Friday, April 5, 2013

Is Greece on the gold standard?

The suggestion is often made that Greece is de facto, with the Euro, on a gold standard and that this is the major reason for the harsh austerity. If Greece had the Drachma as a local currency, the argument continues, then Greece could print the money it needed to pay more wages, salaries and pensions, and it could invest more. As a non-economist, I am not sure that I agree.

At year-end 2010, Greece had foreign debt of 404 BEUR (182 BEUR in the public and 222 BEUR in the private sector).  More importantly, Greece had a trade deficit of 28 BEUR that year and a current account deficit of 23 BEUR. Those deficits could not have been financed with Drachma printed in Greece.

The more plausible argument is that if Greece had never joined the Eurozone, its foreign debt would not have stood at 404 BEUR at year-end 2010 because foreign creditors would not have lent a Drachma-Greece that much money. That, of course, is a question of guessing. I would only point out that non-Euro countries like Iceland or Hungary also received enormous foreign debt despite being on a local currency.

It is one thing to have foreign debt because foreign debt could, theoretically, be repudiated. It is quite another thing to have trade and current account deficits because that means the country continues to need new foreign debt in order to stay in business (alternatively, the country would have to radically curtail imports). If Greece had left the Eurozone at year-end 2010, it could have printed Drachma to pay wages, salaries and pensions but it could not have printed the currency required for the payment of imports.

Any country which hits external payment problems, even if it can print its own currency, will be confronted with some form of a gold standard if it needs new foreign funding to stay in business operationally. And the providers of new foreign funding (such as the IMF) will always impose some form of austerity on public expenditures as a condition for that new foreign funding.

Argentina is often cited as an example where giving foreign creditors the shaft worked for the benefit of the country. It had its own currency and could print it at its own pleasure and discretion. Yes, but this only worked because Argentina had surpluses in its external accounts. It generated new foreign funding out of it own operations; it didn't need it from creditors.

I fail to see how the Euro (as a sort of gold standard) was/is the cause of Greece's austerity. However, I think there are valid questions whether the Euro perhaps led to the type of austerity which Greece experienced in the last 3 years.

Had Greece left the Eurozone at year-end 2010, the new Drachma would have devalued immediately and significantly. The pain of presently 3 years of austerity might have become condensed into a few months: financial assets would have been devalued; many imports would have become unaffordably expensive. At the same time, Greece would have become 'cheaper' from one day to the next and it goes to suspect that economic activity would have picked up for that reason. The public sector might still have been subjected to stringent austerity by the Troika but the private sector would have picked up.

With the benefit of hindsight, I would say that the resulting austerity would have been easier to bear for the simple reason that it would have been fairer than the austerity we have seen so far. An adjustment via devaluation tends to hit everyone (or at least the majority) in more or less the same way. An adjustment via internal deflation hits those who are targeted by the government's measures.

Is the unfair adjustment via internal deflation working? I would suggest that we will find out this year. If there are 3 (or more) months with growth this year, I would consider this as an argument that the adjustment may be working. If there is only 1 month of growth (or none), I would conclude that it's about time to seriously consider alternatives.


  1. I think it is unlikely that fiscal austerity will produce any growth this year, or potentially even 2014. The impossibility of funding the needs of a country which does not actually produce anything (it is even importing food these days) without external debt makes, as you say, printing own currency fairly futile other than for paying internal obligations. However there is another impossibility the Greeks (and indeed other European nations) may have to face soon and that is the maintenance of a democracy in the face of brewing social unrest due to the harshness and unfair impact of the measures imposed. Something will have to give, and the most reasonable answer comes from a better institutional setup of the monetary union itself - i.e. a banking union and better use of the EFSF.

    1. When looking at the statistics, once can only marvel that there is still social peace (more or less) in Greece. The strange thing is, where I move in Greece I don't sense much of a risk to social peace.

      I do not spend any time in Athens. In fact, I rarely get further South than Katerini. Most of our time we spend between Alexandria in the West and Kavala in the East, and we live in Kalamaria when we are in Greece.

      Admittedly, I could go to those areas of Thessaloniki where things are tough but other than that, I sense a life that seems rather normal. Yes, we have several neighbors/friends who are in economic difficulty: adult 'children' have lost their jobs and returned to their parents to live with them, etc. But I really don't sense the kind of trouble 'in the air' which one might expect in view of the economic situation.

      Had someone told me 3 years ago that Greece would be heading for the type of personal income cuts we have seen and for over 25% of unemployment, I would have predicted social chaos. Maybe there is much more resilience in overall Greek society than one would expect when looking at the actions of extremists.

