Friday, September 27, 2013

Alexis Tsipras and SYRIZA - Europe's Salvation?

Prof. Varoufakis published a remarkable speech given by Alexis Tsipras at the Bruno Kreisky Forum in Vienna. The speech is so eloquent that - had Alexis Tsipras not been mentioned specifically as its author - I would have guessed that it was written by Prof. Varoufakis.

Literally a Golden Opportunity presents itself not only to the Eurozone but to Europe in its entirety: "A government of the Left in Greece will extend a hand to Europe’s Social Democrats, to Europe’s free thinking liberals, to all Europeans who do not want Europe to slide into a nightmare. And we will ask them to join us in a common project: The project of stabilising the Eurozone – a first step towards an open, democratic and cohesive Europe".

How will that happen? Very simple: "A Syriza government will put on the table a European Marshall Plan, which will include a proper banking union, a centrally managed public debt by the ECB, a massive program of public investment. Above all, we are requesting a special conference on the european debt in the entire periphery, by analogy to he 1953 London Conference for the German debt at the time, which decided to cut a large portion of it, a moratorium on the payment of interest and a growth clause".

Europe's Social Democrats had fallen into demise a few decades ago because they failed to follow "the legacy of statesmen, such as Bruno Kreisky, Willy Brandt or Olof Palme". Instead, Europe turned into today’s neoliberal desert.

Without this New Movement to be initiated by Tsipras/SYRIZA, Europe will remain forever in the claws of vested interests such as:

• The bankrupt bankers of Greece and Spain, in total cooperation with the bankrupt bankers of Germany and France, who do not want to see any drastic changes.
• The politicians presently in power who do not want any radical changes either.
• The Eurocrats who are particularly against any admission to having designed bad institutions.

Tsipras aims at no less than a New Golden Age for Europe. He is "intent on promoting a European agenda for the salvation of the Eurozone". While he is not yet convinced that today's Austrian Social Democratic Party will join him in his struggle to save Europe, he feels to have the blessing of the late Bruno Kreisky who would undoubtedly want Austrian Social Democrats to join Alexis Tsipras. 

Move over, Kreisky, Brandt and Palme! A new space is needed in the Hall of Fame for Alexis Tsipras!


Well, I know I am sounding cynical above and I really shouldn't be cynical. As I said in the beginning, it is a remarkable and motivating speech; no doubt about it. But notwithstanding all the positive wishful thinking on the part of Alexis Tsipras, I feel compelled to introduce a bit of realism.

Whenever someone tries to enlist sponsors/supporters for a new project/idea, one of the first questions he/she will be asked by the potential sponsors/supporters is: WHAT IS YOUR TRACK RECORD IN THE AREA OF WHAT YOU ARE PROPOSING?

Does Greece have a track record of being the herald of new frontiers for Europe? Well, Greece definitely has a tremendous track record but, regrettably, that was about 2-1/2 millennia ago. The track record of the last couple of centuries, since Independence of Modern Greece, isn't all that convincing.

Well, not quite. Prof. Aristides Hatzis argues in this paper that "Greece used to be considered something of a success story. One could even argue that Greece was a major success story for several decades. Greece's 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 more impressive if you take into consideration that the political situation in Greece during these years was anything but normal". I take it that Prof. Hatzis is suggesting that if it weren't for Andreas Papandreou and PASOK, Greece would be a triple-A rated country today! (I presume the Greek Left would forcefully disagree with Prof. Hatzis...).

But as Tsipras correctly spells out in his speech, the ultimate threat of the EU and the Eurozone for Greece was not a politician nor a party. Instead, it was "the massive capital movements during the first years of its existence from the surplus developed Eurozone countries toward the Periphery. And why is this capital flow a problem? Because the money that flows into the Periphery creates bubbles. In Greece, it caused a bubble of public debt as the state borrowed on behalf of the developer-cleptocrats who then used the money to create all sorts of bubbles indirectly". Well said!

