Wednesday, July 31, 2013

Current Account Surpluses in the EU

Below is a very interesting study by the European Commission about current account surpluses in the EU. Some of the conclusions are quite surprising! Also: some very interesting case studies and an easy-to-understand description of Target-2.

Current Account Surpluses in the EU

Tuesday, July 30, 2013

Who is Afraid of the Mercantilists?

I came across this very interesting article titled “Who is afraid of the mercantilists?” Here are some quotes: 

"The key difference between mercantilists and free traders is one of outlook. Free traders see consumption as the goal of the economy. Mercantilists believe it is production”.

“Our intuition tells us that power should be in the hands of the producers. The free traders should be the supplicants, desperate for specialty steel and consumer electronics, desperate for loans so they can live beyond their means. But surprisingly, control of the relationship, even if they don’t realise it, lies with the consuming nations”.

“Today the producers need the consumers more than the other way around”.

“Should the euro dissolve into its constituent parts, the southern periphery will immediately become much more competitive in world markets.  The revived D Mark, no longer held down by Spanish weakness, would appreciate dramatically, bad news for Germany’s manufacturing export sector”.

“Our natural intuition is that the creditor has the whip hand but that assumption may well be out of date.  These days, China needs America, Germany needs Spain, more than the other way around.  Don’t fear the mercantilists”. 

All of this sounds quite plausible and reminds me of what I have written on other occasions: should the Eurozone collapse, the relatively happier people will be in the periphery because they are not worse off than they already are and with a cheap local currency (and quite a bit of hard currency cash stashed away at foreign banks), they have better prospects for the future. The core, on the other hand, will lose jobs and will have to write-off gigantic sums of loans to the periphery.

This view, however, leaves out a very important element in the equasion of cross-border capital flows because it only focuses on the trade account and not at all on the current account. It is the current account (and not the trade account) which eventually drives cross-border capital flows.

Take an island in the South Sea which produces next to nothing. The people there live on the agricultural products which they produce and little else. They cannot import products because they have no foreign currency for it. Thus, their living standard is very low. Then tourism starts and brings tons of foreign currency which allows the islanders to import every product that they could possibly desire. So, you have an economy with an enormous trade deficit and yet, it doesn’t have to import capital because it gets the foreign currency which it needs out of operations (tourism revenue is part of the current account). The living standard, formerly extremely low, explodes without the islanders having to borrow money.

In simple terms, the current account consists of the trade balance (manufacturings) and the services balance (i. e. tourism, shipping). If the services balances makes up for what is ‘lost’ in the trade balance, the economy does not need to borrow abroad.

The relative importance of the trade versus the services balance is one of domestic employment. It could be that the services surplus does not generate as much employment as is lost through the trade deficit.

Now, there are about 80 million Germans generating horrendous current account surpluses. Just picture that half of those Germans were to spend their vacations in the periphery and spend about 10.000 Euro per head. The horrendous current account surplus would be wiped out overnight; Germans would have a lot of fun as tourists in the periphery; and the periphery would not have to borrow abroad while still having substantial trade deficits. They could maintain their living standard.

What is my point? The process of recycling trade surpluses to trade deficit countries does not necessarily have to come by way of cross-border capital flows. It can also come through the services balance and when those services are tourism, both the paying and the receiving side have a lot of fun.

Primary Surplus - The End of the Process or the Beginning of the Challenge?

PM Samaras is quoted in the Ekathimerini as saying "Our top goal remains to achieve a primary surplus, not because we are being forced to do so but because we can cease borrowing and return to growth".

Well, not quite! There is still the minor detail of interest expense.

No creditor volunteers to finance the negative operating cash flow of a borrower (i. e. primary deficit). Every creditor jumps the gun when it comes to getting a share of a positive operating cash flow.

The key question is what the future primary surplus will be used for; for interest payments or for domestic growth projects. My first haunch is that all of this is already regulated in the memorandum and my second haunch is that the use of the primary surplus will be heavily tilted towards interest payments. Maybe I am wrong. That would be good news!