  2. Her Klaus places like Keterini, especially Kavala,Drama, and Serres have not yet "discovered" as potential places not only for supplying touristic services but for building from scratch industries.
    In Athens and Thessaloniki income disparities seen especially in Athens because 4-4.5 mil people leave there. Many lost jobs so their reactions as i seen are more intense.

    Internal devaluation is a need. Trully, if y have the time can you clarify "If there are 3 (or more) months with growth this year"?

    The program from Troika was having a few targets, first is primary surplus, second is to handle balance of payments and third to deal with recession.
    However I have to stress that none of these targets are easily approached.
    Already there is a deficit in target for primary surplus, because revenues are down, the recession would be hard probably 5-6 % and the sentiment of people truly bad.
    What might change that reality a lot?
    1. Gas prices. In a previous comment - before 20 days - i stress that gas prices inflation (HIPC)is hugely positive compared to 27, but in services and non energy goods is the lower!
    The internal deval will implemented almost to perfect (around 25% to 30%) if to change prices in gas but also 2-3 other things.
    Lowering gas prices is giving an opportunity for spending for an investment! People from troika do not approach-touch the vast importance of motive in psychology. Economy is psychology!
    Lowering gas prices from 1.75 to 1.25 and diesel to 1.00 for heating and transportation we are giving a great "competitive advantage" to people to become creative.
    The revenues will increased significantly, in a month!
    2. Energy costs for small-medium sized industries. Where the point here? The prices are 25% plus from 2008 in an economy shrinked around 25%! The production cost is strongly related with energy cost. Without having a banking sector with negative funding around 15% from 2008 the most companies still leave! But not for long!
    3. If a tourist knew that the gas prices and vat on restaurants (is 23% still) are reduced to the lowest in eu17 would he schedule to visit Gr by his car? From USA the increase in tourists might be plus 40%.

    Let assume that someone is start a company in a sector with possibility to cover partially internal demand and start exporting. Τhere are practical obstacles,with 1,2.

    With Troika agreed govern so people to pay a tax in properties the ETIEDE, probably you know of it. If y have electricity in house y pay that tax which is unfair because people with small fortune in real estate face difficulties, can't pay. Houses with value mill of Euros BUT e.g without electricity don't pay!!!Also do not pay the same proportion according to their assets.
    The real problem ? the ETIEDE tax is paid in PPC bills.
    PPC is facing and probably will face liquidity problems (if that is the target of Troika as a way to liberate energy market).
    The most important, can not reduce energy costs for all kind of companies.
    Solution one tax for all but according to assets in land and value of houses adjusted to the commercial prices of houses.

    If only I can speak for an hour in people from Troika!

    Her Klaus do y know anyone from them?


    1. Regarding the '3 or 4 months of growth this year'.

      I am not saying this based on any facts because I have no facts. Instead, it is based on intuition and on intepretion of who says what.

      Several months ago, Mr. Stournaras started talking about growth resuming in the 4th quarter. Now, if a politician said that, I would guess that he is about to implement some harsh measures and to sort of appease the public, he is promising better times soon. I wouldn't give that prediction any credibility.

      I don't judge Mr. Stournaras as such a politician. Instead, his track record seems to be one of serious research and academic work. At the same time, he seems to be a responsible person and a responsible person knows that by making false promises, he may calm nerves for a while but when the promises turn out to have been false, the reaction is even more violent.

      So, I simply assume that Mr. Stournaras has some facts which I don't have and that, when he promises growth in the 4th quarter, at least one of the three months in that quarter will have to show growth in order to avoid a backlash.

      I hope I haven't disillusioned you by explaining on what unsuphisticated facts I based my statement. At the same time, my other gut feeling tells me that if there is no month of growth this year at all, after 4 years of continuous decline, it will be very hard for the government to maintain its course. As the first commentator said above, something will have to give if that happens.

    2. Mr. Kastner, a few days ago, the president of greek industrialists, said they don't expect growth, not in 2013, not in 2014, but in 2015.

      It is not surprising, as the troika has practically axed anything that produces wealth, except from tourism, which was half-axed.

      The real estate has so much taxation on it, that it's dead. A cement factory that operated since 1926, closed last month.

      Tourism is trying to be competitive with 23% VAT... What will happen, is, like past year, anyone that can, will VAT-evade. But the troika doesn't accept to bring it down to 13%...

      The increased taxation on oil, which doubled its price and made 75% of greek flats not to use heating this year, as expected, gave less income to the state, compared to the smaller tax. But the troika wants to keep it.

