Thursday, May 21, 2015

Reforms, Not Stimulus? Or Knife To The Throats?

Below are two articles which present a good contrast of views:

Reform not stimulus is way out for Greece, by Konstantine Gatsios and Dimitrios Ioannou (Bloomberg)
Defiant Greeks force Europe to negotiating table as time-bomb ticks, by Ambrose Evans-Pritchard (The Telegraph)

The difference between the two, in my opinion, is that Ambrose Evans-Pritchard (AEP) points out what the problem is with Europe's negotiating tactic whereas Gatsios & Ioannou (G+I) explain what the problem of Greece is. The latter question is not addressed by AEP.

"Equally telling is that during the five years since the crisis began, Greek imports have exceeded exports by almost 60 percent. Although Greeks are certainly buying fewer foreign goods than in 2007, it is clear that insufficient 'effective demand' is not the root problem here. What has been lacking is 'effective supply' -- the ability of the Greek economy to produce enough competitively priced goods to sell and grow", state G+I and they hit the nail on its head with that statement.

I have emphasized this ad nauseum in the past: the Greek economy is far from being able to provide the products & services which its residents desire so that Greek residents purchase those products & services from other economies. For this to work in the longer term, the Greek economy would have to provide products & servcies to other economies in order to make the books balance. The latter not being the case, the books don't balance and the Greek economy will always require funds flow from abroad in order to be able to satisfy the desires of its residents. Anyone who truly wants to change this situation for the better needs to focus on getting the Greek economy to provide more products & services which its residents (or foreigners) desire. To the extent that this is accomplished, there will be more jobs, more wage/income taxes, more social contributions - in short, more revenue to the state.

Now critics will call me wrong because, for quite some time now, the Greek economy has registered current account surpluses, i. e. proving that it is not even balancing its books but even achieving surpluses. My answer to this is: Look at the unemployment rate and the exodus of Greeks to other economies!"

Sustainable employment can only be increased if there is an increase in the provision of products & services. So more domestic demand will quickly solve that problem? No, because in the absence of sufficient domestic supply, the money will go into foreign supply (imports). As G+I so aptly phrase it: "A policy of Greek fiscal stimulus would have the perverse effect of creating jobs in Germany, China and other exporting countries that would simply sell their wares to Greece."

And what does AEP have to say about this. Nothing, really. Except that if "the creditors could have found common ground with Syriza at any time had they wished to negotiate." So it's all about finding common ground between creditors and borrowers? Perhaps, particularly when one is stubbornly intent on curing the symptoms instead of attacking the source of the problem. The debt is the 'derivative' whereas the real economy is the 'underlying'. One cannot ever fix the 'underlying' by playing around with the 'derivative'. Certainly not in the long run! But we all know what happens in the long run... 

A very 'progressive' German blogger, Jens Berger, has once argued that Greece within the Eurozone should be no different than the German state of Mecklenburg-Vorpommern (M-V) within the German union. To illustrate: M-V is one of the poorer German states with totally insufficent economic value creation on its own, thereby living on transfers from central government agencies. Jens Berger says, correctly, that no one in its right mind would argue that M-V should leave the German union.

True, but M-V has an adjustment valve which the Eurozone has only in theory: its residents only have to hop on a train and, within a couple of hours, they are in an economy where jobs and incomes are plentiful. And --- they are still in Germany! M-V has registered a phenomenal exodus of residents since German unification and, despite all the transfers, it still has one of the highest unemployment rates in Germany.


  1. Klaus: you are putting the cart before the horse. As, indeed, is the Troika. Although there is still (diminished) demand for goods in Greece, that demand is being satisfied by imports. However, the limited evidence I have seen suggests that it is cheap imports since 2010 -- primarily from China and India. That is indicative of weak demand by a country undergoing severe depression.

    In such a context, there is no possibility for Greek companies to produce goods that would substitute for very cheap imports. Not only can they still not compete with China in terms of the exchange rate, the Greek production costs have been hit by massive taxation alongside depressed demand.

    Moreover, the policy recommendation of a fiscal stimulus is unlikely to be sufficient, since the problem is not merely demand side: it is also supply side, caused by the Troika's foolish policies. Until there is political agreement between Greece and the Troika (by any other name) there can be no economic stability, no significant production let alone FDI or even domestic investment. Varoufakis and I have been saying this to you all along, and you persist with the line that Greece can solve its economic problems on its own. There is no precedent for a semi-developed country in a monetary union being treated like this, and no simple answers to the complex problems.

