek people. Perhaps a cult it being born.

But politics and finance are no places for sympathy and emotions. It's the hard facts which count in order to make money move. This is no time for romantics.

The hard facts are that Greece has, justifyably or not, totally lost credibility and reputation. "Would you buy a used car from a Greek?" --- how do you think Europeans would answer that question today?

A forgiveness of about 100 BN EUR in sovereign debt? That is an amazing number! I have no facts but I would guess that never before has so much debt been forgiven to a country in such a short period of time! A country of the First World, that is! This could be a world record which future Greek generations will, sadly, often be reminded of.

The impression settles down that EU-leaders have given up on Greece; that they have had "enough of Greece". Give them one more (final?) shot of oxygen to gain time for the stabilization of banks and the ringfencing of Greece (and perhaps the French election) and then move on to more important matters.

Anyone with experience in banking knows that it takes time to build up credibility and reputation, but both can be lost in a short time. Once lost, they are gone for a long time.

I see no way how the Battle of Greece can still be won without a complete change of pace and scenery at the leadership levels of the country. Not only for the benefit of foreigners. Above all for the benefit of Greeks. I just can't imagine that there is still a majority of Greeks who feel that their leadership is properly representing what Greece is all about.

Is this the call for an "Orange Revolution"? No, it is not. If anything, it is the call for a "Blue Revolution"; "blue" like in sky and sea of Greece. Should the rioteers of the streets of Athens be the leaders? No! The leaders should come from those decent, hard-working, friendly and open-hearted Greeks who, hopefully, still represent the majority of the population.

But the far better way would be for Greek leadership at all levels to act like the Japanese do. When Japanese leaders fail completely in their duties, they bow their heads and apologize to everyone they have caused damage to, and they leave office. Some even commit suicide. I am not pleading for suicides but I am definitely pleading for the Greek leadership to step aside and allow a completely new generation of Greeks to attempt a new beginning for the country!

In my view. this is the only way to keep the hope for winning the Battle of Greece alive!

Tuesday, February 21, 2012

On the advantages of being competitive

In an interview with Der Spiegel, Prof. Sinn - a staunch advocate of a Greek Euro-exit - said the following:

"After returning to the Drachma, Greece would again be competitive. Greek products would suddenly be cheaper again (than imported products) and that would drive demand away from imports and towards domestic products. Greeks would no longer buy tomatoes and olive oil from Holland and Italy but, instead, from their own farmers".

Here is the key message put in very simple terms, so simple that even a high school student would understand it.

I would only add the following: Greece doesn't have to leave the Eurozone to achieve the above effects. Greece could hold on to the Euro but simulate a situation as though she had returned to the Drachma.

The first step would be to implement special taxes on these imports, thereby making them more expensive. Greeks would no longer buy imports but buy local products instead. This, however would only be a benefit for the Greek producer because he can now sell much more than before at good prices. The consumer suffers because he now has to pay higher prices for those goods.

Thus, the above first step would have to be accompanied by a second measure: the Greek producer must be given a clear time frame within which he has to be able to produce at internationally competitive prices, or else lose all protection right away.

Prof. Sinn argues that a Euro-exit is the only way for Greece to regain competitiveness. I agree that it would certainly be the most effective way. I still argue, though, that there are other ways as well (such as the above) even though none would be as simple as a Euro-exit. My point is, however, that a Euro-exit would have phenomenal collateral damage for Greece and Greeks, and one would be wise to explore all alternatives how this collateral damage could be avoided before jumping the gun on a Euro-exit.

Monday, February 20, 2012

Greece is "burning" 50 BN EUR annually of other countries' savings!

At year-end 2009, the external debt of Greece was 413 BN EUR. At year-end 2011, two years later, that external debt was approximately 510 BN EUR, almost exactly 100 BN EUR higher.

Please ponder the dimensions of these figures!

A country of about 11 million people with a GDP of about 230 BN EUR added about 50 BN EUR per year (that is: fifty billion Euro!) in external debt in the last 2 years (for the period 2001-10, it was about 40 BN EUR per year). And there is no reason to believe that this number will be a lot less in 2012.

Here is a country literally "burning" the savings of other countries. And that trend is not stoppable as long as Greece adheres to the free movement of goods and capital (EU-freedoms). Some people even argue "as long as Greece remains in the Eurozone".

Again, it is the dimensions of the problem and the inability to stop the process within existing EU-treaties!

