Saturday, May 25, 2013

Greece's Current Account: January-March 2013

Much has been written about the fact that Greece's current account is most impressively coming under control: in the 1st quarter of 2013, the current account deficit was down to 2,3 BEUR; less than half the level of the previous year.

The table below compares the 1Q13 with 1Q12. As a point of reference, the 1Q08 is shown on the right hand side because that had been one of the worst quarters for Greece in terms of current account deficit. That reference now serves to show the improvement which has occurred since then.




2012 2013

Revenue from abroad

Exports 4,9 5,4


Services (e. g. tourism) 4,7 4,1


Other income 0,8 0,8


Current transfers 2,6 2,8


---- ----


Total revenue from abroad 13,0 13,1


Expenses abroad

Imports 10,8 10,0


Services (e. g. tourism) 3,2 2,6


Other expense (e. g. interest) 2,6 1,8


Current transfers 1,2 1,0


---- ----


Total expenses abroad 17,8 15,4


Net foreign deficit (current account) -4,8 -2,3


1) There is no question that Greece continues to have a tremendous weakness in its trade balance, albeit no longer as extreme as in 2008, when the import/export ratio was 3,4 to 1. By 1Q13, that ratio had come down to 1,8 to 1. Still, this means that Greece imported 1.830 EUR for every 1.000 EUR which it exported.
2) The really surprising thing, though, is that what used to be primarily a problem of excessive expenses abroad is now converting into the challenge of increasing revenues abroad!
3) Expenses abroad have been brought down most impressively: 23,8 BEUR in 1Q08 compared with 15,4 BEUR in 1Q13! The bulk of that improvement came through a reduction of imports and most of the remainder came from lower interest expenses (primarily due to the PSI).
4) Revenues from abroad, on the other hand, are stagnating, at best. While exports have increased moderately of late, their 2013 level relative to 2008 seems modest when considering that Greece has become quite a bit 'cheaper' since 2008 (internal deflation and devaluation of Euro against third currencies).
5) In fact, all revenue categories other than exports declined relative to 2008. That should raise some serious questions!

1) One has to differentiate between 'success in terms of numbers' and 'success in terms of the real economy'. In terms of numbers, the improvement in Greece's current acccount is phenomenal. In terms of the real economy, it suggests failure.
2) Success in terms of the real economy would have meant that (a) at least part of the import reduction would have come as a result of import substitution and that (b) the export expansion would have been much higher. Both of these developments would have offset, at least to some extent, the negative impact of government austerity on employment. Instead, unemployment has sky-rocketed to over 27%!
3) In consequence, something is not working here as it should. The real Greek economy continues to shrink as a result of government austerity (which is expected) but there does not seem to be any offset in terms of new economic activity in the private sector.
4) The reaction from all sides is "How can there be new economic activity when austerity is killing the economy!" That reaction is false, which is the reason why things are as bad in the Greek economy as they are.
5) Total GDP combines the private and public sector. We are all Keynesians when it comes to understanding that the public sector must spend when the private sector deleverages so that overall GDP does not collapse. Why, then, is it so difficult to understand that the private sector must spend when the public sector has no choice but to shrink so that overall GDP does not collapse?
6) I can hear the pundits: "When the economy is in such free-fall, only a massive stimulus on the part of the public sector can help!" Well, Greece and the EU seem to have forgotten that, in the final analysis, it is private enterprise which generates sustainable growth!
7) The pundits will also say "How can Greece grow when the Eurozone as a whole is shrinking?" Well, Greece - by the size of its economy - is not a huge Titanic which is driven by the currents of the Atlantic. Greece should think of itself as a guerilla band which advances while the large army is forced to retreat. There are always niches for smaller players. Greece must find niches where it can display its strengths instead of sticking to those battlefields where it has little chance of winning.
8) There is no doubt in my mind that part of the enormous offshore funds held by Greeks will return to Greece for investment if and when there is an attractive economic framework for investment. Had specific steps to create an attractive economic framework for investment been taken in the last 3 years, part of that offshore money would already have come (such measures would have had to include EU-guarantees for political risk, including the risk of a Grexit).
9) Similarly, foreign investment by corporations could have been generated only if there had been specific measures to provide an attractive economic framework. A case in point? Look at Cosco! They came to Greece around the time when the crisis broke out. Despite the free-fall of the Greek economy, they tripled their business volume in the first 2 years of operation and they initiated new investments to the tune of 200-300 MEUR since then.