But permit me to ask the following question: Was it the capital flows per se or was it the fact the capital was not wisely invested (or rather: that much of it was simply wasted)? Ok, one conditions the other: if there are no capital flows, capital cannot be wasted. But that is not to say that, by definition, capital which flows must be wasted.

Of course, it was the cleptocracy ('greed' would be a much more polite term) of bankers in Greece and abroad which is reponsible for all this misuse. But where does Tsipras derive his confidence from that a new Marshall Plan for Greece would assure that new capital is wisely invested? Oh, because instead of cleptocratic bankers, it will now be responsible politicians in the EU and in Greece who will be in charge? Let's check Greece's (and Europe's) track record on that.

Upon request, I was once informed by EU staff that from 1980-2010, the total of grants, subsidies, etc. disbursed by EU institutions to Greece (including agricultural subsidies) was 175 BEUR. Now that's quite a bit of capital. And that capital was not 'misdirected' by cleptocratic bankers. No! It was directed by responsible EU and Greek politicians within clearly established EU rules and regulations. And yet, much of that capital (which, indicentally, dwarfs the original Marshall Plan in size!) did not end up where it was supposed to end up.

Do I suggest that there should be no Marshall Plan for Greece? No, I am not suggesting that. In fact, I started arguing in favor of a long-term economic development plan for Greece already 3 years ago. My only point is: the way Tsipras puts it, it sounds a bit pompous and quite a bit devoid of realism.

What Greece needs more than anything else are solid and inviolable institutions (combined with a culture of trust in institutions). Executive, legislative and judicial institutions; administrative institutions; in short: all institutions which an efficient modern state requires. The EU Task Force is there to 'assist Greece in its afforts to accomplish that'. The Task Force can only 'assist' because if they intended to do more than that, it would get involved in Greek sovereignty.

Well, maybe realism will set in one of these days and people like Alexis Tsipras will recognize that an entrenched system of vested interests and corrupt practices is most unlikely to reform itself from within. Just think: vested interests would have to amputate themselves in order to improve the system. Is that likely to happen? Not in Greece; nor anywhere else.

So, the request for a Marshall Plan for Greece should perhaps focus less on the idea "Send us money for investment and the economy will start booming". Instead, it should focus more on the recognition that a beautiful building will only last if it has good foundations. So before one gets carried away with the nicer floors upstairs, all effort should be devoted to make the best foundation possible.

I have frequently given the example of France in the late 1950s when the country was at the brink of total collapse. France was lucky to have a 'saviour' in its own midst. Charles de Gaulle was unanimously elected by the French Assemply, in 1958, to become President of the Council of Ministers with more or less authoritative powers for 6 (or 12?) months. Essentially, a 'benevolent dictator' who had the trust and confidence of the French. And de Gaulle used those powers wisely and responsibly in the interest of the entire Grande Nation (instead of special interests). A new constitution and the Fifth Republic were put in place and soon the country returned to true democracy.

I doubt that Greece could agree, in the midst of the current depression, on such a 'saviour' from within. But as long as one accepts realism in the sense that it is highly unlikely that Greece, as a country and as a democratic society, can get out of the present predicament through its own efforts; as long as one accepts that premise (which I admit is rather bold), well, then there might be a solution.

In that scenario, Alexis Tsipras' next speech would require some amendments. He wouldn't have the gall to "invite Europeans to join SYRIZA in the project of stabilizing the Eurozone as a first step towards an open, democratic and cohesive Europe". Instead, he would politely ask Europe to help Greece to create solid and inviolable institutions which are the first step toward an open, democratic and cohesive Greece! And if that meant delegating some sovereignty to something like a Committee of Wise Men for a while, so be it!

Wednesday, September 25, 2013

A Somewhat Less Euphoric Assessment of the German Election Outcome

The issue of the German election has occupied the Eurozone debate in Greece and elsewhere for over a year. Since Sunday evening, Chancellor Merkel is the new Superwoman! A resounding electoral victory and all might in her hands going forward. Is that really so?