This blog has argued from the start that Greece urgently needs to implement special taxes on imports and capital controls. Not having done this yet has cost the savers of other countries 100 BN EUR in the last 2 years.

If special taxes on imports and capital controls are not implemented any time soon, then I will have to change my position and argue that the sooner Greece exits from the Eurozone, the better for her (and all the others). Then the EU should even consider giving Greece a grant of, say, 100 BN EUR to handle the Drachma-transition for the next couple of years.

That 100 BN EUR would be an investment for the EU (and not an expense).

Sunday, February 19, 2012

ECB the largest creditor of Greece? No, it's the Deutsche Bundesbank!

There has been much discussion about the ECB's being Greece's largest creditor through its holdings of Greek sovereign bonds. That may well be true but the largest individual creditor of Greece as a country is the Deutsche Bundesbank! The Bundesbank has allegedly (there is never official confirmation of such figures) about 100 BN EUR Target-2 claims against the Greek banking sector.

These Target-2 claims of the Bundesbank are actually claims against the ECB but if Greece exited the Eurozone, the ECB wouldn't collect on their claims against the Greek banking sector and neither would the Bundesbank collect from the ECB.

De jure, the Bundesbank is only liable for about 27% of that amount; the other 73% would have to come from other Central Banks. That will be fun to watch when the Central Bank of, say, Finland (which may not have lent anything to the Greek banking sector) may have to come up with money because the Bundesbank has lent too much!

If Greece exited the Eurozone, the Bundesbank is likely to lose much of the 100 BN EUR. If the Eurozone breaks apart, it loses all of it (plus another 400 BN EUR of claims which it has to other PIIGS banking systems).

If that isn't a good motivation to keep the Eurozone alive, then I don't know what is...

Austerity? Perhaps...Cheap? For sure!

Flash-back to early 2009. We had just found a beautiful apartment at the outskirts of Thessaloniki and had to furnish it and bring it into shape. In a short time, we got to know all sorts of Greek prices: prices of furniture, household applicances, etc.; cost of hourly wages (of Albanians; one couldn't get a Greek technician); cost of shopping at Gran Masoutis; cost of entertainment at the Cosmos Mediterranean; cost of inviting the greater family to a Sunday lunch at a Nea Krini restaurant; etc.

We still lived in Munich at the time and, consequently, I was comparing everything to Munich prices (Munich is one of the more expensive places in Germany). I asked the relatives/friends of my Greek wife: "How in the world can Greeks afford these prices?"

Lehman had gone under a few months ago. Eastern Europe was feared to fall and rescue plans were being talked about. Nobody talked about Greece and the Southern Periphery. Except one person.

Dr. Michael Huether, Head of the respected Institut der deutschen Wirtschaft in Cologne, gave a talk at a private gathering of bankers and businessmen. His focus was on Eastern Europe and how the risks emanating from there could/should be contained. And, sort of in passing, he made the following comment:

"And, make no mistake, once we have a rescue program for Eastern Europe, we will definitely also need a rescue program for the Southern Periphery".

What? A rescue program for the Southern Periphery? Does this man know how well things are going in, say, Greece? Most banking systems were struggling with the consequenes of bubbles; sub-prime, real estate or otherwise. The Greek banking system did not seem to be involved in any of those bubbles.

And yet - every time we returned to Greece that year, I was simply shocked by the high price level there. When, towards the end of 2009, it became clear that Greece was headed for trouble, too, I kept repeating the same phrase over and over again to everyone who wanted to hear it or not, namely:

"Greece will only have a chance again when she becomes cheap!"

My Greek wife, of course, thought otherwise. She was certain that Greeks had discovered the perfect way of living. Until one day when we were having lunch at a small sea-side taverna in Chalkidiki.

The owner, a Greek born and raised in Germany, had quickly classified us as cheap tourists because my wife studied the prices in the menu. When she saw that a tomato salad went for 8 Euros, she - still politely - criticized the owner for charging such a price. I guess she was expecting him to apologize for that and that he would make a special price for her as a Greek. Instead, he told her - in German and in rather arrogant fashion - that this was the price he charged; period. My wife's emotions rose but she was still controlled when she said that she would pay half that price in Munich. The owner pointed to the beach and the blue sea and asked arrogantly, again in German, whether she would get that view in Munich. And if she wanted that view, then she would have to pay for it or else go back to Munich.

