Tuesday, October 29, 2013

Doing Business Report 2014

Greece ranks 72nd on the Doing Business Report for 2014. Good news? Ok news? Bad news?

Doing Business sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations. For 2014, a total of 189 countries were examined. With a ranking of 72, Greece clearly is in the upper half of the list, albeit quite close to the lower end of the upper half. During the previous 5 years, Greece had ranked around 100 with the worst ranking in 2011 (109). There has been consistent improvement since 2011.

Greece used to be the lowest European country on this ranking. Now, at least the following countries rank behind Greece: Romania (73), Czech Republic (75), Croatia (89), Albania (90) and Serbia (93). Below are some of the more important countries which rank ahead of Greece:

21 - Germany
30 - Austria
36 - Belgium
38 - France
52 - Spain
65 - Italy

Doing Business measures and tracks changes in regulations affecting the following areas in the life cycle of a business. Greece's rankings in those areas are indicated in ascending order.

36   - Starting a business
52   - Trading across borders
53   - Paying taxes
61   - Getting electricity
66   - Dealings with construction permits
80   - Protecting investors
86   - Getting credit
87   - Resolving involvency
98   - Enforcing contracts
161 - Registering property

The rather good ranking for starting a business seems a bit surprising. Foreign investors will probably look with concern at the low ranking for enforcing contracts. As regards registering property, that ranking is clearly Third World. This is of particular concern because solid property rights are always a top priority for foreign investors.

So what's the verdict? Good news? Ok news? Or bad news?

The ranking per se is ok news, at best. However, one also has to consider the trend and the trend since 2010 has clearly been in the right direction and the improvement since then quite remarkable.

The Economic Consequences of the Euro

The above title is paraphrased after John M. Keynes' "The Economic Consequences of the Peace". Paul A. Volcker wrote the introduction to the edition of the book which I just (re)read and he started by saying: "I read (skimmed may be a more accurate description) John Maynard Keynes' book as a student... Well, here I am almost thirty years older, more than eighty years after the book was written. In reading the book - really reading it this time - I am struck not just by the felicity of Keynes' prose and the passion of his concerns but by the relevance to the world in which we live".

Well, I am more than fourty years older than when I first read (skimmed) the book and now I have reread it - really reading it this time! And I can only totally agree with what Volcker said in his introduction.

Greece is now into the fourth year after the First Memorandum. There have been endless discussions about Greece's sovereign debt since then. The debt in absolute terms; the debt as a percentage of GDP; the sustainability of the debt; the need to restructure it; perhaps the need to forgive it; etc. etc. The discussions which Keynes described as being at the center of the Versailles Conference reminded me of the discussions about Greece since 2010.

Keynes, after resigning from the Conference, developed a revolutionary common-sense approach to the issue of German war reparations in his book: instead of devoting all the energies to the question of how much Germany should pay, devote some energies to the question of how much Germany could pay and how Germany's capacity to pay could be increased!

Keynes devotes a long chapter to the question of "Germany's capacity to pay". In it, he doesn't talk at all about the German budget and the potential of a budget surplus. Instead, he talks about the German economy as a whole and its capacity to achieve a surplus in its external accounts so that this surplus could be used for war reparations.

As a non-economist, I need to make the following caveat: Germany at the time had a local currency and to pay off other countries it needed to have surpluses in foreign currencies. Whether or not the same applies to Greece as a member of a currency zone is not quite clear to me. However, what seems clear is the following: if an economy owes money abroad and if it has the intent to pay off those debts, it will either have to generate external surpluses or sell domestic assets abroad.

Keynes beautifully takes the German trade balance apart to show the potential (or lack thereof) which Germany had to increase exports and/or decrease imports. He concludes that section by saying that "It is for those who believe that Germany can make an annual payment amounting to hundreds of millions sterling to say in what specific commodities they intend this payment to be made and in what markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor of their conclusions, they do not deserve to be believed". Wow! That's the elegant British way of telling someone that he doesn't know what he is talking about!

The rest of the world (mostly EU banks) had transferred, from 2001-10, 283 BEUR (net) to Greece, the entire country, in the form of loans. Since then, I would guess that another 50-100 BEUR (net) was transferred. Much of Greece's foreign debt is now held by official institutions. And now those official institutions tell Greece that they want some of their money back. That is understandable.