I have argued before that the primary surplus should be used primarily to finance new investments in the real economy; i. e. growth potential. When a borrower is on a turn-around path, excess cash should be used to finance growth so that its future debt service capability gets better. It should be used only as little as possible to pay interest to creditors and certainly not to pay dividends to shareholders.

Let me just hypothetically describe what Greece's creditors could do once there is a primary surplus:

* term-out all maturities of principal for at least 10 years (much of it as long as 30-50 years).
* capitalize all interest during the first 5 years and apply a very low rate thereafter (the remainder getting capitalized).

All the worries about Greece's debt would be eradicated overnight because there would be nothing to worry about for the next 5 years at least. In short: the entire Greek debt would be 'regularized' and all markets want to see is that debt is regularized. What happens in the secondary market with that termed-out Greek debt is of no relevance to Greece because the country wouldn't borrow at those yields. 

And Greece could then focus all its attention on the issue which really matters; namely - to get their real economy on track!

Sunday, July 21, 2013

Once Upon a Time There Was A Small Debt-Ridden State... Prof. Yanis Varoufakis

I came across this article (Google-translated) by Prof. Varoufakis. As provocative as the article sounds, I can agree with all of what Prof. Varoufakis says about EU-decisions back in 2010. Clearly, EU-leadership at the time was more worried about the Euro and the large European banks than about Greece's future. Thus, they decided to (eventually) send a couple hundred billions+ to Greece in order to save the Euro and the large European banks. Greece was an optimal target because the country's leadership had gotten their economy into such a mess over the previous 3 decades that it was easy to argue that not the Euro and certainly not the large banks were the cause of the problem but, instead, the corrupt and wasteful Greece. Thus, Greece offered all the excuses to enforce conditions which might otherwise have been considered as too harsh. After all, if one scared the living daylights out of Greece, that could serve as an effective deterrent for other countries.

There are some subtle points in the article which I could not subscribe to. When one talks about the idiotic lenders, one should also talk about the idiotic borrowers. When one claims that only because of the benevolent Frau Troika the Greek GDP collapsed, one should be honest and admit that the GDP collapsed because its prior artificial growth was the result of enormous net debt inflows and when that music stopped, there were not enough empty chairs left. Stating that the Greek GDP shrunk by over 20% since 2009 presupposes that the 2009 GDP reflected accurately Greece's domestic economic value creation. But what if the truth were that the Greek GDP, in 2009, was 30-40% overvalued because of all the recycling effects of foreign debt flows? Then GDP today would still be 10-20% higher than the 'true' GDP of 2009. To argue that the Greek GDP was shrunk by the benevolent Frau Troika is like arguing that the sub-prime market would still be a flourishing market today if no one had ever asked what these papers were really worth.

The real fast one which Prof. Varoufakis pulls is a genial fast one. Genial, because it sounds so convincing and 'fast' because it is so wrong. He says that if Greece had been forgiven all its debts at the outset, the benevolent Frau Troika would have saved 40 BEUR (because Greece's debt is now 40 BEUR higher today than it was then) and Greece would not owe a penny today. That makes me wonder how, in this scenario, Greece would have financed 40-50 BEUR operating expenses (without interest) during this period. In any restructuring, debt first goes up before it goes down (unless it is forgiven) because, as a general rule, the borrower has a negative cash flow and needs to finance that.

Still, I don't want to be nit-picky and I repeat that I agree with what Prof. Varoufakis says about EU-decisions of 2010. Instead, the article motivated me to write a little 'once-upon-a-time' story myself.

Once upon a time there was a small promising state...
One could argue that that promising state was a major success story for several decades. Its average rate of growth for half a century (1929–1980) was 5.2%; during the same period Japan grew at only 4.9%. These numbers are even more impressive when considering all the political and military turmoil which that promising state went through during these decades.