In a representative multi-party parliamentary democracy, the ultimate winner is not necessarily the one who gets the most votes but, instead, the one who can form a coalition government. Most of the times, both are the same but they do not always have to be. Germany as well as Austria had periods in their recent history where not the number 1 party headed the coalition but where, instead, number 2 & 3 formed the government with the number 1 party watching on in a miserable mood (in Germany, SPD/FDP had governned when CDU/CSU were the largest party; in Austria, ÖVP/FPÖ governed while SPÖ was the largest party).

Pitfalls of Representative Democracy
The parliament is supposed to reflect the preferences of the voters. In Germany, there was a clear shift on the part of the voters to Center-Right: CDU/CSU, FDP and AfD - definitely parties of Center-Right - received 51,0% of the vote compared with 42,7% for SPD, Grüne and Linke, leaving 6,3% in the category of "Other". Some of those "Other" can probably be assigned to the Center-Right so that the total for the Center-Right was definitely in excess of 51%. After the last election, the Center-Right had been a minority among German voters.

And what happened in parliament, the Bundestag?

Votes only make it to representation in the Bundestag if they are for parties which garner at least 5% of the vote. FDP and AfD did not make the 5% cut so the combined 9,5% of votes which they received are not represented in the Bundestag. To put it bluntly: those 9,5% of votes became worthless, just like the "Other" 6,3% of votes which are not represented in the Bundestag. 7 million voters (over 15% of the total) do not find themselves represented in the Bundestag!

The Bundestag now has 630 seats. Merkel is the big winner? No! She only commands 311 of those seats, or 49%. Parties which have so far opposed Merkel (SPD, Grüne and Linke) hold an absolute majority of 51% (319 seats) in the Bundestag. For Merkel to form a government, she has to persuade a previously fierce opponent to join her. In contrast, for the Center-Left to form a government, they only have to agree among themselves!

Voters shifted to Center-Right in terms of votes whereas power in the Bundestag shifted to Center-Left. That could trigger some interesting discussions about the German electoral system going forward.

All 3 opposition parties (SPD, Grüne and Left) have for the last 4 years forcefully opposed many of Merkel's policies. The single most important message of these Center-Left parties during the election campaign was that the Merkel-lead government needed to be replaced. They could replace the Merkel-government tomorrow if they could only unite. However, unision is not always a characteristic of the Center-Left: SPD and Grüne not only oppose Merkel but they also oppose the Linke. And without the Linke, the Center-Left has no majority.

So here is now the German version of Catch-22: in order for the allegedly most powerful woman in the world to form a government, one of her opponents must make a sudden switch and agree to work with her. This is almost like expecting the American Tea Party to come out in support of Obamacare, and all of this because of the 'national interest'.

The majority of Germans would undoubtedly support a Grand Coalition of CDU/CSU and SPD. From a national perspective, that would make eminent sense. Such a government would command 503 (80%) out of the 630 seats in the Bundestag, the kind of solid majority which should stand behind the very difficult decisions which the next German government will have to take.

However, the 192 SPD members of the Bundestag will not see it that way. They know better than anyone else that the loving embrace of Angela Merkel will not be good for their political health. It is highly unlikely that the SPD could really leave its handwriting on the wall as the junior partner in a Grand Coalition. They have been through that experience once before with the CDU/CSU: Merkel easily took credit for everything which the SPD did well.

The SPD has a choice between pest and cholera: they can forget their opposition to Merkel out of a sense of responsibility for the nation. After all, Germany needs to be governed. Or, they can stick to their guns and refuse to be lured into a Grand Coalition. That would undoubtly lead to new elections and those would undoubtedly lead to an absolute majority of the CDU/CSU (and much blame for the SPD of having forced upon Germany an unnecessary election).