  2. Well said, that's exactly how it is. Unfortunately, the Syriza government has only shown interest in redistribution of income rather than producing new income. Therefore Greece will continue being in the doldrums for quite a while yet.

  3. Dear Mr. Kastner,

    I have expressed this issue in an earlier article and until we have clear data the assumptions and comparisons made are purely theoretical.

    I have proven in my line of work that we 1 vs 1 are cheaper than china, germany and all other eu coutnries listed in my comments. Furthermore, my suppliers are even more competitive than all foreign suppliers again. China, German etc.

    As i have viewed higher valued products on the shelves still are imported but greatly have been reduced. The value of our exports as to be competitive in foreign markets is very low. As the value of the exports is very low there is less profit as to invest in equipment and infrastructure while also added people into the wokforce. It is working in the private sector but it is only trickling. And it is trickling because we have become believe it or not efficient. Personally my workload has a multiple factor x10 since 2006 and i have the same persons under me. We simply upgraded and consilidated work loads to be extremely effieicent with high output. Meanwhile what i do affects directly the output of a production line. I have unilaterally made two division efficient with the addition of extra workers to a minimal. That is not turned into profit but in reduce wholesale price as to penetrate new markets outside of greece.

    If we can get beyong this damn eco crisis the results will be more evident.

    The report greece 10 years from now is still achievable.


    1. @ V: I get more and more curious in which company you are working. :-)
      And if it is and outstanding exception or phenotypic for private greece companies.

  4. Mecklenburg-Vorpommern is a help needing German state within the German Union, and its citizens are Germans, needing help from other Germans.
    Greece is a help needing Greek state within EU, and its citizens are Greeks, needing help from Germans, Dutch, French, Lithuanians, Italians, Spanish, etc..
    It is not a problem that Greeks get help from all of them.
    It is a problem that they are Greek, and have chosen an insane government.
    Putting a knife on the throat of Greeks is not my intention.
    That sounds too negative. Overruling.
    They have a choice. It is or yes, or not, agreeing with the conditions needed to create an agreement.
    As there are agreements between the tenant and the lessor. Payments. Because the house is not the possession of the tenant. The same for the loans: Greeks do not possess the money, they borrow it, and are the tenants of it. If a tenant does not want to live within the rules of the lessor, the tenant has to leave the house. All consequences are his.
    The lessor cannot demand a tenant to stay.
    EU cannot demand Greece to stay.
    EU must behave like a wise parent.
    Of a son or daughter that is not willing to cooperate.
    It proves of more love of the parent to offer the son or daughter the freedom to make own choices, smart or not.
    To learn. This is of a higher value than all the money in the world.
    This is showing also care for the other sons and daughters.
    They may not suffer because of one stubborn brother or sister, that does not want to listen, to follow up rules, like all others do.

    Feelings of pity are pitfalls, and not helping anybody.

    A question: Why is there not any sign of worry about WHAT will happen after Greece will eventually have received the money they need to go on?
    WHERE are the plans? Has anybody of EU asked for it? No. Let them, the Greek Government, the Finance Ministry, start with it. Showing they are REALLY willing to go on.
    But I am convinced they do not have a plan, still. And that is very very dangerous. For Greece, for EU.

    No, Varoufakis and Tsipras, I do not trust you, not your party, and as long there are too many Greeks who trust you and support you, and are not voting against you, I do not trust Greeks in general and not any meeting with one or both of you. I hardly hear any Greek anti government talk, not in Greece, not in EU. Not from the EU leaders. That scares me.
    That tells me that EU is naive, too much blinded by money and profit on the short term. Not able to watch beyond the horizon is a sign of lack of intelligence.

    1. I'm sorry, but your comment that Greeks have chosen "an insane government" cannot pass. It is very clear to most readers of this blog that your grip on reality is tenuous, and your ability to identify sanity (or otherwise) highly questionable.

      Most of the world's economists have denounced the treatment of Greece by the eurozone as totally irrational; only those employed by banks and governments are supporting the current and past insane policies of the Troika. Your personal political opinions are neither here nor there, and most certainly do not fall within the realm of sanity.

  5. A collegue of yours, former banker and vice president in the "greek istitute for strategic studies", shares your view, however objects that the austerity alone (codename "reform") has been tried and failed and is politically a non viable option (otherwise, in a few years, everyone shocked will comment on "why did Greeks vote for Golden Dawn?). So his idea, is that Greece will not move further without a form of debt restructuring, that will make available all funds that are scheduled to go to debt service, into investments to stimulate production, not consumption. Together with tax overhaul, attraction of foreign investment etc. He argues, that increase of income will come through increased wealth production, not increased consumption. He adds, that the non-ending tax increases and further cuts on wages/pensions will do nothing else than deplete the economy from any liquidity to the degree that won't be functioning anymore. The constant worries and talks about Grexit, also do nothing more than scare away capital.