Still, that promising state has now become a symbol of economic and political bankruptcy, a natural experiment in institutional failure. It’s not easy for a single country to serve as a textbook example of so many institutional deficiencies, rigidities, and distortions, yet the government of our once promising state has managed it. The case of that once promising state is a precautionary tale for all others.

In the 1940s, Juan Domingo Peron emerged as Argentina's political hero because he had discovered the disenfranchised, the 'descamisados' as his electorate. Peron strengthened his power base by redistributing the enormous national wealth of Argentina to the disenfranchised. Our small promising state developed its own political hero who, like Peron, built his power base around the politically and economically disenfranchised. However, instead of redistributing national wealth to those disenfranchised, he redistributed the wealth of other nations to them. And whereas Peron did not have a real opposition because no one in the opposition wanted to be as irresponsible as he was, the opposition of the political hero of our small promising state promised to be as irresponsible should they ever come to power. And they were just that.

When reading the modern history of our small promising state, I am always overwhelmed by the enormous energies its people could marshal for a common purpose as long as that common purpose was against something: sometimes against foreigners; other times against one another. However, when it came to domestic objectives, there were only few leaders who could turn a domestic objective of national interest into a common purpose of all.

Now, notwithstanding the marvels of a pluralist democracy, when the choice of parties and leaders is rotten, the democratically elected leadership will be rotten, too. Yes, the democratic voters of our small and once promising state had a choice and they are responsible for their choices. But what if there are no good choices? Looking back at the last 30 years, it doesn't look like the voters ever had good choices.

One really has to feel sorry for the citizens of our small once promising state. First, they got a leadership which ran the economy into the ground (with the active assistance of foreign funders) and when it came to repair time, the leadership had no stomach for repairs. For quite a while, it looked like they meant by 'repair' that the process of redistributing the wealth of other nations could be jumpstarted again. 

Fortunately, our small and formerly promising state had a lot of capable economists. They understood that the only way to avoid the pains of repairs was to jumpstart again the process of redisributing the wealth of other nations. And these economists were very smart, indeed. They knew that asking for new loans would be a flop, so they came up with politically much more correct ideas. Offering other nations the opportunity to bail out its bankrupt domestic banks could only be interpreted as a grand act of continental solidarity. And channelling funds from official lenders into new domestic investments (regardless whether or not our small and formerly promising country offered profitable investment opportunities) could only be interpreted as an idea worthy of a Nobel Prize.

Our small country remained a small country and one way or another it survived. It may never have regained the 'promising' status but its people lived happily ever thereafter.

Friday, July 19, 2013

Sovereign Debt - the Conversion of Foreign Debt into Domestic Private Wealth

From 2001-10, Greece's foreign debt increased by 283 BEUR. This debt entered the country essentially in two ways: half of it as new debt of the state and the other half as new debt of the private sector (mostly the banking sector).

When the state borrows, it generally does so because it wants to spend money. Spending on the part of the state represents income on the part of those who receive the state's spending.

The state can spend money domestically and abroad. When it spends money abroad, the state generates income to those foreigners who receive that income (producers of submarines, for example). When the state spends money domestically, it generates wealth for those who receive it.

When the state borrows abroad, it conceptually incurs foreign debt on the part of all citizens (conceptually, all citizens are liable for the state). The state can spend that money on many different things domestically. It can hire new employees and provide good salaries to citizens who may previously have had low salaries (or none at all). It can increase the salaries of existing employees. It can increase pensions. It can increase all other public spending which, in turn, creates wealth on the recipient side.

And here is the key point: as soon as the state spends borrowed money, it increases wealth on the recipient side. That may be towns who suddenly have more money to spend. That may be public sector companies. But that is also the millions of citizens who receive their income from the state.

Put differently, money which enters the country as foreign debt is, to a large extent, converted into new domestic private wealth!

Now, much of that new private wealth may quickly disappear if its 'owners' spend it on consumption. Particularly if they spend it on consuming imported goods, the new domestic private wealth converts into income for foreigners who export to Greece.

