Friday, May 17, 2013

Time for jubilation about Greece yet?

Several things are happening in/with Greece today which I would have considered inconceiveable a couple of years ago. On the top of the list, I refer to the fact that Greece is achieving a more or less balanced current account (yes, even after interest payments!).

A balanced current account means that, in consequence, the capital account must be in balance, too. Put differently, with a balanced current account, Greece no longer has needs for net capital inflows from abroad. Paris/Brussels/Berlin are happy with Greece's performance? No wonder! They no longer have to put net new capital into the country!

Back in 2011, one of my arguments was that Greece's top priority should be to reduce its current account deficit. Had someone then predicted a balanced current account by 2013, I would have bet substantial funds against him. Now the current account may well turn out to be in balance for entire 2013. Am I happy? Not really! Instead, I am now recommending that 'Greece must have a current account deficit for some time to come!'.

The international news about Greece are becoming more positive with every passing day. Rating agencies have upgraded Greece's sovereign debt. Greek corporations have been able to raise substantial funds in capital markets. Hedge funds are discovering financial potential in Greece. Etc. All very favorable news; no doubt about it.

Nick Malkoutzis wrote a commentary in the Ekathimerini titled "Greece - a reality check". He pointed out and praised the good news but, at the same time, he warned that these good news may be covering up some of the bad news which still exist without really being properly addressed. I found myself totally in agreement with his commentary - until I read the comments. Many commentators blamed Malkoutzis for being negative. For once, there were reasons to be bullish and optimistic about Greece and Malkoutzis had no better things to do than to talk them down.

That hit home with me. I, too, have always argued that positive perspectives would have to be injected into the Greek mentality. I even went so far as suggesting a propaganda effort for that purpose. And now I found myself agreeing with Malkoutzis! Had I fallen victim to the same disease which I had previously blamed Greeks for?

Once again, I believe the answer lies in Greece's current account. I had argued that Greece's top priority should be to reduce the current account deficit and now that it is in balance, I am arguing that Greece should run a current account deficit. Isn't that a discrepancy?

There are only 3 ways to improve a current account balance: increase revenues from abroad (exports, services), reduce expenses abroad (imports), or a combination of the two. Greece's improvement in the current account came almost exclusively via a reduction of expenses abroad; via a reduction of imports.

Ideally, Greece would have reduced its current account deficit by increasing revenues from abroad. Increased exports/tourism would have had a substantial impact on domestic employment. However, that would have been impossible, ceteris paribus, given the dimension of imports only two years ago. Thus, a reduction of imports was unavoidable (I had even suggested special import taxes!). However, if one cuts imports and does nothing else, one essentially reduces living standard. If the reduction of imports is not 'decided' but comes as a consequence of collapsing domestic demand (which is what happened in Greece), the living standard really tanks.

My argument all along has been that Greece's (necessary) reduction of imports must be accompanied by domestic substitution of some of those imports. Any import substitution generates new domestic economic activity; economic value generation returns to the country; the country produces more of the products and services which it consumes; the economy becomes value-creating (as opposed to value-consuming); and - the country needs less net capital inflows from abroad!

I once established for myself 'early promising signals for Greece', i. e. developments which, if they happened, would signal to me that Greece has returned to a promising path. Here they are again:

* an obsession with import substitution
* an obsession with export expansion
* an obsession with making tourism/shipping competitive
* an obsession with private foreign investment; and, last but certainly not least:
* an obsession with the EU Task Force to do everything possible to modernize Greece's public administration and to make Greece a governable state

What has happened along those lines?

Import substitution: I have only read about one case which could serve as a prototype, the Sunlight investment. I certainly have never heard/read anywhere a public message like 'produce in Greece; buy Greek products!'

Export expansion: my gut feeling tells me that there is a somewhat new awareness that exports are important for Greece but my eyes/ears are not hurting from reading/hearing about export efforts all day long. The numbers show some improvement in exports but by far not the improvement needed and necessary (and possible!).

Tourism/shipping: 2013 seems to become a very good year for tourism but my sense is that this comes primarily as a result of lower prices for existing capacities instead of an entirely new focus. Regarding shipping, I read very little what is happening in that sector.

Foreign investment: I read very little about the tremendous success story of Cosco and the positive impact is already has on the Greek economy (and will continue to have! By 2018, the direct and indirect impact of that investment is expected to account for 2,5% of GDP!). Instead, I keep reading that Greeks continue to have an aversion against foreign investment.

EU Task Force: pardon me, what's that? Have you heard anything about it lately? Are they still around? At the beginning of the year, I had proposed to make 2013 'The year of the EU Task Force'. Well, the year is almost half over!

I think most of the negatives (or rather: reality checks) which Malkoutzis mentions in his commentary would not be as negative if there had been more focus on the above signals. Put differently, without a renewed focus on the above signals, I could indeed see a situation where Paris/Brussels/Berlin become more and more happy with Greece (because Greece no longer needs net capital transfers). But I certainly cannot see a situation where unemployment in Greece has a chance to decline to acceptable levels unless the pursuit of the above signals really becomes an obsession on the part of Greek society.


  1. Agreed, the Current Account being in balance, while very good news, would be even better if it wasn't almost completely due to reduction in imports.

    My impression is: Italy, Spain and Portugal (where the current accounts are also pretty much in balance) have a more export-driven expansion behind it.

    On TFGR, according to their fourth report, last month.

    ( )

    "The delivery of TA (Technical Assistance) intensified significantly in the first quarter of 2013. Over 30% of the TA (measured in expert days/meetings), or 40% of total expert visits, arranged by the TFGR since its creation in September 2011, was delivered in this quarter."

    Most of its in Administrative and Revenue Reform. And I remain convinced that TFGR is deliberately staying below the media radar screen, and making their reports as dull and dry as possible. But it's vital work.

    "The areas where technical assistance coordinated by the TFGR has gained the most momentum are public finance management and tax administration; acceleration of cohesion policy projects; administrative reform of the central government; business environment including reform of export and customs administration; and reform of health policy."

    1. Well, I hope you are right! I have considered the TFGR from day 1 as the best thing that could be offered to Greece. If they achieve what they originally set out to do, Greece has a fair chance of become a 'new Greece'. I had quite a few contacts with the TFGR last year and my impression then was that they had kind of resigned, given the lack of attention by and support from the Greek side. If that has now changed, excellent. What matters is that they reach their objectives. Whether they reach those objectives with or without publicity is secondary.

  2. With reference to the achievement of a balanced current account, the Greek Govt. achieved this , not only by decreasing exports but by massively decreasing all services to the public , such as : medical care, benefits for the disabled and the unemployed, education etc., to the extent that large numbers of people obtain food and medical care only through charities.

    With reference to two of the important ''obsessions'' you mention in your article, i.e.
    a)import substitution and b)export expansion and the reasons why these two are not taking place at a satisfactory level:

    -The Memorandum of Understanding signed by the Greek Govt. with the Troika greately focuses on creating massive internal devaluation - and they are achieving this through substantial cuts in salaries and pensions AND heavy taxation .
    Thus we get depression of the economy ( cumulatively about 30% in the last five years- 5.3% 1st Q. 2013)
    Unemployment has reached 27% AND companies who could export have no funds/ liquidity to continue- never mind expand - their business. Loans from banks, as the banks are still in a dire situation, are hard to come by.

    In addition, the cost of energy- a basic cost for production- has considerably increased due to heavy taxation on petrol,gas,electricity etc.

    I should think it's obvious that these measures are AGAINST, rather than FOR Growth of the economy ( besides of course , the misery and poverty they brought to the Greek population)