At that point my wife started shouting at him in Greek...

Saturday, February 18, 2012

Prof. Hans-Werner Sinn interviewed by FAZ

Below are excerpts from a very powerful interview which Prof. Sinn gave the FAZ.

"Greece has no chance to become competitive in the Eurozone. She would have to deflate prices by 31% in order to reach the price level of Turkey".

"Greece must leave the Eurozone. If we expect Greece to reach competitiveness through deflation, the country will break apart. European politicians can say the oppositve ten times but certain things are not possible economically".

"The insistence on wrong prices is the Eurozone's foremost problem. That can break the Eurozone apart. The debt problem is minor in comparison. The South European countries have not come any closer to the solution of their problems. They should take Ireland as an example where prices vis-à-vis their trading partners fell by 16% in the last 5 years. Ireland had a current account deficit of 4% and now the current account is in surplus!"

"Greece lacks an export lobby which would pressure for deflation so that competitiveness returns. Instead, Greece as a strong import lobby which resists defaltion because that would ruin their business".

"It would be better to give the 130 BN EUR to Greece as transition aid for a return to the Drachma".

"There are 3 options: (a) we continue to finance the current account deficit of about 10% (which will eventually convert to gifts); (b) Greece exits the Eurozone; or (c) Greece deflates dramatically. The latter will never be accepted by the unions".

"The Target-2 financings have made Germany subject to blackmail because everyone knows that the Bundesbank would presently lose 500 BN EUR should the Eurozone fall apart; and that number is increasing. Germany is condemned to save the Eurozone".

"Mrs. Merkel is being pressured from all sides to assume all the risk. Against that pressure she has developed the strategy of muddling through. She opens her pocket book when the pressure gets too much but she doesn't give everything she has because she knows that her friends would lose interest in her if she did. She tries her best but were are trapped, nevertheless".

Thursday, February 16, 2012

I love your music, Mr. Theodorakis but your views are dangerous!

Mikis Theodorakis published an open letter alleging a conspiracy between certain Greeks and foreigners to destroy Greek society and Greece.

English version
German version

No conspirancy would find followers if it didn't include elements which either appear to be true or even are true. Mr. Theodorakis states many facts which are true and some which appear to be true.

I would agree with him when he says that "the Greek people became victims of the robbery duet between Germans and Greeks who enriched themselves at their expense".

Since he didn't clarify what he meant by "Greek people", I will offer my own definition. I would mean by that the masses of Greeks (hopefully still the majority) who are decent, correct, hard-working, friendly and open-hearted people who work tirelessly so that their children can have a better life. These "Greek people" probably had not much of a benefit from the Euro-party.

And instead of the "Germans" I would probably clarify that Germany accounted for about 15% of Greece's current account deficit since the Euro. Thus, there are another 85% somewhere who had fun with the Greek Euro-party, too.

Mr. Theodorakis is blatently wrong and misleading when he says "Mr. Papandreou could have countered the international crisis of 2008 by taking up foreign loans at 5% interest. Had he done that, there wouldn't have been the slightest problem for our country. On the contrary, the opposite would have occurred because we were in a period of economic upswing which means that our living standard would have increased even further".

I will not argue why this is wrong because it is so obvious. Details can be found here.

Why is this so dangerous?

It is always painful to be a victim. Anyone who wants to manipulate people to rise AGAINST something or someone will project on to them the victim's role. The victim does not think rationally. The victim pains and reacts to pain irrationally. Convince someone that he is a victim and point out to him how he can get revenge, and you have control over him.

What Greece needs now are leaders who can motivate people to rise FOR something. For a better future; for a better Greece; for a better world for their children.

About a year ago, the Huffington Post published an article titled "What Greece needs now is a new hero".

That is, indeed, what Greece would need now. And I would love Mr. Theodorakis to compose some beautiful music for that new hero instead of appealing to some of the worst human instincts (such as feeling to be the greatest victims in the world).

Greek government expenditures - Interest expense

With so much discussion about the state of Greece's public finances, it would be helpful to have a set of simple statistics which would allow the "normal" reader to understand what's going on. Instead, there are different sources of information (Greek Ministry of Finance, European Commission, IMF, etc.) which not only report in different formats but, oftentimes, work with different numbers. Above all, they simply love to work with "percentage-of" numbers.

In a restructuring, one has to start with numbers in absolute amounts because one can manage only absolute numbers and not percentages thereof. The "percentage-of" statistics are useful for subsequent analyses.