However, that part of the new private wealth which is not spent on consumption remains private wealth (i. e. a conversion of sovereign debt into private equity has taken place). That new private wealth might be seen in real estate investments, in cash under mattrasses or in bank deposits abroad or whatever. Whichever way one slices it, it remains private wealth.

The trouble is that the owners of the new private wealth cannot understand that their new wealth is the result of sovereign debt. My brother-in-law has his own small earth-moving business; he is a workaholic and much of his work is close to hard labor; he has reinvested much of what he earned in the last couple of decades into his business; he has no debt; and - he is financially quite comfortable even now. There is no way that he could understand that his financial comfort is the result of sovereign foreign debt (without it, the villages and other important customers of his would not have had the money to place orders with him).

In Argentina during the 1980s, the general rule of thumb was that the financial assets which Argentines held abroad were at least as high as the foreign debt of the state. When applying this formula to today's Greece, it would suggest that the financial assets held by Greeks abroad would be approximately 250 BEUR. I cannot judge that number but even Greek politicians have suggested that the number could be in the ballpark. To that number, one would have to add the new domestic private wealth which was generated by foreign debt and which was not spent on consumption.

And the moral of the story? Money generally does not disappear. It just changes owners and the debt of one party can quickly be converted into private equity of another party.

Thursday, July 18, 2013

NZZ on Greek Public Sector

For those interested in a rather sobering commentary about Greece's public sector, read this from the NZZ. (in German).

Sunday, July 14, 2013

Two-Year Anniversary of the McKinsey Report!

Greece Ten Years Ahead was the report which the Athens office of McKinsey published in the summer of 2011. Here is the Executive Summary. To recap: the report proposed policies which would lead to about 500.000 new jobs in the next 10 years and add about 50 BEUR to the Greek GDP. Since we are already one-fifth of the time down the road, the question would be: where are the first 100.000 new jobs and the 10 BEUR of new GDP?

In the last 2 years, I have seen just about zero debate in Greek media, blogs, twitters, etc. about recommendations of this report. As for myself, I have written 14 articles about it but most of them remained below the level of readership which I normally get on my articles. Instead, the Greek media, blogs, twitters, etc. were full with discussions about Greek debt issues. The debt problem can't be solved before the underlying economy is repaired!

I can't really judge whether the McKinsey recommendations make sense for Greece. To me as a foreigner they make a lot of sense but, as cannot be stated often enough, it's the Greeks who have to chose the measures and policies which can change their country and economy. Foreigners can only (and should!) assist.

It escapes my imagination why there would not be more domestic discussion about the real issues facing Greece, i. e. what to do in order to make the Greek economy stronger. Making reforms like liberalizing the economy are undoubtedly important measures but they alone won't solve the challenge that foreigners need to bring investment capital and know-how to the Greek economy.

The 100 or so projects which McKinsey propose would appear to be most interesting targets for foreign investment. Why not go after them???

Thursday, July 11, 2013

Prof. Hans-Werner Sinn's Four Solutions for the Eurozone

At the recent Annual Meeting of the ifo-Institute (of which Prof. Sinn is President), he offered the following four solutions for the North/South problem in the Eurozone:

1. Zero inflation (or even deflation) in the South;
2. Higher inflation in the North;
3. Transfer payments; and
4. Eurobonds.

He predicted that the EU would continue to muddle through and do a little bit of everything.

There is something missing, as far as I am concerned. Prof. Sinn assumes that all, say, Greece would have to do is to become cheaper ('more competitive' is the jargon) relative to the North and positive things would start to happen automatically.

That, it is my firm belief, would not happen automatically in Greece because that assumes that Greece has enough of a productive capability to start booming as soon as competitiveness is restored relative to the North. As I have pointed out on several occations, I don't believe that Greece has enough of a productive capability (yet) which could start booming.

I am amazed that Prof. Sinn would not address at all the need for the North's shifting investments to the South. The only way to strengthen the productive capability of the Greek economy is to steer investments into it. As the CEO of the Allianz Group said a couple of years ago: "We will have to shift some of our (Germany's) foreign investments from the East and Far East to Greece". That statement went by unnoticed.