      The cost of electricity not only to households but also to factories has skyrocketed. How to you expect to become "competitive", when your product leaves the factory already penalized with increased production cost both due to electricity and taxes?

      Talking to the troika about these things, is like talking to a wall. These people are accountants that only see "numbers" and they believe "the higher, the better", when it comes to taxes, even if tax return is diminished.

      The worst of all, is that the unemployment keeps rising. Unofficiall is above 30% and officially it's kept lower, only because of "tricks", like counting out those who work 1 month per year on a temporary job. Already in the first 2 years more than 100.000 young Greeks left the country. This is more than a yearly class of the army. There won't be anyone left to "build" the country below 40 in a few years.

      Do you like the proposed new drachmas Mr. Kastner?

      Right now the people are in a "wait mode" to see if Samaras will keep his promice of the economy "taking off" in September. When the bad news come...

      Polls already show the support for the euro is in all time low.

    3. Well, I would assume that the President of the Greek industrialists ought to know what he is talking about.

      One should remember that in preparation for the Euro, Greece - as all the other countries of the South - welcomed the Euro above all because they felt that the Euro would put on them the straight-jacket for responsible spending which they could not achieve without such a straight-jacket. I guess no one at the time could have foreseen that the Euro would be exactly the opposite of that --- a seemingly unlimited source of cheap funding.

    4. Mr. Kastner, do you have facts that support your assumption about the motivation?

      Looking from far away I got the impression they wanted to become Euro member for less honorable reasons??

      H. Trickler

    5. Trickler
      That assertion was made by Edmund Stoiber (former Governor of Bavaria) in a Maybrit-Illner show some time ago and no one challenged his assertion.

  3. In your analysis of what would happen if Greece hadn't joined the euro, you ignore some parts, understandably, because you didn't live these things and it's always hard for a foreigner to accurately assess a situation he has never lived. There is this:

    How the euro changed the way the greek politicians and bankers operated. Mr. Stournaras himself, who was part of the team that put Greece in the euro, at the time had made a statement worthy of hybris, which was more or less saying that "now the greek economy is armor plated". The entrance in the euro marked a general relaxation in the greek politicians, at the point that the ex minister Pangalos, said that "in our second term, we demolished everything" (their second mandate corresponds to the euro-entry period).

    The banks, in a similar fashion, started feeding the bubble beyond precedent. You could get loans for virtually anything. Loan names nobody had heard before, like "vacation loan". You were opening your mail box and you were finding 4 credit cards from 4 different banks, that you never asked for. Greeks, that never were big in plastic money, became loaded with credit cards overnight.

    Public spending for the Olympics skyrocketed, but who cared? "Armor plated".

    The only positive thing about the troika plan, was that it forced to make some reforms. The rest was disastrous and the other side is that it allowed the corrupt parties responsible for all this, to stay in power and to be them, who "try" to do the reforms. A clean default back in the time, would allow for the elimination of the parties that ruled Greece in the past 30 years, the effective curtailing of the greek debt, that was still under greek law (instead of british law that is today and the rest has become interstate debt) and most of all, freedom of movement in ecomonic policy. Like, "start with what you can exploit rapidly and then build on top of that". Meaning, no 23% VAT on tourism related services, no demolishing measures against real estate, cheap electricity for indstry (in Bulgaria industrial electricity is ultra low). While the initial hit on the income would be more, this would allow for faster recovery. With the current troika program, you have an economy, where demand is non existant, banks serve only as ATMs, industry is depressed, exports are growing much slower than it could, tourism the same, constructions have frozen, youth has fled, is feeing and will keep fleeing and growth will be slow and slow to come.

    Prices doubled and tripled in 1 night during the conversion, but who cared, simply give salary and pension raises to everyone and problem is solved!

    Something similar happened to cypriot banks. After their euro entrance, they expanded rapidly all over Greece. In provincial greek cities, cypriot banks were unknown before. Suddenly you were seeing cypriot banks opening everywhere like mushrooms. And giving loans with ease. Laiki-Marfin too easily as it was later proven.

    But, what could go wrong with the euro, right?

    1. What the Euro did to Greece and its politicians is not unique. Whenever and wherever money flows too easily, it affects human behavior. Have you seen the movie 'Wall Street'? When I started my career in banking with a large American bank in the early 1970s, a Gordon Gekko would have been fired on the spot. Ten years later, banks were looking to hire Gordon Gekko's.

    2. Excellent comment - first time I've been aware of some of that.

      Re tax on tourism, why 23% VAT on anything. Maybe a single digit VAT on everything would work better, less work for accountants, less incentive to dodge. less administration - probably no less money for treasury.