If, say, total expenses are 100 and one wants to reduce them, one needs to budget, say, 95 for the next period. Now it may well be that even though the expense reduction is achieved, "expenses as % of GDP" still increased. This happens when GDP declines even more than the expense reduction.

I have taken numbers from the following sources:

IMF Report #11; December 2011; page 55
European Commission Fifth Review; October 2011; page 101

Since the numbers differ quite a bit (perhaps due to the different publication dates), I will only use the IMF numbers.

Start with "primary expenditures". That is general government expenses without interest expense, the most important figure to control in any restructuring (because the interest expense can be negotiated with creditors). Primary government expenditures were 111,8 BN EUR in 2009. This is the number which will either be reduced or, as has been suggested, increased beyond control.

In 2010, primary government expenses were 101,3 BN EUR, or 9% less than in 2009. Expenses exploded out of control, as has been suggested? Well, a minus 9% is not really an expense explosion out of control.

In 2011, primary government expenses (latest projection) were 92,8 BN EUR, or 8% less than in 2010. Again, an expense explosion out of control cannot really be recognized.

One could go into expense details and state that wage expenses in 2011 were 19% lower (!) than in 2009, and in 2015 they are projected to be 33% lower (!!!) than in 2009.

Now to the interest expense. In 2009, they were 12,3 BN EUR and they increased by 2% to 12,6 BN EUR in 2010. Then, from 2010-11, they increased by 17% to 14,7 BN EUR. I have to admit: there is some expense explosion recognizable here.

And now is the time to move on to "percentage-of" figures. Interest expense as a percentage of primary government expenses increased from 11% in 2009 to 12% in 2010 to 16% in 2011.

The revenue side is a bit more complicated because there were substantial increases in taxes offset by a break-away in the tax base. Thus, revenues increased from 87,7 BN EUR in 2009 to 89,9 BN EUR in 2010 (+2%) but in 2011 they fell back to the level of 2009.

The "primary balance" is positive when revenues are equal or greater than primary expenditures. When the primary balance is positive, no new debt is required (unless there is interest to be paid). Greece is expected to have a positive primary balance in 2012. If tax revenues had not broken away as much as they did, Greece might have even achieved a positive primary balance in 2011.

So here it is. It all boils down to the interest expense. The mistake has been made to think that the interest expense can only be reduced by reducing the level of debt (i. e. haircut). A very, very unfortunate mistake, indeed!

Lower debt doesn't necessarily mean less interest expense: an increase in interest rates could compensate for the reduction in debt. There are 2 very effective ways to reduce the interest expense for a budget:

The standard way: just lower the actual interest rates charged.
The non-standard way: keep the interest rates where creditors want them to be but negotiate that only part of it is paid in cash (the rest capitalized).

Only the cash portion flows through the budget. On one hand, that is a benefit for the budget and on the other hand the creditors can still allow themselves to believe that, eventually, they will get the entire principal and interest paid (they won't, of course, but that is for the next generation of creditors to find out...).

What are some of the conclusions from the above?

1) Contrary to popular belief, the reduction in primary government expenditures has actually been quite substantial. To reduce primary government expenditures in absolute amounts by 17% within 2 years strikes me like it could be a world record.
2) If Greece could start from scratch again in 2012 (i. e. start without any debt), she would not need to borrow money to pay for government expenditures.
3) If only part of the time which has been spent on the subject of PSI would have been spent on negotiating more ceative ways to charge interest, everybody would be better off today.

Tuesday, February 14, 2012

Wow! This will trigger some discussion in Germany! (and elsewhere)

Robert-Bosch-Group is one of Germany’s most prominent multinationals. It is a symbol for the real economy (as opposed to the shadow economy of financial markets). When the Chairman of the RBG talks publicly in Germany, it is like Warren Buffett talking publicly in the US.

Manager-Magazin will publish an interview with Franz Fehrenbach, CEO of RBG, on February 17. Excerpts have been made public today.

Mr. Fehrenbach calls on Greece to leave the EU and the Eurozone. He calls the Greek system “rotten” and describes Greece as an unbearable burden for a solidarity union. "This country of phantom pensioners and rich tax evaders, a state without a functioning administration has no place in the EU". If necessary, the EU should expel Greece from the EU.