There is, however, one scenario which is highly unlikely but it cannot be ruled out entirely. As the mating game between CDU/CSU and SPD goes on for weeks and months without any progress, the SPD will come under enormous pressure to do something which it does not want to do. And the Linke may start whispering into the SPDs ears something like "Do you really want to prostitute your principles on the alter of 'national responsibility'. You can fulfil your national responsibility by forming a solid government of the Center-Left if the two us us learn to live with one another".

It is really up to the Linke whether or not Merkel can form a Grand Coalition government. They would have it in their power to 'seduce' the SPD by offering all sorts of sweeteners to them. SPD leaders have basically sworn not to work with the Linke but such oaths can be forgotten when 'Mutti' shows them every day who the boss is. Or, those leaders can be moved out and replaced by more open-minded souls. It is unlikely that the Linke, a rather divided bunch of politicians, could get their act together and agree on a strategy as above. If they could, however, there would be a chance that the next German government will be totally different from the one expected last Sunday night after the election results were announced.

Tuesday, September 24, 2013

A View at Thessaloniki's Harbor Makes Economists Superfluous...

One of our balconies looks directly at the Thessaloniki Harbor, albeit it in quite some distance across the bay. This does not look like a small harbor at all. There are plenty of large cranes and all that.

My wife has exactly zero interest in economics (she thinks there are more important things in life...). I have tried to change that since the crisis by pointing at the Thessaloniki Harbor where there were hardly any freighters to be seen. I would explain that this was an indicator of the crisis. The day when Thessaloniki Bay would be full of freighters unloading products for the entire Balkan and picking up Greek products for export, the crisis would be over. Then Thessaloniki could become something like a 'HongKong for the Balkan pensinsula'. Still, I have not been able to catch my wife's interest so far...

We have now been back to Greece for about one month and I note that, almost every day, there are a few freigthers in the Thessaloniki Bay, including a few very large ones full of containers. On average, I would say that there are about 4 freighters parked all the time (and there is turnover!).

And today I read this article in the Ekathimerini where it says that one of the world's largest cruise ships docked in Thessaloniki unloading 3.800 tourists to visit the city.

But the real good stuff is this: large cruisers had stopped calling on Thessaloniki 5 years ago. 3.500 tourists had refused to disembark because of the huge bureaucracy employed by the local port authorities at the time. If cruise ships are now returning and if 3.800 tourists are disembarking, that can only mean that someone has taken a lesson and has also taken measures to improve.

If that's not a positive sign, then I don't know what is!

Sunday, September 22, 2013

National Bank of Poland - Proposed Dismantlement of Eurozone

Controlled dismantlement of the Eurozone: A Proposal for a New European Monetary System and a New Role for the European Central Bank.

The above is a working paper published by the Polish Central Bank. The authors are a former Deputy Finance Minister and the Chief Economist of Commerzbank's subsidiary in Poland. They argue the Eurozone was now threatening the EU, as it is unrealistic to believe that the current austerity policies are likely to work. Defending the Euro at all costs may lead to political collapse, and a disorderly breakup. Their proposed alternative is for the euro to remain the currency of the least competitive countries, with the strong countries to leave first – to be followed by a new system of currency co-ordination.

This working paper was first published in July of this year.

Saturday, September 21, 2013

Tsipras 1 - Troika 0

The widely read German blog NachDenkSeiten is a very progressive blog. Some would probably describe it as 'very leftist'. Be that as it may, they publish very thought provoking articles. And they recently published an interview which Alexis Tsipras allegedly gave the Kyriakatiki Elevtherotypia on September 8, and they commented on it. Tsipras is quoted, among others, as follows (in the middle of the interview):

"Our interest obligations, based on the Troika program as of today, amount to 83 BEUR until 2020. They are supposed to be paid 61 BEUR out of our primary surplus and 22 BEUR out of privatizations. Isn't there any serious person in this world who would notice that this is pure phantasy? There has never been a case in history where a country coming out of a depression managed to have high budget surpluses and growth at the same time!"