Steering investments to Greece would require two things:

(a) the preparedness of the EU to implement the proper incentives (i. e. guarantees for the political risk including a possible Grexit); and
(b) the preparedness of Greece to offer a competitive economic framework for such investments. That could be either in the form of individual agreements with individual investors or in the form of Special Economic Zones where all investors have those terms. Either way could work.

Without new investments, there will not be new jobs and without new jobs there will not be new wage/income taxes, social contributions and revenue for the Greek state. And without all of that, the Greek state will continue to move along the path of bankruptcy without a light at the end of the tunnel!

Tuesday, July 9, 2013

Missing! - "Sources and Uses of Funds!"

I witnessed jubilation yesterday. Jubilation in Greece for having secured new funding from the Troika. Jubilation on the part of the Troika (and even Mme. Lagarde personally!) that "Greece was making substantial progress!" Komma. "But Greece is still lagging behind with the implementation of reforms!" A classic carrot-and-stick argument.

I am confused. I keep reading that Greece now has a primary surplus. If so, what does Greece need the funding for? Perhaps for the payment of arrears which have accumulated? That would be good news. But what else could Greece need a few BEUR for?

Ooops, I overlooked that Greece also has to pay interest and repay maturing debt in the next weeks/months. Now that seems like a real good application of the new funds received! Greece can hold on to the status of not being bankrupt and lenders get their money back (courtesy tax payers!).

What has been and still is missing when it comes to the new disbursement of funds is a so-called 'sources and uses of funds statement'. The only such statement I have seen todate was a graph hidden in an IMF-report which stated the following:

From 2010-12, Greece received 'rescue funding' of 247 BEUR, of which 206 BEUR was debt-related. Put differently, only 41 BEUR was left for Greece to finance its operating needs. Presumably, a similar ratio applied to the upcoming disbursements.

What is happening here is called 'delaying bankruptcy' under Austrian or German bankruptcy laws. That is a criminal offense. Managements, bankers or whoever else does it faces the risk of having to go to jail.

This is developing more and more into a farce. Early on in the process, European tax payers probably believed what they were told by their politicians, namely that hundreds of BEUR were being sent to Greece to save the country. By now, I fear that ever fewer tax payers are still that gullible.

Yes, the Greek rescue funding has been a tremendous success. Without it, many European banks would have had to be nationalized. No one can explain to me that the rescue funding todate had very much to do with a possible future turn-around of the Greek economy. To achieve that, new funding would have had to be channeled into new investments to compensate for the GDP downturn caused by austerity.

Sending more money to the Greek state may indeed not be the right answer, given the proven malpractices of the state when it comes to finances. However, Greece is more than the state. Greece has a real economy and I am not aware of any substantial new funding which went directly into the real economy for investment. Without that, Greece will not have an economic future for a very, very long time!

Saturday, July 6, 2013

Greek particularities

The Ekathimerini published a commentary by Angelos Stangos who concludes his observations with the following paragraph: 

"There is no need to point out that Greece has the highest unemployment figures, also among its youth. Efforts are being made to create new jobs via growth-inducing measures, and yet Greeks continue to be extremely picky when the opportunity does arise. There’s an ad for peach picking, but hardly any Greeks show up for the job. There’s one for strawberry picking (25 euros/day for a five-hour shift) but there’s hardly any interest and such jobs are unavoidably taken by non-Greeks. It’s a mystery how all those unemployed people out there manage to get by. Meanwhile, in yet another mystery, car traffic has reportedly increased over the past few months and so has turnover in the recreation and entertainment sectors. Meanwhile, we hear the market is all dried up".

That hit home with me because I make the same observations when we live in Thessaloniki close to half of the year: traffic jams (many SUVs) all the time; full cafés; retail shopping like there was a boom; etc. At the same time, I observe two extremes. Let me first give the example of my wife's nephew.

