Monday, July 7, 2014

Greece's Capacity to Repay Foreign Debt

John Maynard Keynes wrote in 1919 about Germany's capacity to pay indemnities to the Allies as reparations. Below is a brief excerpt whereby I replaced 'Germany' with 'Greece'.

"Estimates of Greece's ability to repay foreign debt depend on the assumption that she is in a position to conduct in the future a vastly greater trade than ever she has had in the past. It is only by the export of specific commodities that Greece can pay. It is certain that payments can only be made by Greece over a series of years by diminishing her imports and increasing her exports, thus enlarging the balance in her favour which is available for effecting payments abroad. Greece can pay in the long run in goods, and in goods only, whether these goods are furnished directly to Eurozone partners, or whether they are sold to others and the other credits so arising are then made over the the Eurozone partners".

Well, not quite. Keynes only talked about the product side of the current account. Particularly with regard to Greece, the services side of the current account is equally important because it generates large revenues from abroad (tourism, shipping, etc.).

But still: a country's ability to repay foreign debt depends on the country's ability to generate a surplus in its current account. One can, of course, achieve that surplus by radically cutting imports (as Greece did). However, cutting imports is of no sustained value because once they are cut, the end of the line is reached. In consequence, only through an increase in revenues from abroad (exports, services) can Greece entertain the hope of ever repaying at least part of its debt to foreigners. And the nice thing about increasing exports and services is that it creates domestic employment, domestic wage/income taxes and domestic social contributions --- all revenues for the state.

I am presently celebrating the 3rd anniversary of having repeated the above points over and over again.


  1. Many happy returns on the anniversary...Seems there will be many more unfortunately....

  2. Cutting imports, austerity and unemployment have also advantages.

    They reduce wage expectations, in the Greek case (despite Keynesian theories) they even lowered wages.

    The lower the wages the higher the competitiveness, the higher company margins, the higher the current account and the reduction of unemployment of the long-term,

    Remaining in the euro is essential, because otherwise company costs in form of capital would rise extremely and destroy the fruits of lower wages.
    A weak Drahma would raise appetite on higher wages.

    I wonder how people like Mr Münchau and possibly this blog cannot understand this economic principle applied by European leaders, given that nearby Turkey gives the best example.

    1. Am not quite sure how your comment relates to my article. I didn't quote any of Keynes' theories on aggregate demand, money, interest rates or whatever. I quoted from his one book where he didn't discuss theories but only the real economy, in that case the real economy of Germany. And his message was simple: if you want to get money out of an economy, you have to make sure that the economy can make money on its own in the first place.

      The economic principle applied by European leaders? In simple terms: get the household under control (i. e. reduce the public sector); liberalize the economy, become internationally competitive pricewise and --- sit back and watch how the marvels of capitalism start working on their own. That would work in economies like those of France and Italy. They have a substantial industrial base; they have been economic powers before and the only reason why they no longer are is become they have become so controlled and uncompetitive. There, one would simply have to unleash forces which have been in place before.

      Greece has never had much of an industrial and/or manufacturing base and whatever it once had, since the Euro it has become even less. Thus, a huge portion of the products and services which Greek consumers desire to have must be imported. If you don't know how to manufacture, you won't learn it simply by becoming competitive pricewise. Only foreign investment can offer the necessary know-how transfer within a reasonably short time frame. That's why I once wrote and article titled "Don't send money! Send machinery & equipment (and the know-how) instead!"

      Since 2010, Greece has become cheaper (more competitive) pricewise and the Euro has become cheaper against third currencies. If there had been an economic base and structure ready to respond, they would have responded by now. Instead, exports are declining.

      Whether it's the Euro or the Drachma, if the Greek economy does not increase its own economic value generation capacity (with the help of others because alone they won't be able to do that), Greek living standards will not return to previous (artificially high) levels.