What is absolutely not understandable is that no one seems prepared "to say in what specific commodities they intend this payment to be made and in what markets the goods are to be sold". Not to mention the question whether the Greek economy has the capacity and resources to produce those commodities in the first place.

Keynes not only analyzed the capacity of the German economy but he also devoted thoughts to the possibility that this capacity could be increased: "If the Allies were to 'nurse' the trade and industry of Germany for a period of five or ten years, supplying her with large loans, and with ample shipping, food, and raw materials during that period, building up markets for her, and deliberately applying all their resources and goodwill to make her the greatest industrial nation in Europe, if not in the world, a substantially larger sum could probably be extracted thereafter; for Germany is capable of very great productivity".

Well, I am not going to argue that Greece could ever become the greatest industrial nation in Europe but what I have criticized heavily since the beginning of this blog is that no one - no one at the EU level and certainly no one at the level of Greek leadership - no one has been making a long-term economic development plan which would outline the optimization of the Greek economy's potential for the next generation. Well, not quite. McKinsey presented its Greece Ten Years Ahead report over 2 years ago. I cannot judge whether their recommendations would have been the answer to all questions but they certainly didn't get much attention.

There is no way that one can draw water from a dried-out well unless one first dumps water into it, which doesn't appear to make sense. Instead of wasting time with senseless activities, one ought to devote one's energies to fixing the well. Any banker who has ever been involved with a troubled borrower knows that the only way to eventually get one's money back is to make the borrower strong again. One can, of course, squeeze the borrower to the tilt and liquidate as many assets as possible. That way, one will get some money back but one will never get all the money back.

Lest I be misunderstood: I am not saying that the rest of the word should simply "supply Greece with large loans" (Keynes) and wait for miracles to happen. Those miracles won't happen by themselves. What is absolutely necessary (and has been necessary from day 1 of the crisis) is to put together a long-term economic development plan for the Greek economy. A plan which builds on existing capacities of the Greek economy as well as identifiying new capacities to be developed. The primary responsibility for putting together such a plan lies with Greece. However, any such plan - if it is to stand a chance of being successful - needs to be embedded in an overall European economic environment, if not even a world-wide environment (particularly China in the case of Greece). This is why the EU should feel equally responsible for working out such a plan together with Greece.

I fear that "supplying Greece with large loans" outside the concept of a long-term economic development plan stands a high chance of eventually ending up as wasted money. Throwing money at a problem without having an overall concept for using it wisely tends to fall into the category of "We don't know where we are going but the faster we drive, the sooner we will get there!"

Wednesday, October 23, 2013

Rays of Hope in Greece?

For over 3 years now, one has become accustomed to the fact that news from Greece are bad news. This is why I want to point out that, of late, there have been several reports in the other direction. They suggest that, unbelievably, there might be a chance of things getting better. Perhaps even some hope that there is a light at the end of the tunnel, after all. Here is a selection:

Ten rays of light in the Greek crisis
EU Task Force sees improvements in Greece

Well, what is to be made of that?

The most important conclusion which could be drawn from such positive news is that - perhaps, perhaps, perhaps - it is not true that 'Greece and Greeks will never ever change'. That statement I have heard on many occasions, always by Greeks, and I have to admit that I have come around to believing it.

Secondly, there is just no way that things can always and only go down. At some point, bottom is reached and the trend will be reversed. Many people project that point of reserval to come next year. Let's hope that they are correct. But at some time it will have to come. No way to avoid that.

But one cannot ignore the almost unbelievable size of the challenge. The last thing I heard is that Greece now has about 1,5 million people unemployed (about 800.000 without any income) and many others who are in very dire straits.

It may well be (and let's hope it will be!) that some time in the near future the bottoming-out will occur; that we will start seeing growth rates replacing destruction rates. Presumably, that will also have an impact on spirits which is badly necessary.

But one has to bear the sad reality in mind that an economy of the size of Greece's has no way of creating over 1 million new jobs in a reasonably short time frame. And that, in my opinion, is the crux.

Will those over 1 million Greeks accept their misfortune and remain quiet? Or will they leave the country for greener pastures elsewhere? Or will they stay in the country and begin causing social trouble?

Time will tell.

Saturday, October 19, 2013

EU Ignores Greek Whistleblower

This is actually a very worrisome article. It reports that a Greek civil servant reported multiple cases of squandered EU funds. Officials in Brussels (European Anti-Fraud Office; or OLAF) have apparently not acted on any of the whistleblower's suspicions, which he communicated in several letters.

