Monday, November 4, 2013

Prof. Krugman Lashes Out at Germany

Many Greeks will love this --- within less than one week, Prof. Krugman fired away 6 articles (so far...) about the bad Germans who are pursuing beggar-thy-neighbor policies. Below are the articles in chronological order:

The harm Germany does
More notes on Germany
Defending Germany
Sin and Unsinn
France 1913; Germany 2013
German surpluses - this time is different

Well, what can I say? Prof. Krugman's attack is certainly more convincing than Germany's defense. There is no question that Germany's current account surpluses have become a major issue in the global imbalances. There is no question that Germany should admit to that fact instead of denying it. What Germany could do about that is a different matter.

I recently read a cute analogy about trade imbalances. Suppose an observer from out of space looked down on Earth and tried to understand what's going on. He wouldn't see any money but he would see some countries where people work a lot to produce things and, when they have finished products, they ship them to other countries. Other countries work less and produce less. They can do that because they receive the products they desire from the producing countries. The observer from out of space might wonder why the producers do that.

I think it is wrong to attack current account surplusers for their sins. Instead, one should explain to them that, in the longer term, they are really hurting themselves. Germany's net foreign investments are already huge in terms of its GDP and they are getting huger with every passing day. One day, Germany may want or need to have those investments back in the country (perhaps to pay pensions?) and what if those investments have lost value by then? What if there are investments which Germany will have to write off instead of calling them back?

I enjoy following bloggers' comments to commentaries in the Ekathimerini. There are quite a few hot heads who can think of nothing other than blaming Germany's mercantilist policies for all of Greece's woes; who argue that Germany is increasing imports from all other Southern countries except Greece; who argue that Germany has done nothing to improve the trade balance in favor of Greece; who argue that Germany pursues a hidden agenda to destroy Greece. Numbers might suggest that this could be so.

I suggest a different look at the situation. The German economy has a very major representation in Greece through the German-Greek Chamber of Commerce. Now, these people are not in Greece to search for Greek products which the German economy might need. They are in Greece to promote German exports to Greece and, possibly, to seek Greek investments for Germany.

Does the Greek economy have a similar representation in Germany? Or in other potential trading partners? People who know how to analyse the needs of foreign markets and the potential of the Greek economy to respond to those needs?

Germany is very important for Greece but clearly not the only important country. Until the crisis, Germany accounted for about 15% of Greece's current account deficit. How about the other 85%? Who are they and how could they reciprocate by buying Greek products? (a hint: China's share of Greece's current account deficit is larger than Germany's).

Tourism would appear to be the number one area where Greece's external acounts could improved quickly: the Greek capacities and Greece's attraction are there; they just need to be brought effectively to the markets. Yes, tourism has been expanding of late but I don't see Greece's potential there as single-digit growth rates. I think they could definitely be double-digit, and they should be.

To improve trade balances is much more difficult than to improve the services balance because for trade one has to increase capacities and/or build up new ones. None of that is going to happen in and by itself. One has to develop a plan: What are Greece's existing capacities and where could be new ones? What are other countries (like Germany) importing and how could Greece adjust its capacities to those needs? Etc. etc.

Bottom line: let Prof. Krugman fight the global battle of current accounts and don't get side-tracked by it. Instead, focus on your own economy and how that economy could play a more important role in the global battle.

A small economy like that of Greece has one great advantage: it doesn't necessarily have to follow global trends; it doesn't have to move like an army. Instead, it should move like a guerilla and focus on niches.

1 comment:

  1. Krugman has no credibility.

    About Germany's defense, you do have to wonder. Is the German government playing a part in the pantomime? Because their PR department is non existent.

    There are quite a few hot heads who can think of nothing other than blaming Germany's mercantilist policies for all of Greece's woes; - these people need to understand that when they say that they are saying that Greece as a country and/or the Greek people are somehow inferior and at the mercy of Germans which is obviously complete and utter garbage. They need to grow a pair and take responsibility for what is going on in their own country.

    About the trade surplus/deficit argument. It sucks away my will to live, I mean how can you argue with someone who says a trade surplus is bad?

    They are only going to take you down to their level and beat you on experience.