I see two possibilities: either Manager-Magazin will be pressured not to publish this interview or, if not, this interview will cause shock waves in Germany, if not in other countries as well.

Monday, February 13, 2012

More on misguided mindsets

I had made a post on passionate but misguided mindsets to which I received a very interesting reply. Below is that reply as well as my reply to it.

I fail to understand how this mess is related to selfhelp...

in all relationships, including borrower & lender there are two needed to tango. Could Greeks borrow if no one lend them? No, and why did they lend them? ...but to make money of course! and where did the borrowed money go? Italian clothes, French supermarkets, German cars tanks & submarines, American fridges & films... (that made many CEOs happy back then)

Yes, there were a few corrupt ones, just like the ones that exist all over the world (don't forget that the Siemens case started to unfold in US...), Greeks are not so good in hiding it... in other countries corruption is institutionalized!

Please, lets stop pretend about the bad Greeks and the innocence of the EU!

Please don't interprete this as though it were addressed to you personally because it might offend you and I don’t want to offend you.

The normal reaction to a sentiment which you also display is: grow up! Don’t look for excuses elsewhere even if there were good such excuses! Teenagers may lament to their therapists how they are helpless products of their parents’ mistakes. That’s fine. But at some point, everyone needs to start assuming responsibility for oneself, otherwise we have to trace the line of guilt back to Adam & Eve.

I am not saying that all Greeks are bad and that all the EU is innocent. If you browse through my blog, you will find that I am actually saying the opposite for the most part.

But what I definitely would say to all Greeks is: please stop putting yourselves into the victim’s role! I mean, you have got to have much more of a feeling of self-worth than to do that all of the time. Putting oneself into the victim’s role automatically means that someone else is put into the usurper’s role. And I really don’t know who in the world would be out to intentionally usurp Greeks. If you have an idea who that could be, please let me know. If you tell me it’s the Germans, I will explain to you with facts why you are wrong.

Since my wife is Greek, I have some understanding of what 400 years of foreign occupation can mean to the feelings of self-confidence and self-worth of a people. During those 400 years, other European “people” went through almost uninterrupted wars while Greeks had to be “subservient”. Those European “people” who survived those battles obviously came away with a greater feeling of self-confidence and self-worth than others who did not have to go through that process.

I have met many Greeks when I lived in the world’s 3rd largest Greek city (Chicago) and through my wife I have met many former Greek guest-workers in Germany. None of them were cry-babies. They were of the mold that they wanted to do everything possible so that their children would have a better future. They didn’t strike for that (because it wouldn’t have worked); they worked for that!

And that is the mold which I personally would require of Greeks when I am asked to send tax money to Greece instead of using that tax money in Austrian universities.


On passionate - but misguided - mindsets

I came across this article by Marshall Auerback titled Greece and the rape by rentiers. Well...

The former Soviet Communists had a term for those "Westener's" who were quite gullible and who could be used to spread disinformation. They called them "useful idiots". Quite a few learned graduates from Oxford and Cambridge found out later that life in Moscow was not God's answer to happiness.

I had a similar gut feeling when I read Auerback's article, which is why I commented on it as below.

This is a very biased article which ignores the roots of the problem and uses the incompetence of EU-elites in order to classify them as scapegoats for the Greek crisis.

Yes, Greece has been raped by rentiers but it was Greek rentiers who were the rapists. In the last 2 years, EU-incompetence has allowed other rapists to jump on the bandwagon. A bad symptom but far from the root of the problem.

The root of the problem is so obviously 3-4 decades of utter mismanagement – if not intentional “rape” – by Greek elites. Mostly the main power centers in Greece — political parties, business leaders, professional guilds, public sector unions and the media — which are now fighting to preserve their privileges, blocking structural changes that could make the economy more functional.

This began with Greece’s joining the EU which set loose the flow of grants (according to one source: about 75 BN EUR to date). It was accelerated by Greece’s joining the Eurozone for which she was not fit. This mistake accelerated a trend but did not cause it. What happened up to 2008/09 goes exclusively on the account of Greek responsibility.

Had Greece not received the EU grants nor the cheap Euro-loans, the country’s standard of living would today be like in the 1970s.  It could well be that Greeks would still be happier today because not having something is one thing and losing something one got accustomed to is quite another. The point, however, is that much of the country went through a sensational increase in living standards without realizing that this had nothing to do with increased productivity and/or value creation but, instead, it was exclusively a function of money flowing into the Greek economy from the outside.

