"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.