I don't know whether the numbers which Tsipras quotes are correct but if they are, the score on this one is clearly: Tsipras 1 - Troika 0.

Before Tsipras-followers get carried away, let me bluntly say that all of this stuff about Greece's having been destroyed by excessive debt service demanded by the Troika is a lot of baloney. It is similar baloney when people express shock about Greece's indebtedness rising despite all those brutal Troika measures. Debt always rises in nominal terms when the borrower has a negative cash flow, and Greece still has a negative cash flow. And when, in addition to that, GDP declines, then debt expressed as percentage of GDP explodes. Anyone who has trouble understanding this should revisit Mathematics 101.

Greece todate has not used a single cent out of its own resources to service its debt. Whatever was paid by Greece as interest and/or principal was first lent to Greece, thereby increasing debt. Greece's debt/GDP ratio may by mind-blowing but it really doesn't matter when one doesn't service debt out of one's own resources.

Having said this in a blunt way, I now have to turn the page and turn to the situation where Greece will have a primary surplus. When that happens, everything changes in the rule book. From then on, choices are available and decisions have to be taken. Decisions such as: Will we spend the next Euro on debt service or on education? Will we pay interest or will we invest in the economy?

If what Tsipras says is true, it would suggest that the Troika is expecting Greece to spend every surplus Euro (and more!) on debt service. If that is indeed the Troika's plan, then one would have to join sides with Tsipras and look for sane people in the world. Sane people would suggest that it is absolutely pointless to drain a borrower of cash (by way of interest or dividends) when that cash could be used to investment which generates even more future cash.

I can only repeat my earlier warning: beware of the primary surplus. And perhaps Greece should open not only one but even two escrow accounts.

A Dutch Disease in Greece?

Economists are a special breed: they are so wonderfully eloquent when it comes to explaining the past and, oftentimes, so terribly incapable of predicting the future in simple ways. Personally, I prefer their wonderful explanations of the past over their wrong predictions of the future because those explanations can really open one's eyes: one suddenly understands something by which one was puzzled before.

This is what happened to me when I learned about the Dutch Disease. I learned about the Dutch Disease through an article by Prof. Hans-Werner Sinn about Mongolia. This theory suggests that when a country generates a lot of foreign revenue through activities which have little domestic economic value creation (such as the export of natural resources), it tends to damage the domestic manufacturing and/or agricultural sectors.

The logic is simple: a country exports a lot of natural gas (little domestic employment) generating a lot of foreign revenue; foreign revenue drives up domestic prices and makes the country's manufacturing and/or agricultural sectors uncompetitive. According to Prof. Sinn, Mongolia lives on the export of natural resources.

Greece had invented the ultimate export product which generated virtually zero domestic employment: Greece exported promissory notes for debt. In a way, those promissory notes were the entry visas for capital desperately waiting to cross the border into Greece. Foreign capital flowed into Greece; domestic assets prices and other costs exploded; imports became cheap; the domestic manufacturing and/or agricultural sectors declined. Unemployment could be avoided as the government hired 'surplus people'. All of this worked well until foreign demand for Greek promissory notes collapsed.

Capital flows have a lot to do with confidence and confidence is an intangible value. When a Drachma-Greece joins the EU, confidence goes up and capital starts flowing. When an EU-Greece joins the Eurozone, confidence explodes and the capital flow turns into a tsunami. A tsunami of foreign capital can endanger ANY economy which allows free capital flows, even the strongest one. The verdict is still out whether Switzerland will ultimately be successful with its measures to keep the value of the CHF under control.

When capital flows in the form of debt (instead of equity), things get particularly chancy because interest must be paid on the debt and, eventually, the borrowed money must be given back. On the other hand, debt is not bad per see. It all depends what it is used for. If I could borrow USD for 30 years at a fixed rate of, say, 1% and use the debt to buy 30-year treasuries at a fixed yield of, say, 3%, I would have a 2% profit margin locked in for 30 years. The more I borrow, the better it is.