Giorgos is 25 years old and just graduated from a technical college in Serres. Giorgos is a compulsive worker. Every free time he spends in his father's earth-moving business (his father is also a compulsive worker who seems to have accumulated a good amount of wealth during the Euro-boom and who has no debt). The type of heavy duty work which Giorgos does makes the picking of strawberries look like recreation. At the same time, Giorgos drives - for a couple of years now - a fancy Mercedes Coupé which was not brandnew when he bought it but which still looks brandnew. Now, regardless of how much his father paid Giorgos per hour, there is no way that he could have saved enough to buy that car. Obviously, in the small village where Giorgos and his family live, that attracts quite a bit of attention.

I attended Giorgos' graduation last month. I was most impressed by the young people I saw and met there. They were not loser types. Instead, they all seemed self-confident and eager to go out and conquer the world.

Another example is Eva, a 30-year old language teacher at the Aristotle University of Thessaloniki who, in addition to her university job, has two other jobs: private language lessons and a part-time job in a software company. She tells me that she can financially support herself. Obviously, she has no time during the week to spend in cafés.

Now to the other extreme. One of Giorgos friends, also 25, is a cocky young, spoiled brat of Albanian descent (he flunked the graduation exams). He drives a Mercedes SUV provided by his father. When I asked what his father did for a living, he said 'he is a businessman'. This fellow gave me a lecture about everything that was wrong in Greece. People like he, he said, really did not have high expectations. All he wanted was a good job so that he could buy a house and have a family. 'Is that asking too much?', he asked me. Well, if he worked like Giorgos, he would be able to fulfil his dreams; probably not tomorrow and probably not next year, but some time soon. That thought, however, did not cross his mind and neither did he understand what I tried to explain to him.

This reminded me of a recent article which Marina Souyioultzi published in her blog Greconomy. Note the following excerpt:

"This system of education (the Greek system) has obviously not been developed in a vacuum.  In a recent lecture (in Greek) (, the philosopher Stelios Ramfos explained how the way that Greek children are educated is completely consistent both with our culture of parenting, and with our attitudes towards work and the State in later life.  Essentially, the argument was that the Greeks fail to ever wean ourselves from mothers who tend to express their love in overpowering and often co-dependent ways.  This early childhood experience translates into an obsession with the past (and hence the memorising of facts) in school and the civil service mentality in adulthood of a job for life.  Breast-feeding on the mother becomes milking the state (through tax evasion, a civil service job, a fake pension claim, a state-dependent enterprise and so on).  With this psychological make-up it is very difficult for the Greeks to modernise our (caretaker) State institutions such that they become more appropriate for creative risk-taking.  It is also difficult to escape the vicious cycle of populist leaders, as the Greeks are always seeking father figures assuring us that we will be provided for.  Finally, I would add that the failure of Greek parents to instil boundaries in children's behaviour early on evolves in adulthood into a disregard for the law (tax code, building regulations), for public property (university campuses), for for public property (university campuses), for meritocracy and indeed for common civility.  The lack of boundaries at home is obviously exacerbated by a failure of the school system to teach values of tolerance and respect, thereby perpetuating low levels of trust.  meritocracy and indeed for common civility.  The lack of boundaries at home is obviously exacerbated by a failure of the school system to teach values of tolerance and respect, thereby perpetuating low levels of trust".

Based on my own experience with a Greek wife raising our sons and based on many observations of other Greek families, I could associate with those observations (well, maybe not the part about breast-feeding and its consequences...).

Still, how can all of this work when the country is in deep crisis? One of my Greek friends explained that to me as follows: "The casual observer may see complete misery in very selected areas of Greece but he does not see complete misery all over Greece. This can only mean that 'Greece is still living off the fat and there is a lot of fat left'. Ok, so that makes the overall situation a bit more bearable. But what happens when the rest of that 'fat' is gone? My Greek friends tell me that there is plenty of 'fat' left. They concede that the 'fat' is limited to only a part of the population but that part, according to my neighbors, is quite large".

In a way, this makes sense. Before the crisis hit, I never got the impression that Greeks who were doing reasonably well (not wealthy!) would consider an amount of, say, 100 TEUR as a large amount. Heck, a taxi license allegedly went for 200-300 TEUR. Suppose a family had 200 TEUR and can now get by with, say, 20 TEUR a year, that family can live 'off the fat' for another 10 years. And when you add to that the fact that, since the crisis, over 80 BEUR left the Greek banking system by way of deposit withdrawals, a totally new dimension is added.

So what's the point of all of this? My point is that there may be many, very valid Greek pecularities which explain the current situation but none of them bode well for the future. At some point in the future, the 'fat' will be gone and when that happens, people like Giorgos' friend will have to learn that money and living standard are not blessings which fall from heaven (or come from parents). Instead, they are the result of hard work and clean living. At least in my vision, they are!

Thursday, July 4, 2013

One Can't Talk About Current Accounts Often Enough!

I find it noteworthy that the issue of Greece's current account is being discussed more and more in other blogs. As I have argued for over 2 years now, of all the many issues, I consider the issue of Greece's current account probably the most important one! That's why I quote below a comment which I posted in the Ekathimerini today.

The current account relates to the whole country, the entire Greek economy (and not to the state only!). It records how much a country earns abroad  (exports, services like tourism, shipping, etc.) and how much it spends abroad (imports, services, etc.). Put differently, a negative current account means that a country is spending more abroad than it earns abroad out of its normal operations (not including financial activities, which are in the capital account). The current account plus the capital account make up the Balance of Payments which, for mathematical reasons, always has to balance. Thus, it is crucial to understand the following 2 formulas:

Current account deficit = surplus in capital account (capital imports; i. e. Greece)
Current account surplus = deficit in capital account (capital exports; i. e. Germany)

Capital imports/exports are typically loans and foreign investment. Greece could only accumulate a current account deficit of 199 BEUR from 2001-10 because it had such a huge surplus in the capital account (foreigners were throwing money at Greece like there was no tomorrow). Put differently, Greece spent 199 BEUR more abroad during this period than it earned abroad (that’s quite a lot of living beyond one’s means…) and it needed foreign capital to finance that. In fact, Greece not only got the 199 BEUR in foreign capital; it got as much as 283 BEUR of it! And almost all of it was in the form of interest-bearing loans. The excess of net capital inflows increased domestic money supply (asset values, wages, prices - everything goes up!) and facilitated foreign investment on the part of Greece.

The trade balance is typically the largest part of the total current account. A trade deficit (Greece had a gigantic one!!!) means that Greece imports more products than it exports. Here, the following is key to an understanding: when Greece needs certain medicines, it has no choice but to import. With toothpaste, for example, Greece would have a choice to import or to produce domestically. Thus, when Greece imports products which it could produce domestically, that is an ‘export’ of jobs to other countries. Every time Greeks import agricultural products, etc., it exports jobs to other countries. And: where the jobs are, there are the wage/income taxes, the social contributions and the revenue for the state. By importing so much which could have been produced domestically, Greece not only exported jobs (which jobs were presumably compensated for by the public sector) but also deprived the Greek state of revenues.

When Greece does nothing other than squeezing the current account into balance (as is happening right now), the result is unemployment. If Greece were to squeeze imports and substitute them with domestic production, it would be re-importing jobs. Why there hasn’t been a wave of ‘Buy Greek Products!’ so far escapes my imagination!!!

The comment was made that the US has had a current account deficit (a huge one!) for decades and it had no major problems. Right! Because the US is the US, the world’s largest economy and a great place for foreign investment. The US seems to have an infinite capacity for attracting foreign capital (loans AND investment) and this is why their current account deficit has not been a real problem so far. But remember: a current account deficit also means the transfer of domestic wealth to the rest of the world. In the very, very long run, half of Manhattan, all of Florida and the entire S&P 500 may be owned by foreigners. A problem? Not really, except that the return on those investments then flows abroad and not to Americans.