It may well be that 'success in terms of numbers' will eventually lead to 'success in terms of the real economy' but without specific and quick measures in the private sector, that will take a long time. Such measures would have to include every creative incentive in the book to attract foreign investment and to expand exports. I see no other way which could have a lasting positive impact on employment.

'Success in terms of numbers' will be celebrated outside Greece's borders. Without 'success in terms of the real economy', there will be no celebrations in Greece. Without the latter, it is difficult to see how a Greek government can continue to persuade Greek voters to stay in the Eurozone. Instead, I would consider it more likely that the electorate will eventually shout "Forget all those reforms! They only split the country and do nothing good! If that means we can't stay in the Eurozone, so be it!"


  1. Just found this report from National Bank of Greece - Container Ports: An Engine for Growth I've only glanced at it, but if its substance matches its presentation then I'll file it with similar documents I have stumbled across from time to time - plans for, and analysis of, the real economy of Greece, published by Greek institutions, and written by Greeks!

    I wonder if NBG has similar reports for other Sectors, I had a quick look on their website, I did not find anything, including the one above.

    The report turned up in a Google search, with an obscure title - "[PDF] 572.6 kB". The same search also turned up the Lloyds List Greek Shipping awards 2012. Amongst the awards there is one for Shipping Financier - DVB Bank was the winner. It is a subsidiary of DZ Bank - Deutsche Zentral-Genossenschaftbank) a German bank about which little is ever heard.

    Also today there is the Opening of the Themistocles International Passenger Terminal in Piraeus


  2. "Why, then, is it so difficult to understand that the private sector must spend when the public sector has no choice but to shrink so that overall GDP does not collapse?"

    It would, if the private sector operated in the same manner as the public sector. It doesn't. The private sector doesn't have a central bank to back it up.

    In the end the public sector can always make payments in it's own currency, with the only risk being inflation (and the loss of faith in the currency which that might cause). The private sector doesn't have this unlimited borrowing capacity, and so it's behavior is drastically different.

    It should come as no surprise that the private sector doesn't increase it's spending during an aggregate demand shock.

    The private sector is just a player in the game. The public sector creates the game. It's as simple as that.

    That the Eurozone dared to experiment with a rogue central bank that does not back up it's own states is of no concern to the private sector. As far as the private sector is concerned, it's going to increase it's spending when aggregate demand increases.

    The private sector follows, it doesn't lead. That's the truth, even if the liberals don't like it. If it wasn't the truth, Japan wouldn't have two lost decades. It's private sector would just increase it's spending and everything would be fine. And Japan is a hugely competitive country, with a hugely competitive export sector. So what's the hope for small uncompetitive Greece? Zero.

  3. You are right that improvement of the Greek economy requires investments, but unless the business & legal environment changes this will not happen!

    And yes, for the government it becomes more and more difficult to explain the situation.

    And yes, the electorate could suddenly prefer a Grexit, and this possibility deters foreign investors - vicious circle completed...

    But everybody should clearly see that today Greece without euro would be in a much worse condition.

    Imho the Greek state and society urgently need reforms, and before that herculean task is done the living standard cannot improve!

    H. Trickler

  4. Slip/Trickler

    I really have trouble with Slip's differentiation between public and private sectors in the sense that the public sector has a Central Bank which can allow unlimited spending whereas the private sector does not. Have you looked lately how much liquidity the US private corporate sector (Apple & Co.) has built up? Certainly enough to start a boom. And yet, they are not investing. Not for lack of money but for lack of opportunity.

    Why does Slip ignore that the Greek private sector has quite substantial liquidity reserves? Remember that 80 BEUR left the Greek banking system as deposit withdrawals since the crisis and noone can tell me that all of that has been spent on taxes and/or consumption! Remember that wealthy Greeks hold 3-digit BEUR liqudity in foreign bank accounts! The question is why they are not investing this liqudity in Greece.