Whatever the EU decides to do by way of an economic recovery plan for Greece (if it ever decides to make such a plan), the key issue will be the question of how such recovery monies should be used. If they are used the wrong way (as in the past), they will only increase the damage of the Greek Disease in the longer term.

Personally, I have a strong bias that monies are best used when they are used by those who own it. Many of the terrible decisions in the world of finance have their origin in the fact that bankers deal with other people's monies and not their own. In practice, this would suggest that support monies for Greece would be best used if they came directly from foreign investors and not through intermediaries.

Suppose the EU established a 20 BEUR Reconstruction Fund for Greece to be administered jointly by the EU and the Greek government. Does anyone want to make a guess how much of those funds would end up where it is supposed to end up? (i. e. in value generating enterprises and projects). Or could someone imagine that part of those funds will end up in places where they should not be?

Suppose, instead, that the EU established incentives and support mechanisms (such as guaranteeing the political risk, including that of a Grexit, on foreign investments) which lead to 2.000 foreign investments of 10 MEUR each in new middle market enterprises/projects in Greece. Would those 2.000 foreign investors who still carry the economic risk of their investments not make sure that their monies are spent wisely?

And one alternative is always not to send money but to send machinery & equipment instead.

Friday, September 20, 2013

A "Merkel-Plan" (Instead of a Marshall Plan) for Greece. Really?

Prof. Robert Kuttner of American Prospect argues forcefully that Greece needs not a Marshall Plan but a 'Merkel Plan' instead. Off the bat, I would suggest that whatever it is that one has in mind for Greece's future, I would not put the name 'Merkel' in its title if it is meant to serve a positive purpose...

Actually, I should feel vindicated by this article because, since 3 years ago, I have argued that Greece needs a long-term economic development plan aiming at establishing solid domestic economic value creation and, thus, creating sufficient employment opportunities. I have often referred to the Greece Ten Years Ahead report by McKinsey in that connection.

So why is it that I hesitate about what Prof. Kuttner has in mind?

The following statement by Prof. Kuttner I found very worrisome: "It is also worth remembering that the German Federal Republic itself, after 1989, did not condemn the former East Germany to austerity as a remedy for its fictitious economy. Instead, Chancellor Helmut Kohl allowed the “Ossies” to exchange their nearly worthless ostmarks for deutschmarks at the inflated rate of one to one. He also poured the equivalent of more than a trillion euros into the reconstruction of the Eastern economy".

My view is that what West Germany did with the former DDR beginning in 1990, however noble the intentions may have been, serves as an excellent example of how NOT to build up a value-generating economy. The first mistake was to give the East an overvalued currency (just like Greece was given the Euro) which made it impossible for the East to compete. And the real mistake was to think that the challenge would best be met by simply throwing money at it. Today, over 20 years later, the monies thrown at the East exceed 2 trillion Euros; the East is, for the most part, still an economically underdeveloped region; and millions of talented former East Germans are now in the West strengthening the economy there.

Prof. Kuttner asks: "Why not couple Greek budget and tax reform with a large infusion of funds for public works and economic modernization in the spirit of the Marshall Plan?" True! That should be the overall concept. But how should it work in practice? Who will provide that large infusion of funds? Who will determine what the funds will be used for? Perhaps a High Commissioner from the EU who will set up shop in Athens and direct the Greek economy from his office?

The issue is not that the Greek economy needs a long-term reconstruction (or rather: construction) plan aiming at generating sufficient domestic economic value creation. That's obvious! The issue, instead, is how that could best be accomplished. If the challenge is reduced to simply throwing money at the problem, the results won't be better than they were in the former DDR.

PS: for lack of better alternatives, I think the Greece Ten Years Ahead plan by McKinsey would be a good starting point.