The unemployed who hits a jackpot may live well for, say, 10 years if he decides to spend it all on consumption. When the money is gone, he has to return to the standard of living of 10 years ago. Much worse for the Greeks because they didn’t hit a jackpot but, for the most part, took on debt which is still there.

In the last 2 years, Greece has shown little if any initiative to help herself. Greece’s focus has been on lamenting how she got into trouble and pointing out to others (EU, etc.) how they could solve the Greek problem (i. e. Eurobonds). Other than that, the Greek government – beginning with Mr. Papandreou – handed over from the start the responsibility for solving Greece’s problems to the EU, IMF, Troika, etc.

If there ever was a plan from the Greek side how they could get out of the self-created mess, I have overlooked it. Complying with Troika commands is not a plan; that’s a job for cost-cutting bookkeepers. How to get the Greek economy going again, that would require a plan. It’s not going to happen by itself!

And why should other nations worry about a plan for the Greek economy which plan Greeks could make just as well on their own? Help for Greece? Of course, but it depends on what is meant by help.

Any society which has been through the period of Enlightenment knows that "help to help yourself" is the only help which leads to sustainable results.

Central Europe had the Period of Enlightenment only a couple of centuries ago. Greece had her own Period of Enlightenment over 2,000 years ago. The philosophers of Enlightenment in Central Europe derived their thinking from Greek philosophers over 2,000 years ago.

Should Central Europeans now "educate" Greeks how to help themselves? No way; that would be an insult to Greeks! Central Europeans should tell Greeks that it's up to them to help themselves. If they need support in that, Central Europeans should definitely grant it!

What is "help for Greece"

Let me offer a very simple definition.

Help for Greece is anything which creates new jobs, which new jobs pay income taxes, which new companies pay corporate taxes and whose owners pay taxes on dividends.

If one bears that overriding priority in mind all the time, perhaps one will come up with some solutions.

Lessons to be learned from Greek past - UPDATE

In a previous post I have made reference to Greece's history of defaults and/or non-compliance with loan agreements. My caveat was that I had not done any primary research on the subject.

I have now come across two articles which shed more detailed light on the subject. They are:

The history of Greek sovereign debt defaults
Greece: long framework of occupatioin, looting, wars... and defaults

Saturday, February 11, 2012

Government expenditures/revenues - different cultures

The debate tends to focus on budget deficits. More interesting is to compare the level of government expenditures and revenues among the Eurozone as well as EU countries.

On average, the governments of EU countries spent about 51% of GDP and had revenues of 45% of GDP in 2010. Individual countries deviated from the average quite significantly.

Some countries (particularly in Scandinavia) had high expenditures (close to 55%) but they were also prepared to pay high taxes. There is not one country which limited expenditures to 35% or less, but there are countries (mostly in the South) whose revenue base is low (about 35%).

The real problem are countries which have a low revenue but a high expenditure base. Greece is high - but not at the top - as regards expenditures. Greece is low - and close to the bottom - as regards revenues.

Greece's government expenditures were 50% of GDP, slightly below the EU average. That may come as a surprise to all those who critize Greece for uncontrolled government spending.

With 39% of GDP, Greece's revenue base was far too low in comparison with her expenditure base. The deficit was, consequently, 11%.

If Greece had had the average EU revenue base of 45%, the budget deficit would have been only 5%. Here one has to consider that Greece's interest expense (included in government expenditures) is enormous!

If Greece had had Austria's revenue base of 48% of GDP, her budget deficit - despite enormous interest costs - would have been down to 2%.

Now here is the million-dollar-question: why should foreign tax payers come up with the money to cover Greek government expenditures which money Greek tax payers are not prepared to come up with?

Answers are welcome!

Remembering a tale from High School

Half a century ago, we had a most interesting history professor in an Austrian Gymnasium. Since the teaching of history, then, ended with the year 1918 (because Austrians did not want to teach about their role in the 1930s/40s...), our professor had much time to teach us other things. One of the things he taught us was how the Austrian economy worked after 1945. Here is his story:

"Children", so he called us teenagers, "we (Austrians) don't have oil and we don't produce cars, but we need oil and want to drive cars. Thus, we have to import a lot. Since we need foreign currency to pay for those imports we must find ways to obtain foreign currency. Thus, we have to try to export as much as possible but, as a small economy, we cannot export enough to pay for all the imports. So we have to find other ways to obtain foreign currency and one of them is tourism. The more tourists come to our country and the more foreign currency they leave here, the better our chance to close the hole between the imports we need and the exports we have. And since that hole cannot be closed even after tourism, we need to be a very attractive place for foreign investment so that foreign investors bring us their money and the government needs to keep its household in order so that it can borrow money abroad".