      Klaus, I found a real SEZ within the Eurozone itself - the Canary Islands. So SEZ's are possible within the EU. Maybe Greece can declare all of the islands as SEZ's. VAT in the Canaries is 6%!! Its major industry is tourism - if its OK for Spain, why not for Greece.


    3. Mr. King,

      The troika was adamant to raise the VAT. It allowed a single digit VAT only to accomodation (hotels). But tourism isn't just a place to sleep. And everything else, from a can of oranje juice to a souvenir, went to 23%. How will this help the growth, is a mystery that only the troika can solve. The islands, exactly because of tourism and the fact that in winter they have problems with supplies (ships don't pass as often as in summer and transportation fees are higher than for the mainland), had as special VAT status. They were having lower VAT (single digit). Guess what the troika asked for. Yes, to make the VAT of the islands, equal to that of the mainland.

      Unfortunately, the troika is obsessed with high taxes, even if facts prove that the tax return is being reduced.

      The solution for VAT and tax evasion that comes with it, is known, but not applied. The troika is more concerned on rising taxes on paper, than on insisting on more practical solutions. The proposal exists. Real time link of the machines to the Athens' minitry of economics. You give a receipt at Mykonos? VAT is collected/registered in real time in Athens by the ministry.

      And another problem for example, is manpower. The SDOE, that conducts controls against tax evasion, has 1200 men. How is it possible to control tax evasion with 1200 men? At summer alone, there are 17 milion tourists in over than 300 islands. How can you expect 1200 men (some of which are office workers exclusively) to make controls effectively? In Italy, they are 55.000. On the other hand, you can't hire 5000 men to reinforce them, because the troika doesn't allow new hiring of public servants.

      I find it hilarious that the troika insists on things that have no logic, instead of looking at the root of the problem. They have this attitude of "let's take no risks, so raise the tax and keep it high". When the tax arrived diminished, they simply say "well, let's keep it there" and search from there money elsewhere.

      This is madness... They only look at numbers. They don't try to find a logic in what they do. If the numbers add up, it's fine. If they don't add up, well, tax more or make new cuts... Then growth doesn't come. I wonder why!

    4. Mr. King,

      You may also want to search on your own for the 1999 Athens stock market scandal. This was also done, on the wave of the euphoria for the euro-entry. The goverment itself, was encouraging to invest in stock. You had sheperds, suddently "playing" in stockmarket and consultant offices opening in small towns. I can't write in detail, but when the bubble bursted, about 100 bln from the small fish was lost. About 2/3 went abroads, 1/3 in the hands of greek sharks.

    5. Anonymous, would they be the same shepherds I've read about who round up their stock in Porsche Carrera's.

      The Greeks weren't the only folks who jumped into the stock market at the end of the last century. Yanks did it, Canuks and Aussies did it, more than a few Brits did it, the phenomena was wide spread. The chairman of the Federal Reserve called it "irrational exuberance" - many seemed to interpret his speech as also saying, "and long may it continue", but that wasn't what he meant.

      As Thomas Tusser said A foole and his money be soone at debate: which after with sorow repents him too late. - Five Hundred Points of Good Husbandry, 1557.

      The advent of the Euro probably just added to the sentiment of never ending shopping sprees - Shop 'Til you Drop, Retail Therapy and similar expressions came into common usage in the period. In 2001 the EU commissioned a report on Consumer Addiction, and Over-Indebtedness. Pity they didn't commission a similar report for EU Governments.

      If you look at VAT rates for the developed countries that didn't suffer too badly from the Great Recession you'll find that most of them have VAT rates of 10% or less. Cause and effect - probably not, just a coincidence, perhaps with some deeper underlying cause - like common sense.


    6. No, the Porsche experts were farmers. The terrain is too rough for sheperding in a Porsche.

      Mr. King, you don't need to convince me about VAT. VAT, as well as high property tax, is what killed completely contruction in Greece, which was related to dozens of other professions. This was one very successful greek company.

      The owner was arrested for the 2nd time a while ago for debts to the pension funds.

      You raise cost of fuel and electricity for industry and agriculture. And lo and behold! You have recession deeper than predicted! Who would have known, right?!

  4. Regarding the 3-4 months growth or 1, i thought it was like mentoning an empirical law which i didn't know. This is why i asked.
    Definetely Mr Stournaras is exactly what y mention,i agree he is the best and he has a clear picture.
    But consumption might be negative this year. Signs of stabilitation (not increase) if we let say return to positive growth for some months we haven't seen in consumption. Even a small growth in industrial equipment? I don't know.
    During Nov 2012 were made proposals for those 2-3 views i mention above. All these will change two issues, to make all people able to pay their obligations in a better percentage than today and give a motive, for optimism as reward for a demanding period.
    The revenues from increasing heating equal to transportation
    gas was 600 m euros, we have reached for the only 80 for 2 months.