Wednesday, September 18, 2013

Travel Notes from the North West

Regular trips to Greece's North West are always highlights and I always return with new impressions. Below are impressions from our latest trip out West.

Lights after the end of the tunnels!
The highway from Thessaloniki to Igoumenitsa (Egnatía Odós) is simply spectacular! No money must have been spared when designing this road. And not a single road damage in over 300 Km of highway! Something interesting caught my attention this time around: over long stretches, the highway is illuminated on both sides. Not just a few lamps here and there, perhaps in the vicinity of cities. No. Complete and first class illumination throughout the middle of nowhere! I have never seen this kind of luxury anywhere else. Some construction company must have been quite happy when it received this order...

Metsovo - a little jewel
All I knew about Metsovo was what I had read about it in books about the Civil War, so I expected a forsaken small village. Quite to the contrary! A really charming tourist town. The hotelier (quite a fancy hotel!) showed pictures where there were over 1 meter of snow in winter time. The place looked like a ski village on the Arlberg Mountain. After my wife pointed out to him that I was Austrian and not German, he became a little more relaxed. He said that the Germans had really been brutal during WW2. And when I was out of sight, as my wife later told me, he said to her "and the Austrians just as well". But he was a nice man!

Ioannina - no longer bustling?
I had always loved this city for its bustling inner city life. Only last spring had I experienced the city that way. This time, the place looked quiet, if not depressed. I discussed this with our favorite waitress at the Gran Serai Hotel who had dinstinguished herself in the past with economic analyses. Her judgement? The depression is finally hitting Ioannina.

Parga - here come the Anglo's!
What a busy tourist place! And much more surprising: the place if fully under control of the English. In Chalkidiki, where we spend most our beach time, it seems that there are only Slavic accents to be heard. Russians, Serbs, Romanians, Bulgarians, etc. Hardly any 'West-Europeans'. Quite a change to be suddenly surrounded by English who act like they own the place.

Paxos - firmly under the control of 'the West'
No Slavic accents to be heard on Paxos! It seems like English is the native language and, again, the place is full of English tourists (plus some Italians and French; only few Germans). One of them complains to me that he is now being charged for having his yacht overnight at the harbor. I ask him how much. He says 12 Euros for his fairly large yacht. I tell him that I have to pay 10 Euros a day for parking my little Hyuandai, so 12 Euros for his large yacht doesn't strike me as very expensive. He still complains because last year it was still free of charge. Enough said about him.

Angelos - the expert on everything
I meet Angelos at the café. An Athinian in his late fifties, he spends summers on Paxos. He notices that I know little about Greece and feels compelled to show me that he knows everything. First, of course, politics. Greece's problem is that it does not have qualified politicians. What about Samaras, I ask? He is American. And Venizelos? He is American, too. And Tispras? He is a fool. Well, who would be qualified? No one; that's the point. So what's the solution, I press Angelos? He says there is no solution.

Paxos does not have an economic crisis, Angelos explains. The tourists bring money in the summer and that is enough for the rest of the year. I ask why this couldn't work for Greece as a country. For once, Angelos has no answer.

There are 2.500 Greeks living on Paxos and 2.000 Albanians, Angelos explains. The Albanians earn 40 Euros/day compared with 25 Euros/day in Athens. 'No papers, of course', he adds. I ask why Greek authorities don't intervene. Why should they, Angelos asks? It works well as it is.

Angelos asks me where I park my car. I tell him. How much I pay, he wants to know. I tell him 10 Euros/day. Angelos crosses himself and exclaims "Are you crazy?" I have to immediately walk with him to the car. Angelos tells me to drive the car to a new place and there I pay nothing. Greek ingenuity!

Meanwhile, my wife is chatting with Maria who owns the studio we rent and runs a little café below it. Maria is the newspaper of Paxos. She knows everything about everyone there. Including about Angelos but I will keep it a secret what she said about Angelos.

I very lovely trip with a lot of new impressions about Greece.