Giorgos Boutos, a government finance official in Athens, first sent documents about the suspected fraud to the EU in July 2010. But he heard nothing from the Greek representative at OLAF, while a letter to Director-General Giovanni Kessler went unanswered. In fact, he did not receive any response from OLAF until after he filed a complaint with the European Commission's head of cabinet. The response, however, was only a confirmation that his letter had been received and that the case had been given a file number.

It wasn't until seven months -- and several more inquiries -- later that Boutos received fresh news about the case. Still, that letter merely stated that OLAF was in the process of "a comprehensive reorganization," and asked him to be patient. 

Meanwhile, Boutos told the newspaper, many similar cases of misspent EU funds now fall under the statute of limitations because the EU took too long to address them. Exactly €516,000 of misappropriated EU funds have been repaid. But Boutros stressed that the EU could demand that all such funds be paid back -- that is, if it really wanted to. 

Boutos also questioned whether investigations had been delayed because some suspected fraud cases involved relatives of government and party officials -- or whether Brussels even cared at all about such instances. 

"I don't know whether I should cry or laugh," he told the paper.

Friday, October 18, 2013

Thoughts On The EU's Four Freedoms

The cornerstones of the European Union are often cited as the Four Freedoms (originally set out in the Treaty of Rome). In 1941, Franklin D. Roosevelt laid out his own Four Freedoms for the American Union long before the European Union came into existence. It is interesting to compare the two.

Four Freedoms of Franklin D. Roosevelt
Freedom of speech and expression
Freedom of every person to worship God in his own way
Freedom from want
Freedom from fear

Four Freedoms of the EU
Free movement of goods
Free movement of services
Free movement of capital
Free movement of people

We might have less trouble in the Eurozone today if the Europeans had limited themselves to the Four Freedoms laid out by Roosevelt instead of creating Four Freedoms which, in my opinion, got the Eurozone into trouble.

I have always taken the position that Greece, for one, was not ready for the free movement of goods and the free movement of capital. Far too much capital moved to Greece since joining the EU but particularly since joining the Eurozone. And, regrettably, much of that capital was not used wisely.

Had capital been used more wisely (i. e. more investment and less consumption imports), Greece might be the economic star of the EU today. Unfortunately, much of that capital was used for wrong purposes.

Would that have happened to Switzerland if Switzerland had joined the EU and the Eurozone? Well, Switzerland DOES HAVE these freedoms, even without the EU and the Eurozone, and they are still in good shape. But the Swiss are the Swiss and they have had wealth for a long time and their unfulfilled consumption desires are not out of the ordinary.

Greek consumption desires were beyond the ordinary because the Greeks have not had wealth. It's not really surprising that Greeks went the consumption route once there seemed unlimited access to capital.

What do we learn from this?

Anyone who believed at the time that the Greeks would behave like the Swiss was not thinking very well. At the same time, EVERYONE should have been aware that, if unchecked, the resulting imbalances in trade and capital flows could happen in Greece.

Whose fault is it that nobody did any checking and certainly nobody did anything to reign in undesireable flows of trade and capital once they occurred?

Greece's Current Account 2009 - 2013

Per August, the Bank of Greece reported a year-to-date current account surplus of 1,6 BEUR. To really appreciate this number in the historical context, I present below the trend over the last 5 years. Regrettably, there was not enough room for the year 2008, which was historically the 'worst' year in Greece's current account. Had I been able to include it, the trend would have been so much more obvious.

(in BEUR)

January - August

2009 2010 2011 2012 2013
Revenue from abroad

Exports 10,0 10,7 13,2 14,2 15,1

Services (e. g. tourism) 18,6 19,6 19,5 19,3 19,0

Other income 3,0 2,7 2,1 2,6 2,4

Current transfers 4,3 3,9 3,6 4,3 6,2

---- ---- ---- ---- ----

Total revenue from abroad 35,9 36,9 38,4 40,4 42,7

Expenses abroad

Imports 30,6 30,7 32,1 28,5 26,5

Services (e. g. tourism) 9,4 10,2 9,6 8,5 7,4

Other expense (e. g. interest) 9,2 7,9 7,6 4,4 4,8

Current transfers 2,8 3,0 2,7 2,7 2,4

---- ---- ---- ---- ----

Total expenses abroad 52,0 51,8 52,0 44,1 41,1

Net foreign deficit (current account) -16,1 -14,9 -13,6 -3,7 1,6

The current account went from minus 16,1 BEUR in 2009 (in 2008 it was even 21,8 BEUR!) to plus 1,6 BEUR during the first 8 months of the year. In case somebody doesn't get the message, that's a turn-around of 17,7 BEUR! Below are a few observations.

1. The turn-around is composed of 6,8 BEUR on the improved revenue side and 10,9 BEUR in the reduced expense side. That's actually quite a positive trend because, until not too long ago, the improvement in the current account had come almost exclusively on the expense side.
2. On the revenue side, it's mostly increased exports which accounted for the improvement. However, note the export improvement has come only in the last 3 years. Could that mean that Greece's export structure is indeed improving but it only took a while until the results showed up? Also, in 2008, exports were 13,2 BEUR, so relative to that years the increase was much lower. When considering that the Euro devalued against third currencies about 20% during this time (i. e. Greek products became cheaper against third currencies) and Greek labor costs declined substantially during this time (i. e. 'more competitive'), one would thing that there should be quite a bit more of export potential as the Greek domestic productive capacity adapts to new opportunities.
3. What is surprising on the revenue side is that services remained kind of flat. Tourism is included in services and tourism should have had greater potential during this time.
4. On the expense side, reduced imports do not appear quite as important as one would expect from published news that Greek demand was 'killed' during the time. There should be quite a lot of potential to reduce imports and substitute them with domestic production.
5. Quite noticeable is the decline in services. Again, tourism is included here and Greeks apparently reduced their offshore tourism.
6. Finally, other expense has come down significantly. Interest expense is included here and this would suggest that the various restructurings of Greece's debt (PSI; lower rates) DID have a positive effect. After all, interest expense almost haved whereas debt increased during the period.

Thursday, October 17, 2013

The Key to Greece's Recovery

This is a very interesting and balanced article from the Harvard Business Review where the author outlines what he thinks the key to Greece's recovery is. What I particularly like about the article is the positive and constructive tone to it. A sort of can-do approach. My reaction to the article can be found among the comments to it.

Speaking of positives, here is some really positive prose from Invest in Greece. I have a bit of a problem, though, taking the prose for face value.
A couple of years ago, I decided to check out IIG and approached them with a foreign investment issue. I never even got a response. The Italian investor Dr. Piero Giardrossi was "looking to acquire a couple of abandoned structures on an uninhabited islet off the coast of Kastellorizo in the Dodecanese. But after spending two-and-a-half years chasing the investment, he is about to give up". Apparently, he didn't get a response from IIG, either.

Again, prose is important, too, but it has to be supported with facts and actions. Otherwise, it's like the prose of George Papandreou when he kept saying that Greece was making a lot of progress with reforms.

Wednesday, October 16, 2013

Ambrose Evans-Pritchard on France (and the FN)

"Their (the FN's) working assumption is that the Eurozone's North-South imbalances have already gone beyond the point of no return. Attempts to reverse this by deflation and wage cuts must entail mass unemployment and loss of the industrial core".

This article by Ambrose Evans-Pritchard is enlightening. He doesn't accept face value what MarineLe Pen is saying but he doesn't discredit her arguments either. If anything, he says that "the worst fears of the EU elites are starting to come true". I have made similar arguments in the below posts.

Giving up hope
Justifying the giving up of hope
Why hope is no longer justified

Saturday, October 12, 2013

"I Don't Want to End Up With More Problems... But I still love Greece!"

Here is the story of an Italian investor who is running against Greek bureaucratic walls in connection with an investment he wants to make in Greece. The bottom line is:

He (the Italian investor) also concluded that “it is clearly a political matter not a legal one. I was in Halki to look for a house by the sea; there are quite a few on the seafront and also very elegant. However, all their terraces and steps to the water are illegal and I don’t want to end up with more problems. I will now check the Dalmatian Coast instead,” he said, though admitting: “I still love Greece.”

Cute last words, I can add to this...

Reading Up On Keynes...

A few weeks ago, I began doing something which I hadn’t done since my College days – I did some reading of writings of and about John Maynard Keynes. Among others, I am just finishing the book “The Battle of Bretton Woods” by Benn Steil. And I am amazed! Two principal issues dominated the negotiations lead by Keynes on the UK side and by Harry White on the US side, namely: the flow of trade and the flow of capital as a result of a new monetary system.

Now I, for one, had not heard much about the flow of trade and capital as the Eurozone evolved since inception. Instead, I seemed to always hear two principal themes: the convergence of interest rates and the external strength of the Euro. Since both developed very favorably, the Euro simply had to be considered as a success.

It was only after Lehman that I began looking more closely at the world-wide flow of trade and capital, albeit not within the Eurozone but, instead, between the US and the rest of the world. And I was overwhelmed by the enormous current account deficits which the US had been running for years and decades. It seemed that the obsessive and no-fear-of-debt-having American consumer had created jobs and wealth in the rest of the world and I started wondering how long that could go on.

Thus, when the Greek crisis began erupting in late 2009, the first thing I looked at were Greece’s Balance of Payments figures (particularly the Balance of Trade) since the Euro – and I couldn’t believe what I was seeing. Everyone seemed to be worried about Greece’s budget deficit and sovereign debt whereas in actual fact it was clear that the Greek economy was essentially driving itself out of its value-generating activities since the Euro. And none of the discussions focused on that problem. Instead, the logic shared by most everyone was that the budget would have to be gotten under control, reforms made and then everything else would automatically fall into place.

I am simply baffled how, prior to Bretton Woods, leaders would have understood that the issues are trade and capital flows and, since the Euro, no one paid attention to them. All the numbers showed the scary development since the Euro but no one seemed to deem them important.

The dogma for the EU and Eurozone were the 4 freedoms, including the free movement of trade and the free movement of capital. As long as that was assured, everything would be fine. And now I read that even Keynes was meandering on these issues: believing in the benefit of free trade and capital flows but questioning their ultimate success at the same time (I guess Keynes realized that Great Britain was not ready for completely free trade and capital movement).

In retrospect, I think that Greece, for one, simply was not ready for the free movement of trade and capital; certainly not after the introduction of the Euro. Furthermore, despite being a great believer in the workings of free market forces within an adequate policy framework, I am beginning to wonder whether the completely free movement of trade and capital is a workable proposition within the Eurozone in its present structure (which is why I recently gave up hope that the Eurozone could survive in its present structure).

The opposite to free movement of trade and capital is not necessarily the control of trade and capital. I, for one, believe that the Eurozone, in its present structure, needs a ‘managed flow’ of trade and capital whereby the ‘management’ takes the form of incentives. I remember reading, back in my College days, about the concept of ‘infant industry protection’. The idea is that one cannot expose an economy to world-wide competition if that economy is not yet ready to compete. In the case of Greece, I am not even sure that a return to the Drachma would change all that much. Ok, Greece would immediately become a lot cheaper (‘more competitive’) in foreign currency terms. But being cheap alone doesn’t automatically build up a productive capacity. That requires a long term economic development plan.

Regarding the alternative of a Grexit, I don’t see the operational challenge as unsurmountable at all. If handled well, a one-week bank holiday (at the most) should suffice for that. But I don’t believe that, in a redesign scenario, it is the weaker countries which should leave the Euro. It would be of greater benefit to the weaker countries if the stronger ones (Germany & Co.; i. e. the North) left the Eurozone. That would leave the South with a cheaper currency relative to the North. The South would not only become more ‘competitive’ pricewise but its Euro-denominated debt would devalue relative to a Northern currency.

That, however, is guessing. What is not guessing is the realization that the free flow of trade and capital, combined with a common currency, has deprived a country like Greece of its productive capabilities and until that issue is properly addressed, the losers of the Euro-structure can have little hope to ever utilize their economic potential.

Wednesday, October 9, 2013

How Not to Manage Foreign Debt Problems

What a relief to read that, back in 2010, there were board members of the IMF who obviously did have experience with countries going through external payments crises and who, therefore, criticized what the IMF and the Troika in general were doing. Not much of a surprise that the critics included board members from Latin America. After all, Latin America had arguably the most experience with national external payments crises and how to handle them.

Since I was personally involved in the external payments crises of Chile and Argentina during the 1980s, I could only marvel about the incompetence I saw displayed at the level of EU leadership beginning in 2010. It prompted me to write the cynical article How Not to Manage Foreign Debt Problems. And I got angry at the arrogance of EU leadership who not only failed to seek advice from those who did have competence but, to top it off, even rejected such advice when it was offered from people like Bill Rhodes & Co. That prompted me to write a most serious article A Nueremberg Trial for EU Elites.