    I don't disagree that public sector spending can serve as a stimulus. The best example are the first 3+ years of the Nazi-era. Helmut Schmidt once described that period as the best example in economic history that Keynes can work. There was nearly limitless public spending financed by the Central Bank. BUT: it wasn't spent on consumption. Instead, it was spent on infrastructure and other capital investment like the build-up of arms, all of which created employment. That deficit spending elimited what had been terrifying unemployment within a couple of years.

    One difference between public and private spending is that public spending can be made whether it is wise or not, whereas private spending is generally only made when it is wise. If someone came up with proposals for wise public spending (i. e. wise investments), I would wholeheartedly support it.

    Trickler gives the answer why the Greek private sector does not invest its liquidity in Greece at this time (not to mention the foreign private sector). I don't think it's the lack of demand. If there is not enough domestic demand, one could cater demand of other countries. I think it's primarily the lack of opportunities whereby the greatest shortfall is an adequate economic framework for investment.

    Most of Greece's toothpaste is imported (to use my favorite example). Suppose Greece established a 'toothpaste production zone' near Athens where investors are offered a near-perfect economic framework. A business plan would show how they could produce toothpaste at prices which are below the import prices and still generate an ROE of, say, 10%+. The demand is there because Greeks use toothpaste. Tell my why a Greek who presently earns between zero on his money (in a foreign bank or under the mattress) and 2-3% (in a Greek bank account), tell me why that Greek would not invest in a toothpaste manufacturing!?!

    The private sector doesn't lead; it only follows? Well, check the validity of that premise with China. There, initially only very gradual opportunities for private enterprise unleashed a boom which has now been going on for a couple of decades.

    Let me close by quoting Churchill: "Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon".

    1. "The question is why they are not investing this liqudity in Greece."

      "If there is not enough domestic demand, one could cater demand of other countries. I think it's primarily the lack of opportunities whereby the greatest shortfall is an adequate economic framework for investment."

      You are giving the Greek private sector too much credit, Klaus.

      What if the economic framework is not the main problem?

      What if the main problem is the Greek private sector's low capabilities?

      You think it's the economic framework which stopped the Greek private sector from being internationally competitive, or from making hi-tech products, or from modernizing agriculture, or, or, or? You are wrong.

      What stopped the Greek private sector from achieving that is that is comprised of not skilled enough people, who are charging too much for whatever it is they produce.

      Greece is lucky that it has the ancient monuments and the islands. Without these, it would have been left for dead in tourism also.

      PS - I see China, with it's massive over-investment and subsidies, as a vindication of my views about how the public sector creates the game and the private sector plays in it. They just created the game smartly there.

    2. Jim Slip
      1 of 2

      "What if the main problem is the Greek private sector's low capabilities"?

      My reaction to that is: Do you want to view the glass half empty or half full? Yes, a blind man could see that, in general, the capabilities of the Greek privae sector are not earthshaking. At the same time, I come - time and again - across examples where I marvel about some private sector activities in Greece (I have come across company websites where I thought these companies could just as well be located in an American science park).

      Exactly because there are so many things wrong in Greece, I see so much potential which could be unleashed. Can you imagine unleashing a lot of new potential in, say, Switzerland? Everything in that country is near-perfect; you are not going to discover a lot of surprise opportunities.

      Greece, on the other hand, is full of problems. However, those problems are so obvious and can so easily be identified. Thus, they could quickly be attacked which would unleash potential quickly. I once wrote an article that I could see 6-8% growth in Greece exactly because of the fact that there are so many obvious impediments to growth which - if the will were there - could quickly be attacked, unleashing potential in the process.

      It all starts with human resources. Somewhere I once read that Greece has one of the highest, if not the highest, levels of education among the young generation in the EU. Certainly one of the greatest numbers of universities relative to population size. I am always amazed that I could generally get by in Greece with the English language. Whether it is a call to the hotline of OTE or a service appointment for my car, there are always people who are completely fluent in English. You don't get that in Austria by far!

      I think one of the greatest strengths of Greeks is their ability to improvise. Following dogmatic procedures is probably not one of the strengths of Greeks but oftentimes improvization achieves better results than following dogmatic procedures.

