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.


  1. Daniel Gros (I've read many of his articles) strikes me as a particularly repulsive figure, because of his grisly cynicism.

    It's unfortunate that of the three things that the troika could've done (austerity, reforms, investments), they limited their efforts on the first one.

  2. The point herr Klaus is exactly as you said "excluding oil and shipping, Greek exports in 2012 were still below the level of 2008!
    But this what explain?
    I think the quality of reforms and inefficient business environment.
    The real issue is to create environment so as people to take initatives.
    Daniel Gros is making a mistake to the extend that the cost for a entrepreneur to start a business is still high. Banks still funding is negative for 2013 because capital requirments are weak but also NPL are around 30%.Also as you know deposits are minus 70 b euros so there is a problem.
    It's difficult to observe an increase in industrial equipment for very small businesses when e.g when you pay 1.75 for gas or heating diesel 1.4, when taxation system is totally a mess. We ve said to reduce bereaucracy but if you see how many new legislation forms written only in 2012-13 you would become a librarian!.
    Cost of energy, in industries and for individuals and self employed is must.
    Look at it practically in two areas.
    First we ve said we have a primary surplus, but if you are able to see the budget execution because i can't we have 1.5 bil like subsidy!!! from SMP (eu central banks) and for 7 months period gov paid less obligations 1,135 bil compared to 2012 (2035 2012--- 2013 900).
    This all are around 2.6 bil our primary surplus?
    There is a forced as i am saying primary surplus, a killing surplus.
    Second what i am saying is reduce gas prices 1.25 like Bulgaria and heating at 1.00e, reduce energy cost ( in natural gas from Russia we paying 30% more than in central europe)!
    Only this will liberate professions better like taxi or trucks or buses which are almost closed professions will make some people to spent money for lower consumption cars and the revenues for excise tax definetely will increase. We are minus 2.5 bil in revenues from excise tax herr Klaus compared to 2010! With minus 2.5 bil we are trying to improve our budget image. This is not happening!
    See it like a company when in financial distress plus with other major changes ( restructuring etc) the real target is to increase sales even without profits.
    The most important in budget execution is that public investment program is also curtailed around 200 mil in June July period! If this practise followed next months PIP will reduced around 1-1.5 bil this year.

    What development you see?

    The Greek economy is not like Germany with industries ready to reclaim competitive advantages.

    The current account deficits will still exist?
    Yes but with the targeted reduction i mention the recession will tackle a bit.
    Development is the major target that mention when came in Greece mr Schaeuble.
    Finally,the very small greek companies will hire personel, we need to give them space, foreign investments are a need but 500000 small entepreauners if only make one hiring many issues will resolved.


  3. The Eurozone has been conceived as a trade-off.

    The surplus nations would enjoy a lower currency-rate than if they were on national currencies. This is an indirect subsidy on their industries.

    The deficit nations would enjoy borrowing on lower interest, without the danger of currency devaluation. This was the suprlus mechanism of the Eurozone.

    This trade-off doesn't exist anymore because the European banking system doesn't function anymore (and the ECB allowed it to happen). That is why there is a crisis, and so that is why the Eurozone has no reason of existing anymore either.

    Internal devaluation is an unbalanced and needlessly complicated adjustment, which Milton Friedman described as if "having each individual change his habits instead of changing the clock in summer time. Obviously it is much simpler to change the clock that guides all, than to have each individual separately change his pattern of reaction to the clock. It is far simpler to allow one price to change, namely the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure."

    If Milton Friedman can't convince the neoliberals, then I don't know who will.

    1. Thank you for providing Friedman's analogy. I wasn't familiar with it. It is a good one!

      Neither did I know that the Eurozone was designed as the trade-off you describe. My sense was/is that the Eurozone was designed to make everyone behave like the Germans do.

    2. How can you be like the Germans? The Germans have their mighty industries. We don't.

      Then, when we compare the public institutions, the two societies are nothing alike.

      So what's left? To try and have these virtuous current-account surpluses. But that wouldn't work if everybody tried to do it simultaneously, would it?

      In the meantime, here is a very good analysis of the latest Greek GDP figures: