Tuesday, June 17, 2014

Missing Greek Exports --- Really a Puzzle?

The timing of my latest piece on the dismal Greek export situation turns out to have been fortuitous: it almost coincided with the EU Commission's publication titled "The Puzzle of the Missing Greek Exports". The conclusion of that paper is identical to mine --- the Greek export situation is dismal!

In ancient times, that is before cross-border services like tourism or transportation had arrived, the formula for a country was quite simple: if you wanted to import products from abroad, you had to export an equivalent amount of products. If you had nothing to export, you would not be able to import anything. Tough luck for domestic consumers desiring perfumes or tea from Asia but --- a fact of life.

2013 was a banner year for Greece's Balance of Payments in as much as a current account surplus of 1,2 BEUR could be achieved. Even more importantly, the trade deficit could be reduced to 17 BEUR, still an enormous amount but sensationally lower than the 44 BEUR in 2008.

And yet --- one has to bear in mind that, even in the banner year 2013, exports accounted for only about 55% of imports! Yes, that is a significant improvement over the 2000s when exports accounted for only 40-45% of imports but one has to take a step back and think of the dimensions: for every Euro that Greece exported, it imported two Euros in exchange (more or less). The USA have been criticized for their trade deficit but exports always covered close to 80% of imports. In crisis-stricken Italy, that ratio is closer to 90%.

My understanding is that Greece has not ever in its modern history exported much, for whatever reasons. That's fine and dandy as long as one accepts the consequence of not being able to import very much which, in turn, leads to the consequence of having a low standard of living. My first visit to Greece was in the mid-1970s and I remember a rather poor country outside metropolitan areas. Fair enough --- you offer little but you also don't demand a lot. A combination of factors (notably the EU membership with its subsidies and the Eurozone membership with its cheap loans) allowed Greece to demand very, very much without a corresponding pressure to offer something in exchange.

The EU Commission's paper is a very academic piece: it applies something called the 'gravity model of trade' and it makes all sorts of most sophisticated regression analyses. However, the bottom line is quite simple to understand: Greece could - and should! - offer substantially more in exchange than it is presently doing. To quote:

"Greece's export potential could be enormous. Greece controls 16% of international shipping, making it the world's largest shipping nation. It is located along one of the world's busiest international shipping lanes - the Suez Canal and the Mediterranean - and at the crossroad between three continents. This makes it a natural gateway for trade between Asia and Central Europe. As part of the EU, it is a member of the world's wealthiest free trade area. It is plentifully endowed with sun, beach and culture, making it a prime tourist destination country".

This reminds me of a statement which I made frequently in the early phases of this blog, namely: 'If only the Greek economy developed the right way, I could see - even without an ouzo - Greece as the economic power house of the Eastern Mediterranean within one generation'.

The paper suggests that Greece's exports fall short by 33% of potential. Thus, Greece ranks only 31st among 39 countries analyzed in the paper. But the really interesting thing is that the paper does not put the blame for that on any lack of skills or competitiveness. Instead, the conclusion is that about three-fourths of the shortfall are accounted for by institutional deficiencies in Greece. To quote:

"For Greece, we find that structural reforms that improve the institutionial framework to the average level of our EU/OECD country sample have the potential to close the exports gap - the difference between actual exports performance and gravity to model prediction by between 54% and 78%, depending on the choice of institutional indicator. Rule of law is required for contract enforcement and the willingness of banks to provide trade credit. Sophisticated exports rely on access to the international value chain and the ability to import requiring light customs procedures".

That, of course, sounds rather theoretical and is difficult to prove in practice. Still, I once took a first-hand look at the practice and I would conclude that practice confirms theory in this case. This is what a successful private export consulter told me a little over a year ago: "The public export promotion agency (which is quite large) is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them".

In late 2013/early 2014, the Greek government had elevated the primary surplus to the status of a life-or-death-issue. Fine, let the technocrats have their fun as long as they understand that a primary surplus has nothing directly to do with the functioning of the Greek economy. Going forward, I would strongly recommend that the Greek government elevates the export performance to a life-or-death-issue because that will have a direct impact on the standard of living of Greeks!


  1. Rule of law is no doubt required, not just for the Greek economy, but for Greek society in general. The Greek society remains one large mess of quasi-anarchy. Nothing has changed.

    Imho rule of law (primarily) and light customs (secondarily) would improve Greece's export performance, but not as much as the EU Commission might think. Why? As you put it, lack of skills and competitiveness.

  2. 1. Ι lower your labour cost by 30%.
    2. I raise your energy production cost (electricity, oil tax) and taxation by 30%, so that i can reach a primary surplus of 4,5% of GDP, as per Berlin's comands.
    3. Banks will give you no loans.

    Question: At what price will you sell the final product?

    Hint: Send your wife to your local austrian supermarket and then ask her: "Maria, how much lower does the FAGE yogurt cost now?". Maybe she will reply : "The same as before, Klaus".

  3. Greece's huge tobacco sector was closed down as a condition for joining the EU. Greece is the only country in Europe with natural tobacco growing conditions. NOT because EU was against tobacco. No, a deal so that Italy could plant a permanently failing crop in inappropriate soil and claim a loss each year from 1975 onwards.


  4. I am in the UK. I am just back from the Supermarket. The Feta cheese on the shelf there was produced in Greece with Greek milk by a Greek company and packed in Greece.

  5. I am in the UK. I am just back from the Supermarket. The Feta cheese on the shelf there was produced in Greece with Greek milk by a Greek company and packed in Greece.

  6. As someone who lived years in Argentina, what is your opinion about current events?



    1. Only as it relates to Greece, the following: I have always argued that there are only 2 ways to get rid of sovereign debt subject to international law --- either repay it or have it forgiven. Otherwise, it remains an obligation until doomsday (unless in situations like regime changes such as the Tsarist Empire / Soviet Union). The hedge funds are testing that thesis with Argentina and they seem to be successful. In the 'old days', something like that was unlikely to happen because there were no hedge funds as lenders. Almost every lender had something to lose, could be put under some sort of pressure from other banks, from Central Banks, from governments, etc. Hedge funds apparently have nothing to lose and when you have nothing to lose, you can pursue a strategy like Elliot. Normally, such small lenders who blackmail an entire country and the majority of lenders are paid out early on by the majority of lenders; just to get rid of the nuisance. Not in full but normally they are offered a good deal. It takes some nerve for a hedge fund to stick it through like Elliot but I hasten to point out that the game is over when it is over and it ain't over yet. Elliot does not have the cash yet. The others have smart lawyers, too. However, if they stick it through to the end, they will make a killing. Not only will they be paid 100% on something which they bought way below par but they will claim enormous sums as penalty interest. My sense is that Elliot will eventually settle but at a very, very high price.

    2. You confirm what i thought. From what i read in news the intention of Argentinian government is to reach in an agreement, althought if Elliot does not accept a " very reasonable" solution obviously with profits, there will be eventually effects.
      For my understanding however court's approach-rationale and finally decision, was not solid at all from two aspects.
      First Judge Griesa possibly is incompetent for that decision due to very practical and obvious reasons and the fact that he is more that 83-84 years old. Judge Griesa does not assess at all the aspects, in a broader view.Which was the sceptic of his decision,under the view of the crash in economy in 2008 the role of hedge funds to begin this crisis, or even he did not evaluate how the specific funds are profiting. He should assess history and contribution to the society they serve.
      All these are not irrelevant with his decision. Second Elliot's intention was a speculative one and never gave signs of any compromise with good faith.The luck of good faith is confirmed from his approach (asks full 100%).
      Markets do have their rules but people and especially legislators should assess all under a critic approach.
      Judge Griesa role could be much more helpful for a compromise and a final agreement for the benefit of all.


    3. Actually, the legal case is quite simple. The loan is subject to US law. The documentation says that payments must be made in USD in a designated US bank account. Unless those USD are in that US bank account, any judge will rule that the loan is still due in full. How a US judge can rule that Argentina cannot make payments to third parties is not known to me but there must be cogent reasons under US law.

    4. Why "any judge will rule that the loan is still due in full"?
      This is the case, "in full".
      The issue for me is, if a judge has or better should have, the independence to make a broader interpretation of the law.

      Elliot Management is demanding to be paid at 100% althought bought this bonds for a few cents of a dollar KNOWING everyone that he will sue the Agentinian government, eventually. He did it all on purpose.
      In 2005 and 2010 if i recall well a 92% of bondholders (i don't rememberif any under US law) agreed to a 70% haircut. The remaining 8% did not accept the agreement and go to courts.
      The judge should have evaluated all the facts and the actions of Elliot.
      The Argentinian government it is important to suggest an offer in a price no more than 40% of total sum that Elliot is demanding which is a profit for the company
      If Elliot do not accept that offer, then Argentina should begin a global campaign in press, tv, newspapers, with paying advertisements informing people for their scope of work, their lobbying activity to influence US legislation and their contribution in producing employment and social goods for a society.
      People around the world despise all this kind of banking-hedge fund-private equity industries.
      In such cases it is sad for a whole country to deal with that kind of problems without any authority to force a mutually descent compromise.


    5. I am not a lawyer but I just don't see how a judge can rule against the letter of the law (even if it violates the spirit). Just assume a judge did what you suggest (i. e. take into account and evaluate all the surrounding facts), can you imagine what kind of precedent this would be for the future? No one could ever trust the letter of a loan agreement again.

    6. There is the loan agreement, yes, but the agreement prohibit Elliot to seak an agreement in 2010 with good faith? (Elliot bought bonds in 2008).
      92.4% not 70% or 80% of bondholders (i think many bonds under US law) do not oppose.
      The facts that intervene during a period of 6 years don't confirm a good faith from Elliot.
      Argentinians from the other side decided to have one of the best consultation teams and shifted a lot. They say today they want an agreement, they propose negotiations.


      Judge Griesa would not have to change his rulling (the letter of law) but only he should have made a significant remark-suggestion an underline, to his decision, so as both sides reach in a viable in economic terms mutual agreement.

      See it from another ankle, only practically. According to the advertisement : "Total bonds that did not enter the restructuring agreement are 15 b $."
      Argentina if was to pay the 1.5 b $ to hedge funds at 100% then is also obliged to pay in 100% and 15 b $.

      It would be good for both sides to talk but Argentinians can not pay more than 30-50% of total sum, but can propose a solution with new bonds and money together.


  7. The Greek export fail to "recover".
    Export has always been a week point of the Greek economy, Greek businesses don't like competition, and nowhere is competition as fierce and honest as on the global market. On the domestic Greek market they can hide behind complicated rules and regulations, political protection and politically influenced judicial execution. In the end there will always be a political anmesty for their debt because of an election.Greek businesses have always risked the money of other people, cheap and unsecured government and bank loans. In the present supervised Greek economic climate the word is "put your money (collateral) where your mouth is", that scares any Greek businessman. The concept that in order to get a personal profit you have to risk personal capital is alien to Greeks, it's malaka, it's more stupid than paying taxes.
    So, when will Greek export pick-up?
    1. Then they change their understanding of risk, do not hold your breath.
    2. When some sucker underwrite the risk for them. That can be ECB, EZ, EU, or the Greek state on behalf of one of the aforementioned.

    I have noticed that anonymous 1 think that export will pick-up if wages are increased, energy and tax rates are reduced and banks go on a lending spree. Well, that was what we had before and that did not make Greece an export champion. I do admit that one can stimulate any and all export by subsidizing it enough, if one has the money for that.

    Anonymous 2 pull out one of the typical Greek myths (lies), the one about how "the others" stole their tobacco growing indutry. Greek children above the age of 5 has already had it indoctrinated in them. The facts are that of EU's tobacco production, a nation of 60 MIO (Italy) produces 39%, another nation of 11 MIO (Greece) produces 36% (source greekproducts.com 2014). Both nations being handsomely shovered with CAP money from EU for doing so, while at the same time EU run expensive anti-smoking campaigns.
    PS. I'm a heavy smoker and still offended.

  8. What Greece needs to do is, to export a lot more Ouzo than it does now! Ouzo represenets a national treasure for the Greeks!!