Actually, the nature of an external payments crisis is so simple that a high school student would be able to understand it. All it means is that a country is running out of a currency which it needs but which it can't print. The issue is that is it the country in toto which is facing a sudden stop in the availability of the foreign currency. Put differently, the issue is the entire foreign debt of the country. Whatever happens within the country - be it the public sector, the budget deficit, the sovereign debt, etc. - is of secondary importance.

Now, what might a high school student answer if he is asked his opinion about lenders' attempts to get foreign currency back from a country which has run out of foreign currency and which has a negative foreign currency cash flow at the same time (i. e. current account deficit)? If he is polite, he might say that 'this is like attempting to draw water from a dried-out well'. If he is blunt, he might say that 'this is stupid'.

The Latin Americans could have told the Europeans that the first thing you do is to take the entire existing cross-border debt and reschedule it. The greater the crisis, the farther out the rescheduling of principal maturities (perhaps 25 years; perhaps 50 years; perhaps 99 years; perhaps Evergreen Bonds). And to ease the interest burden, one simply defers interest payments for some time and capitalizes interest (apart from the fact that one should not have fixed interest rates but, instead, rates which adjust to certain macro-economic variables; for example, one could set the interest expense at, say, 5% of total government expenses).

The reason why one reschedules the existing debt (instead of refinancing it) is to keep existing lenders on the hook. The Europeans had the good grace to volunteer their tax payers to pay off existing lenders (without even asking tax payers for approval). Deutsche, BNP & Co. must have opened champagne bottles at the time; the tax payers will sooner or later realize that they paid for the champagne (and much more!).

Terms like 'debt restructuring' or 'PSI' have been used as though they automatically involved a haircut. Well, 'debt restructuring' means that principal and interest maturities are restructured and 'PSI' means that the private sector remains involved (instead of being let off the hook). No more and no less. By misinterpreting these terms as automatically involving a haircut, one scares off everyone and jeopardizes a reasonable solution.

At December 31, 2010, the entire foreign debt of Greece was 404 BEUR (182 BEUR with Central Government and 222 BEUR with Financial Sector and Others). The holders of that debt would have had to be told that they will continue to hold that debt for quite some time to come. At least until such a time when Greece starts generating positive foreign currency cash flows and even then there would only be interest payments and no principal.

Why would the lenders have agreed to such a proposal? For the very simple reason that one cannot draw water from a dried-out well unless someone first dumps the water into it. And it should have been made crystal clear to every creditor that no tax payer can be expected to dump water into the well so that private lenders can take it out for their own benefit. Those creditors who might have refused to accept that would have been invited to make adequate risk provisions to their P+L, check their equity ratios afterwards and prepare to walk over to their governments to ask for a bail-out (and to do that with fitting humility lest the governments don't fire them on the spot).

Monday, October 7, 2013

Germany's Current Account Surpluses

Greece's current account deficit has been reduced significantly in the last 3 years. So have the current account deficits of other countries of the periphery. The reverse is not true for Germany: its current account suplus has not only remained firm; it has even increased in the last 3 years.

Many international commentators create the impression as though all Germans were ignorant of the downside of current account surpluses (when they are excessively high). Yes, the idea of being the "export champion of the world" seems to have taken roots as a virtue in general German thinking. But no, it is not correct that no one in Germany questions this idea.

Discussions among German economists, intellectuals, commentators, etc. about the country's enormous current account surpluses have been intensifying of late. Below are just 2 interesting articles:

Die Crux mit dem deutschen Leistungsbilanz├╝berschuss
Der Fluch des guten Geldes

The tenor is always the same: current account surpluses cause, as a mathematical consequence, capital exports. Germany is now the world's largest exporter of capital; the largest provider of international capital. That could have damaging consequences for the German economy at some point in the future.

I found particularly former Chancellor Helmut Schmidt's answer interesting when he was asked whether Germany should reduce its current account surplus. His answer:

"I believe that we really have to reduce our current account surplus. If we don't do it, others will do it for us and we may not like the way in which they will do that. Fourty years ago, there was a law in Germany which stressed the importance of maintaining a balance in the country's external accounts. Today, we are far away from such a balance."