Incidentally, from 2001-10, Greece transferred 199 BEUR of domestic wealth to the rest of the world! The only trouble is that that ‘domestic wealth’ was, in the final analysis, money which had first been borrowed abroad. For those interested, I list a couple of links below which explain this in more detail.

A voice in the wilderness
Finally, the importance of current accounts has been discovered!
On the importance of current account balances
Greece's current account and foreign debt from 2001-10

Wednesday, July 3, 2013

2013 Index of Economic Freedom

I have commented before on several occasions on the World Bank's Doing Business Report. In the 2013 report, Greece ranks #78 (only Albania, Croatia and Serbia rank behind Greece). The good news, though, is that Greece improved its position dramatically in the last year and belongs now to the top improvers worldwide.

The Heritage Foundation publishes a similar analysis, titled the "2013 Index of Economic Freedom". Below is the summary:

"Greece’s economic freedom score is 55.4, making its economy the 117th freest in the 2013 Index. Its score is the same as last year, reflecting substantial declines in property rights and financial freedom that largely offset improvements in six of the 10 economic freedoms. Greece is ranked 40th out of 43 countries in the Europe region, and its overall score is below the world and regional averages.

Compounding an environment of worsening competitiveness and political volatility in Greece is the continuing lack of economic freedom. Major fiscal weaknesses exposed and aggravated by the debt and employment crisis have not been sufficiently addressed as the country enters its fifth straight year of recession. Double-digit deficits and large increases in borrowing have continued even while multinational financing packages have been approved to keep the government solvent. Unemployment, particularly among young people, continues to rise, and adjustments in market conditions have been stifled or delayed by public unions and other special interests.

As the Greek economy continues to undergo an extended period of economic and political turmoil, bold and committed policy actions are critically needed to restore fiscal sustainability, enhance labor market flexibility, and tackle systemic corruption".

The task ahead for the Greek government seems enormous!

New EU-Rules on Bank Bail-In's - Perhaps a Straightjacket?

Those who are interested in my take on the new EU Directive regarding bank bail-in's should go to the link below. Since it doesn't directly relate to Greece, I didn't post it here.

New EU-Rules on Bank Bail-In's - Perhaps a Straightjacket?

Tuesday, July 2, 2013

Why Greece can't be Florida!

Prof. Paul Krugman recently wrote a piece where he compared Florida with Spain. It could have just as well been Greece instead of Spain. He pointed out that Florida wasn't Spain because Florida is part of a fiscal and monetary union whereas Spain is not.

He might have added that Florida is part of a Federal State with federal taxes but that's only a moot point (even if you have a fiscal and monetary union, if there are no federal taxes, the federal government - every time it needs money - has to go to the states. When citizens pay federal taxes, they do so because it is their obligation and they really can't interfere much with what the federal government does with the money. Should citizens instead be asked to come up with money to save Florida, the result might be different).

Prof. Krugman explains that, as a result of the real estate bust, Florida paid less federal taxes but received much federal aid (aid, that is; not loans!). He estimates that something like 5% of GDP went to Florida that way.

As proof for his argument that a fiscal and monetary union can be the answer to all sorts of problems, Prof. Krugman points out that Florida's unemployment rate is now not only down but even slightly below the national average.

So far, so good. But what conclusion does Prof. Krugman draw from this?

The reason for Florida's positive employment development was not an employment boom. Instead, the reason was out-migration: workers leaving Florida for better job markets. And Prof. Krugman cynically adds: "Oh, by the way: further evidence against the notion that “structural” mismatches explain weak employment".

Well, that's exactly what's in store for Greece if the Greek economy cannot be restructured so that it can achieve satisfactory employment levels. With the present level of domestic economic value generation, that simply ain't going to work. Much, much more economic value generation needs to be built up in the country (and, to some extent, brought back to the country).

Otherwise, Greece is going to be for the Eurozone what the state of Mecklenburg-Vorpommern is to Germany: a recipient of transfer payments with a mass exodus of Greek talent to other economies. There is no other way!