    PS: You didn't answer if y know someone from Troika!

    If y know, the real problem is to tackle hard recession. To tackle recession only people's optimism can change that! To become people obtimist we have to give them a few motives!


    1. I have no contacts with the Troika but I have had several contacts with the EU Task Force, Maria Velentza.

  5. Her Klaus, my intention was not to learn any specific contacts, but to highlight from different view -if possible- extremely complicated and demanding issues, experessing in a way, a concern

    The link

    About the "sentiment" against euro,is something which on purpose is not explained with truthfullness from us. Its not simply a coin which represents economic, political and democratic beliefs but a part of political unification to deal with difficult problems in different periods, a peacefull unity of nations.


  6. The issue of the soundness of Troika-measures (i. e. VAT) has been raised above.

    Well, I guess other than the Troika itself, there are few people left who would argue that the measures have been sound. Just think that about half of austerity so far has come from cutting investments! The various aspects of VAT are covered above.

    I wish we would know how these measures came about. Were they unilateral decisions by the Troika or did the Troika have better ideas but resorted to silly measures when Greece rejected to implement smarter ones (which would have hurt vested interests). I guess we will never know.

    I once asked an old friend of mine (a member of the ECB's Governing Council) what really drove the Troika's decisions. His answer was something like: 'you know, I recently asked a top Troika-official that same question and he replied that Greece would reach equilibrium when it had reached the level of Bulgaria'.

    If that is really what the Troika is after, they are well on their way...

    1. Mr. Kastner,

      It is rather obvious, that the troika plan isn't interested in helping Greece find growth quickly and minimize the damage. Every single sector of the economy that used to make money has been targeted specifically and shot at. It seems more like someone in Brussels has decided that they want "low wage zones" in the SE and that is the goal to pursue. It is also written in the memorandum, that wages will be lowered towards the levels of central and SE Europe. Well, in Bulgaria the minimum pension is 150 leva (75 euros). In Greece, already, with 360 euros (the minimum pension for farmers) you can't live. Now, 2 things will happen. Either you will cause revolution or Grexit under Tsipras, to prevent the revolution.

      How can an economy recover, with high VAT, high taxes, high oil price, dead banking sector, high industrial electricity price? You can't also say that "you didn't know it would fail", because everytime you do that, recession deepens and tax return diminishes. So, if you keep doing it, it means you want it and you don't care if it's working for the advertized purpose or not. It works for the non advertized purpose...

      The same "for every illness, high VAT is the cure", exists in the cypriot memorandum. It already asks for increase from 8% i think, to 19%. Surely, this will help boost cypriot tourism, in order to mitigate the hit from the loss of the banking sector, won't it?

      Greece should have defaulted in 2010. The arguments raised by the goverment back then, seem ridiculous now and i am pretty sure the goverment knew... But Papandreou was serving interests other than those of the country and one day should be held in trial for it.

    2. The usual story. According to the "Vima" newspaper, because of the dimished taxes, the troika asks for new cuts and supposedly, Stournaras replied: "Do not pressure us further. If you want new measures, take the keys of my office and give them to Tsipras. I will also give you the phone number of Tsakalotos (SYRIZA economist with studies in Oxford), so you can chat with him".

      Of course, this "defiant" dialogue, is an excellent mediatic attempt to paint the goverment as "resisting", but we all know, that the troika will "forget" new measures up until the german elections, because Merkel wants a "calm" campaign, where she will be able to show as "trophy" the "redeemed and docile Greece".

      Unfortunately, time has come, where Greece must kick the troika out of the country. Enough damage has been done. We must save what can be saved.

  7. I find the following post useful in understanding the pros and cons of in or out.

    The crux of the matter is this: a domestic currency will allow a government to reshape and reinvigorate the economy as it sees fit (through sovereign credit expansion). Protectionist measures (like capital controls) will be necessary to avoid leakages. Sound policies will also be necessary to avoid a collapse of the exchange-rate (something that would require fx, hence a sound trade balance, hence the need for sound policies).

    It will be a different world to what we've gotten used to recently. But, hey, it wasn't so long ago (only 1994 actually) that there were severe limits to the amount of foreign currency that you could take abroad.

    When the economy recovers, we can reexamine the need for more freedom. We shouldn't forget however how the private sector handled that freedom: very badly. It borrowed like there was no tomorrow, and in the process destroyed the country's trade balance.