That sort of says it all!

Also for Greece!

Friday, February 10, 2012

Some good news

Since the upcoming weekend is likely to be a tough one for Greece, I make reference to this very good news published in the Kathimerini a few days ago. As a matter of fact, if the facts are indeed as presented in the article, one would have to say that they are very good news and that Greece needs to be congratulated!

"Fake" or "honest" help for Greece?

Let’s assume that after WW2, the US had lent Germany billions so that Germany could have serviced the 3rd Reich’s debt. Would that have been “help for Germany”? Instead, Germany’s debt was forgiven and the German Wirtschaftswunder was jumpstarted with the Marshall Plan. That was “help for Germany”!

Some of the things which have been done to date have indeed been “help for Greece”. The EU Task Force would be a prime example. But to call the using of Greece’s balance sheet (and tax payers’ money) to bail out banks is everything but help for Greece. Most of the charade we have seen so far is nothing other but a recycling of money.

The real trouble is the difference between Germany/Germans after WW2 and Greece/Greeks today. After the disaster of the Nazi-era, one could be fairly sure that whatever jumpstart-help one would provide for Germany, the Germans would use it wisely. In Greece, unfortunately, it is very difficult to imagine that jumpstart-help would be used wisely. Realists would argue that much of it would quickly land in private accounts in Switzerland.

Here is the problem. How can one invest new funds wisely in an economy which has the lowest EU-rating as regards the ease of doing business (World Bank) but the highest EU-rating as regards corruption (Transparency International)?

Nevertheless, without new investment, primarily new foreign investment into the private sector, Greece will soon be a political powder keg at the EUs Southeastern corner. That can’t be in the interest of the EU, either.

One alternative would be not to send money to the private sector but machinery & equipment instead. There may be other alternatives. But all the efforts should really be spent on those kinds of considerations instead of the money-recycling which has been going on for 2 years now.

Wednesday, February 8, 2012

Face the truth, Greeks! ...and foreign creditors as well!

Let me put it so simple that even a high school student will understand:

Greece as a country (not only the government) owes about 500 BN EUR to foreign creditors and every month at least another 2 BN EUR are added to this foreign debt (for import payments and replacement of domestic deposits withdrawals).

THERE IS NO SHORT-TERM WAY TO CHANGE THAT! (so why spend so much time on this question?)

The only way to reduce this foreign debt is to forgive it. What's the point of that? You only upset those who have to forgive it. Let them hold on to 100% of their claims! The claims don't matter to Greece; only the interest expense on the claims does. In exchange for letting your creditors hold on to 100% of their claims, negotiate with them that they lower the interest expense for the next, say, 10 years to a level which Greece can afford without jeopardizing the re-building of her economy. If Greece can afford only 2%, fine. Pay 2% in cash. If creditors want 6% instead, fine. Let them have 6%. But tell them that the difference of 4% will not be paid in cash but, instead, will be capitalized.

Here is a common-sense approach to problem-solving: when in deep financial trouble, don't waste efforts on fixing present/past burdens. You can't fix them, anyway, when in deep financial trouble. Put present/past burdens (the 500 BN EUR) aside and spend your time fixing the future. If you are successful in fixing the future, a fixed future may enable you to also fix at least part of the present/past burdens (probably not all of them).

Common sense does not understand why anyone would question "austerity" for the Greek public sector. I mean, there is all the evidence in the world that the Greek public sector, because of its size and inefficiency, is the root of most Greek problems. And now you want to continue to allocate substantial resources to that behemoth? Starve it to death, instead!

Now, the highschool student will understand that total economic activity is the sum of the activities of the private and public sectors. If the public sector is starved to death, the private sector has to compensate for that.

Not Keynes is the medicine for Greece; anti-Keynes is! Not deficit spending of the public sector is the solution; investment spending of the private sector is!

Anyone who has ever been involved with change management will know that it is virtually impossible to change a social system like the Greek public sector within a foreseeable time span. An existing social system of that size has so many self-protective mechanisms that it will devour all reformers.

If you can't change it, make it superflous or irrelevant!