      No, it would not make sense to bring a top German/Austrian Mittelstand manufacturer of high-tech tools, machinery, etc. to Greece. Such companies not only require a top level of manufacturing/engineering skills among their own employees but they also require a network of similarly competent suppliers. That one can't build up overnight.

      But why aim at things which are beyond one's reach? There are so many things in between which are equally needed. A consultants' phrase says that "the most expensive effort is to go for the last 5% towards perfection". Well, stick to the first 60-70%. There are enough opportunities in that segment for the simple reason that not every is or wants to be perfect. German exporters to the US have often told me that Americans don't even come close to using 100% of the capabilities of the German machines because they are not capable thereof. If so, why invest so much in producing 100% capabilities?

    3. Jim Slip
      2 of 2

      Greece does not have enough skilled people? Well, you might want to take a look at the lower social spheres in Austria or Germany. Nothing for Greeks to be embarrassed about.

      However, the German/Austrian Mittelstand has a 'secret' which I consider one of the greatest strengths of the Mittelstand. It's called 'Lehrlingsausbildung' (apprentice training). Those are kids around age 15 who do not have any better education at all. There are put on a program where they pass through every division of the company over a period of several years. They are trained on the job by those who are good at those jobs. Parallel to that, the company makes sure that they attend some formal education at trade schools. By the time they are through with all of that (say around age 20), they have become a most valuable resource for even a high-tech company.

      You would be surprised to see how many employees in even the most sophisticated manufacturers have their origin as a Lehrling. You see those people even in management jobs. Why? Because they had human talent which they developed and they learned everything where and how it could best be learned. No reason why something like that could not be implemented in Greece. If Greece got some Austrian/German Mittelstand-companies to invest here, they would immediately start with that process.

      I could go on and on. I can see your critique of Greek capabilities and, as I said, the weaknesses are so obvious. In such situations, I quote the slogan which helped the Kennedy's half a century ago to win elections: "Most people look at things as they are and ask 'why'? I look at things how they could and should be and ask 'why not'?"

    4. I don't disagree.

      So let's focus on our original disagreement, that of aggregate demand.

      You mentioned how "the US private corporate sector (Apple & Co.) has built up enough liquidity to start a boom. And yet, they are not investing."

      Why is that so in your opinion, in a country with a sufficient framework (the USA)?

      Could it be because privateers are pursuing existing demand (or adding to it) and not creating it?

      I reckon that's the case, and that is why contractionary fiscal policies have caused so much damage.

      As Martin Wolf puts it below, it's a blunder which unmakes investments, doesn't start businesses, atrophies skills and destroys hopes.

      What a shame that 80 years after the great depression, we again resort to the policies of liquidationism.

      Frankly, the only good thing I see coming out of this, is that the predictable failure of libertarianism will again lead to a controlled environment similar to the post-war one.

      History does indeed move in circles.

    5. Jim Slip

      Regardless how hard you try, I don't think you will succeed in getting me involved in debates à la Martin Wolf, Paul Krugman That is debates about monetary policy. That is absolutely not my cup of tea. Now, you may say without discussing monetary policy, it makes no sense to discuss anything else. Maybe yes, maybe no. But as long as I see something meaningful else, I will focus on that.

      And in Greece I see so many "meaningful else's" that they will keep me busy for a while!

      I simply don't have that high regard for the 'science' of economics. The law of gravity allows me to calculate the speed a satellite requires to circle the earth and if the satellite keeps that speed, it will circle the earth forever. There is no economic law which can have similarly predictable consequences because economics depends so much on human expectations. What influenced expectations yesterday may not influence them today or tomorrow.

      So I try to stay on the practical level. When I read that Greeks are almost record holders in terms of hours worked annually (over 2.000) and when I see how little outcome that generates, I am inclined to recommend: "Don't work harder, work smarter!"

      When I see new cafés opening up (look at the website of Mikel's to see a success story) while so many others are closing down, I conclude that there is demand if one only goes for it in the right way. At the same time, I wonder why all that creativity goes into new cafés and not, perhaps, into a new toothpaste manufacturing facility...