Sunday, September 15, 2013

Business Success in a Depression!

If someone had asked me a couple of years ago to invest money in a coffee shop franchise in Greece, I would have responded that there are easier ways to destroy money.

And then, about a year ago, I saw the first time a Mikel's coffee shop, in Katerini. Katerini was said to be particularly hard hit by the depression with collapsing consumption spending. Yet, none of that could be observed at Mikel's. On the contrary, the shop, which had been open for about 6 months, allegedly never had a day with sales of less than 4.000 Euro.
The entire concept of this franchise seemed brilliant to me. From design to products to service - the whole package simply looked perfect. Thus, I was not surprised to see Mikel shops opening in Thessaloniki in the last few months.

And it seems that people are beginning to notice the success of Mikel's. Here is an article from the Ekathimerini about this franchise.

I guess this just goes to prove that even in the worst of times, good ideas can still be successful!

Monday, September 2, 2013

"Starve the Beast?" (the Greek state)

This article in Greek Economists for Reform lead me to the website of the Konrad-Adenauer-Stiftung which had organized, together with IOBE, a debate about growth and austerity in Greece. The participants were Daniel Gros, the director of the Brussels-based research institute CEPS, Gikas Hardouvelis, professor of Finance at the University of Piraeus and Chief economist at Eurobank, and Aristos Doxiadis, a venture capitalist (the hyperlinks lead to the respective presentations).

I draw particular attention to the presentation of Daniel Gros (and his comments!). There has been a good amount of discussion recently whether Greece is a 'success story' or not. I have always stated that the answer to this question depends on one's point of view. From within the economy, one would probably consider factors like good growth, good employment, good wages/incomes, etc. as factors of success. Daniel Gros' slides/comments make it clear why, from the standpoint of foreign creditors, Greece is definitely a success story.

Foreign creditors typically have other priorities. Their top near-term priority is not having to put more Fresh Money into the country. They may resign themselves to the fact that their existing loans may not be repaid for a long time (if ever) but they certainy want to stop 'throwing good money after bad'.

Thus, the primary issue which matters to foreign creditors is, as Daniel Gros says, a balanced current account. As soon as the current account is in balance, the country as a whole no longer needs new net foreign debt. The government may still have to borrow but the government can/must then borrow domestically. 

Foreign creditors really don't care whether the current account is brought under control through prudent policies (increasing exports; substituting imports where possible) or through imprudent policies (killing domestic demand). They just want current account deficits to disappear even it means "starving the beast", to use Daniel Gros' expression.

In 2013, Greece will most likely record a positive current account balance before interest. That is good news for foreign creditors: while they still have to put new net money into Greece, it is not going to be 'wasted' by Greeks but, instead, it will be used to pay interest back to themselves. And should the overall current account balance be positive in 2014, foreign creditors can have a party: from there on, they no longer have to put new net money into Greece at all. Operation successful! And the patient? Ah, who cares about the patient?

To me, it is very difficult to understand why the improvement in Greece's current account could not have come about in more prudent ways. Yes, imports collapsed due to collapsing domestic demand but Greece still imports a lot of goods which one either should not import in the midst of a crisis (such as cheap junk from Asia) or which one should produce domestically (above all: agricultural and other food products).

The export side is particularly dismal. When excluding oil and shipping, Greek exports in 2012 were still below the level of 2008! And this despite the fact that the Euro has become cheaper against third currencies and Greece has become cheaper within the Eurozone. Things just don't seem to be getting in gear in the Greek economy.

To bring the current account under control in a prudent way would have required some long-term economic planning. For example, one could have read the McKinsey Report of 2011. Or one could have considered the fact that putting in new net money is not necessarily bad per se. It all depends what the money is used for. If new net money is used to repair a dried-out well, one will later be able to draw some water from the well. If not, one will have to continue to first dump water into the well so that one can draw it later. A school boy might wonder why one does such silly things.