Take Soviet Communism as an example. The old social system could not be defeated; it could only be made irrelevant/superflous by introducing a new social system (and there are still suspicions today that perhaps part of the old KGB-system has survived with Putin).

So what is the common-sense solution?
By-pass the public sector and throw money, very much money, into investments in the private sector. Require the government to approve all legislation necessary so that such investments in the private sector are made.

Where should that money come from?
Ideally, it would be "Greek money" presently invested in, say, Switzerland. Here the trick would be to find ways how that Greek money comes back to Greece voluntarily. My suggestion: offer it the same security as Switzerland does but much higher returns.

Until the Greek money returns, the necessary money must come from places like the EIB or foreign companies who are prepared to invest in Greece if and when the security/return-equation is attractive. The EU could use its think tanks to devise ways how money (or machinery!) can be sent to the Greek private sector.

The only way for Greece to come out of the present mess half-way healthy is a successful private sector initiative. To make that happen is not only in the interest of Greece (by establishing the necessary economic framework for new investments). It is of equal interest of Greece's creditors and, above all, of the Eurozone and the EU. They all will later be better off for it!

Has Germany gamed the Euro and worsened the crisis?

This article in The Atlantic suggests that Germany did. By doing that, the author renders himself as largely ignorant.

The article sounds convincing from the standpoint of a regional economy within the Eurozone. It overlooks the fact that the world has become a village through globalization.

Neither the Eurozone nor the EU nor Europe have an eternal license to run the world. Yes, this small spot on the globe called Europe has exercised dominance for much of the last 2 centuries. But that is only 2 centuries out of the last 2-1/2 millennia and during the rest of the time it was non-European powers/empires which accounted for more than half of the world’s GDP. Were the last 2 centuries the rule or the aberration?

“Europeans”, whatever one means by that, have recently been called the “laziest people in the world” by some commentators/analysts. Spoiled brats, so to speak, who have been accustomed to have somebody else pay for their defense while they could spend their money on welfare states.

Particularly the Eurozone ought to give up its inward-orientation and start realizing that its commercial opponents are outside the Eurozone and not within. Germany is actually one of the few European economies which has learned to do that in the last decade.

At the expense of the rest of the Eurozone? Not really: Germany’s exports into the Eurozone are lower today than they were when the Euro was introduced. Germany has competed with the rest of the world and done so very successfully (note that German car exports to the US were booming during a time of USD decline!). That this strategy has also generated competitive advantages within the Eurozone is a by-product but was not the intent of the game. Germany is winning world markets, not Eurozone markets.

Mind you that, less than 10 years ago, Germany was called the “sick man of Europe”; blamed for dragging down the overall growth rate in the Eurozone; reminded that they should look at, say, Greece which had more than twice the growth rate; etc. etc. Germany had really gotten “sick” during decades of success and putting on fat. Add to that the burden of reunification and the long-term decline of “made-in-Germany” was recognizable. One of the most prominent German economists wrote a book titled “Can Germany still be saved?”

Well, it was – surprise, surprise – a Social Democrat who took the necessary steps towards saving Germany: Gerhard Schroeder with his Agenda 2010. At great cost to the living standard of the average German, he initiated the process which made Germany competitive again in international markets. That deserves praise, not criticism.

Now, it is clear that Germany’s economy has not had a healthy structure since WW2: the German economy can employ its people only because it has so many customers in the rest of the world. Should these customers break away, unemployment in Germany would skyrocket immediately. That is a very significant dependence.

Germany protects against that by hoarding the cash surplus from exports instead of spending it on imports. To a large extent, that is a cultural thing and no one should force any people, neither the Greeks, to change their cultures in the interest of a perceived greater good. Americans are by nature consumption-addicted no-fear-of-debt-having consumers. Germans are the opposite.

However, there is not a single regulation which would inhibit foreigners to sell their products to Germans.

I once had my own company for a few years. I don’t mean to offend anyone but when I had a month of lower sales, I didn’t blame my customers for not buying enough from me. I did soul-searching why I didn’t sell more to them and what I could do to change that.

Make new laws in Germany to stimulate imports? Forget it! Instead, offer products to Germans which they can’t refuse to buy and show German tourists why they should spend all their tourist Euros outside Germany instead of within.

But, please, don’t ask Germans to become less competitive in the world. That wouldn’t be good for Germany but, above all, it would be terrible for the Eurozone!