      When I look at the Thessaloniki harbor from our balcony, I see lots of cranes, etc. but I hardly ever see any quantity of ships. That's when I wonder what I would see there if Cosco were allowed to buy into the Thessaloniki harbor (instead of having unionists pride themselves for blocking such a Cosco-involvement).

      When I see the prices at our Gran Masoutis as high (or even higher) than 4 years ago, I wonder how much purchasing power (and demand!) could have been saved for other purposes (like buying Greek toothpaste...) if only such supermarkets were not allowed to control prices.

      Etc. etc. etc.

      The problem with economists is not that we are dead in the long run. The problem, as I see it, is that in the long run, every economist will find enough empirical evidence somewhere to prove that he was right.

      Let Japan turn out to become a success story and Krugman & Co. will scream "I told you so!" Let it become a failure and Krugman & Co. will have explanations that it failed because someone did not allow the experiment to work the way it should have worked. The same goes for the other side of Krugman & Co.

      I spent my career in environments where people reacted "you have blown so much hot air and you have never been right - so you better work for a competitor". Regrettably, that logic cannot be applied to economists.

      So, consider this as "common sense rebelling against high intelligence" or whatever, but in the end, common sense can accomplish a lot!

    6. This isn't about monetary policy. It's about fiscal policy, and how that affects aggregate demand.

      No matter how good the framework is, the private sector will simply not invest during a depression.

      The private sector doesn't take risks during a recession, and it takes too many risks during a boom.

      Why can't we agree to that?

      I guess the reasoning is that the hard times will force reforms which otherwise wouldn't have been implemented. However, the case of Greece shows that reforms are only halfheartedly and partially implemented. It also displays the waste that this policy brings forth (businesses that close, upcoming businesses that won't open, workers that lay idle and lose their skills).

      Let me put it differently, if Greece is the black sheep of the Eurozone, why are now 10 Eurozone countries in recession?

    7. Why are Greece & Co. in a recession? I think that's a direct consequence of how the Euro has played out. In fact, you had the same experience in Chile/Argentina in the early 1980s after they had pegged their currencies to the USD 'forever'. Luckily for them, they had only pegged their currency and not given it up, so they could devalue.

      Whenever a formerly weak currency pegs to a strong one (or even assumes the strong one), the immediate consequence is confidence in the country. That leads to capital flows into the country. Asset prices rise; wages/salaries rise; cost of living rises; etc. In short, the country loses international competitiveness and recession/depression come as a result. Chile/Argentina could get out of that vicious circle by devaluing. Greece is trying to go the route of internal deflation. Every Chilean/Argentine economist could warn Greece & Co. that the route of internal deflation is an extremely painful and very long one (and a very unjust one, I might add). The only way to accelerate that, in my opinion, would be to accelerate inflation in the North to speed up the closing of the competitiveness gap. But that would only be competitiveness in terms of prices and not in terms of productive capacity.

      I don't follow the other countries closely but I would argue that, in Greece, fiscal policies can't make much of a difference. Suppose the Eurogroup agreed to finance on an ongoing basis a 10% budget deficit of Greece. So what? Deficit spending only gets you something in the longer term if there is at least some basis of a productive/industrial sector. Otherwise, deficit spending will only stimulate the economies of those countries which Greece imports from.

      In case I haven't said this clearly before: it is investment, investment and, again, investment which Greece needs and if you add the word 'foreign' to it, then we will reach full agreement.

      The private sector does not want to invest in Greece because of the depression? Well, check back with Cosco & Co. Cosco, for one, would be eager to invest more in Greece but there are strong forces which oppose that.

  5. J Schumpeter introduce the concept of "creative destruction", in one of his books, creativity in Greece is an issue, when real economy is shrinking and unemployment is beyond logic.
    Task Force and experts from Netherlands took responsibility to improve the mechanism for Greek exports,but only recorded a disagreement with the minister in charge.
    There are 4 different views, the Greek meritocracy system which begins from the top, does not accept changes with decision making usually assesed as poor, the perception of all about policies implemented but never explained thorowly to gain a bit public acceptance, a technocratic clear problematic about the issues and mistakes in approach when not analysing carefully a situation.
    Its pity not having for years an authority to promote exports substitution.