Tuesday, August 28, 2012

And what if the Troika-program worked, after all?

An economy, like a stock market, is very much a psychological thing. Shared negative views are likely to become self-fulfilling prophecies. However, the same forces work in reverse, too.

Consider only the following two facts: (a) by all measures, Greek salaries and wages have come down significantly during the last couple of years; and (b) not too long ago, the Euro was approaching the exchange rate of 1,60 against the USD; some economists saw it heading towards an exchange rate of 2:1. Today, the Euro is trading in the range of 1,20-1,25 against the USD.

Add both factors together and the conclusion can only be that Greece must have become significantly more price competitive relative to third currency countries.

Exports have increased impressively for quite some time now. The sobering thought is that, despite this impressive export performance of late, monthly exports are now barely at levels which Greece had already had in 2007/8, at a time when Greece was more expensive in Euro-terms and much more expensive in third currency terms.

What would it take to have an obsession with exports to take roots? What would it take to have foreign investors return to Greece because they recognize that local labor cost have become much more competitive (and that there is abundant free labor available!)?

My answer is: it wouldn't take all that much. Entrepreneurs do not need to be told what to do. If anything, the government could incentivate exports a bit with special incentives and/or programs. Once entrepreneurs see that there are good new opportunities, they will jump on them by themselves.

It's a bit different with foreign investment because, there, investors are justifiably worried about the convertibility risk. But any risk can be covered. Clearly, Greece itself cannot cover the convertibility risk of itself. But, remember, there is something called the EU! The EU could provide, only for certain types of activities like new foreign investment, a guarantee for the convertibility risk. The cost of such a guarantee? A piece of paper and a few signatures! The more they provide such guarantees, the more investment would potentially flow and the less worrisome the convertibility risk would appear.

Take this example. The media have just reported that, in July, deposits in Greek banks have, for the first time in a long time, increased substantially.  That is generally interpreted as meaning that Greeks have regained a bit of confidence that the new government will succeed and that the Euro will stay around. Let this happen for another couple of months. At some point, many Greeks will start wondering whether they would not be better off to return some of the Euros which they hoard under mattrasses to their bank so that they can earn some interest on them.

Shared positive views can become self-fulfilling prophecies. To kick the process into motion, one would need a few success stories. If they don't happen by themselves, perhaps one can "help" them a bit to happen.

There are still many well-known international investors who are happy with their investments in Greece. A corporation which has the kind of market share which, for example, Heineken has in Greece can't be all that unhappy with Greece. Perhaps Greece could line up some of its still pleased foreign investors and engage them in some form of a publicity play. Let's just dream a little and assume that Heineken would go public with the following announcement: "After 3 years of recession, we see light at the end of the tunnel in Greece. We believe that now is the time to make new investments in Greece, particularly for export to non-Euro Balkan countries!" And if the words were followed by respective action on the part of Heineken, others would take note.

Let's just assume, hypothetically, of course, that there had not been any bad news about Greece in the last couple of years in the media. Would the crisis have become as bad as it is? Why could that not be put to work in reverse?

I remember something someone who suffered from periodic bouts of depressions once said: "I know that the road into the depression is like hell. But I also know that, at some point, I will get out of it again and that nothing is as pleasurable as the road back. So, on my way there I force myself to think of the way back".

I would argue that it is almost a question of mathematics that, eventually, Greece will have hit rock bottom and start to recover. Perhaps soon, perhaps not so soon. But it will be a lot sooner if one started to have some success stories here or there. Success stories have a way of reinforcing themselves and positive views have a way of becoming self-fulfilling.

1 comment:

  1. except that the title sounds like "what if pigs could fly?" You know pigs cann;t fly and the troika program cannot work. The 'successes' are basically tax-raiding the bank deposits of those who still have their money in Greece, not to build new plants, but to pay for those who are chiefly responsible for that mess.