Imports of Products - Exports of Jobs

Every time I walk through Greek supermarkets, shops, etc., I wonder whether Greek leadership understands the following formula:

Whenever Greece imports a product which could just as well be produced in Greece, it exports jobs. And where the jobs are, there are the wage/income taxes, social contributions and revenues for the state. The toothpaste which I buy in Greece is produced in Brazil and comes to Greece via a distributor in Hamburg. All of the product development/production jobs are in Brazil and most of the distribution jobs are in Germany. The same goes for the related wage/income taxes, social contributions and revenues for the state. Is there any reason why Greece needs to import toothpaste from Brazil? Or import it in the first place?

Why wouldn't Greek leadership continually hammer in this point in public speeches, writings, interviews, etc. until the advantages of "buying Greek" are clear to even the last Greek in the most remote village? The government could take a cue from John Maynard Keynes who said the following in a radio address to the British people in January 1931:

"Whenever you save five shillings, you put a man out of work for a day, whereas whenever you buy goods, you increase employment - though they must be British, home-produced goods if you are to increase employment in this country. Therefore, O patriotic housewives, sally out tomorrow early into the streets and to to the wonderful sales!"

Keynes presents the trade-off as one of saving versus spending. In today's Greek depression, I am not sure that this is the relevant trade-off because demand has very much declined because of lack of money, not because of undue saving. But Greek housewives (and consumers in general) are still spending money and as long as one spends money, however reduced the volume is, there is a trade-off, or rather a choice to be made: will the Euro be spent on a Greek product or on an imported one. Thus, one would have to adapt Keynes quote to today's Greece as follows:

"Whenever you spend 5 Euros on an imported product which is also produced domestically, you put a Greek out of work for a day. If you spend the money on Greek products, you increase employment in Greece and aggregate demand as well. Therefore, O patriotic Greek housewives (and consumers in general), sally out tomorrow early into the shops and buy only Greek products!"

I can't wait to hear such speeches!

Saturday, October 5, 2013

1st Hellenic Innovation Forum - October 7-8, 2013 in Athens

This most interesting article from the Ekathimerini alerted me to the 1st Hellenic Innovation Forum which will take place in Athens from October 7-8.

If memory serves correctly, the EU had decided some time ago that all member countries should aim at spending 3% of GDP on R&D. Or rather: all member countries committed that they would spend 3% of GDP on R&D. It would be interesting to know which countries kept their promise.

Greece did not keep its promise. As the article says, Greece spends about 0,5% of its GDP on R&D, less than any other EU country (Sweden, interestingly, spends 3%!). The article states that

"A closer look at research and innovation activities in Greece reveals that some excellent basic research institutes and a few small but innovative companies do exist around the country. However, given the high regulatory burden and the unfriendly environment toward innovative companies, great innovations in basic research cannot spill over into new business in Greece. Instead, these ideas are used by business abroad".

"Of particular importance for Greece is the Teaming for Excellence program. The scheme will offer substantial funding on a competitive basis for projects aimed at developing cutting-edge research centers in less advanced EU regions. The proposals will be submitted by teams comprising an internationally recognized research institute – among those of the European elite – and people from the host region. The key objective is to provide a high-speed lift to excellence in research and innovation in countries such as Greece, allowing them to align high-quality science with technology-based entrepreneurship".

There will be a conference on Teaming for Excellence in Prague from October 17-18.

The article considers Greece’s major assets R&D centers its current research potential, its culture and living conditions, as well as its distinguished diaspora.

The article also references a paper titled "Growing out of the crisis: hidden assets to Greece's transition to an innovation economy". I particularly liked the following conclusion of this paper:

"Greece’s Euro-zone membership may have given the false impression that the economy might be driven by innovation. The Greek economy is not – it faces not only institutional but also severe structural deficits with a small industrial basis, low export ratio, small businesses and many closed professions. If decreasing labor costs and further institutional reforms were to be the only active policy, then Greece’s future would be a low wage economy with an extended workbench of other innovative economies. Greece can only become prosperous if it also uses its comparative advantages beyond tourism, trade and agriculture".

I still recall how enthusiastic I became about Greece's future potential when I first read the Greece Ten Years Ahead report by McKinsey. Reading through the above literature reinforced those feelings.

What if the Greek government felt the same way?