    Makes sense to me. Not to the troika though.

    The greek unemployment numbers don't say the true story. There is a disjointed educational system from the economy's realities. The educational system is also too loose. Greece is providing too many university posts and too many faculties. There are faculties that by hearing their name, one can't understand what they are about. Having a large number of aircraft designers in a country without aicraft industry, is a paradox. On the other hand, if you want to find a plumber because your house is flooded, you must pray on your knees. The policy of "university for all", which was inaugurated by PASOK in 1981, also had the effect, that the agrarian population shrank and their children moved to the cities. So now you have everywhere young people with university degrees, that have never seen a cow or don't know how a flower smells. Let alone how to cultivate their grandfather's cotton field.

  6. Klaus, I can't help wondering why in your careful elaborations most times you avoid considering Grexit??

    With Grexit and after devaluation of Drachma the local production automagically becomes competitive in many cases, which helps balance the budget and gives work to unemployed.

    Example: I currently travel in Portugal and here (in contrast to Greece) you won't find huge uncultivated areas that could be used for agriculture.


    1. You observe correctly that I avoid the subject of Grexit; intentionally so.

      In any discussion about what is best for the Greek economy, the subject of Grexit cannot be excluded from discussion. In fact, already back in the spring of 2010, I would have expected that there are, totally confidential, discussions between Greece and the Eurozone about the pro's and con's of a Grexit.

      Today, there cannot be an objective discussion of Grexit. If Grexit happens, it will happen in an unvoluntary and disorderly way. The shorter-term fall-out will be worse than anything one can imagine. That's why I don't even talk about it.

      Yes, in the longer-term, Grexit could be beneficial for the Greek economy but I am more concerned about what happens in the shorter-term (say 1-2 years). Greece will be in shambles until the dust settles with hyperinflation and social unrest. But what's even more important: the world will elevate Greece to the "Ausschwitz of today" and guess who will be blamed for it? Paul Krugman & Co. will write articles how wonderful life would have been for Greeks if they had not been forced out of the Eurozone by Germany and if Germany had only recycled a bit of the profits it had taken on Greece.

      So, it might well be that Greece would be better off with a Grexit once it reached point B. What I am concerned about is what happens between point A & B. The only way to responsibly enter into that period would be to upfront forgive Greece most of its debt and to add another 50-100 BEUR as alimony. And even then SYRIZA would still want to sue Germany for war damages.

      Two years ago, when things with Greece were more 'peaceful', I wrote the below article. Today, I avoid the subject of Grexit because any such discussion would only be interpreted as pouring oil into the fire.

    2. Thx! The motivation for publishing a blog cover a wide range and I did not read a statement about your intentions.
      Only from the context I guessed that you intend to present your observations together with well founded economical analysis, regardless of the question whether such analysis "would only be interpreted as pouring oil into the fire".
      In case a well founded analysis could be explosive, imho politicians might be tempted to produce blind spots in their vision of the unpleasant world. From technical experts like bankers I rather expect a thorough analysis disregarding possible hot spots ;)


    3. Re Lord Dahrendorf, 1995:

      When at that time I red his analysis, I thought that he was exaggerating and that technical aspects (like target 2) and international acceptance were the highest risks.

      Nowdays I must admit that unfortunately he might have been correct.

      While for some years PIGS looked like the most unstable economies, France has to be added to that group and since the left government of F. Hollande did not remedy the situation I see a dark future: If a non left oriented government tries to do what must be done, there will be strike and disorder terminating any such attempt.



      Even NyTimes does wishful thinking:

      Imminent default


    5. The article below mentions another risk of a Grexit which I had written about quite some time ago. That risk is: if Greece leaves the Eurozone and, after some intitial shock period, adjusts to the Drachma and gets its economy booming, then the EZ-elites will really have a problem justifying the continuation of the Eurozone.

  7. Gatsious and Ioannou spend 2 pages building a strong case for not giving Greece further fiscal stimulus; it was not hard to convince me. A look at the last 40 years stimulus and the results should be sufficient.
    Then they draw the strange conclusion that further stimulus, in the form of debt reduction, should be offered, in order to assure their friendship and willingness to reform. Well I for one, do not buy my friends and their willingness to reform in their own best interests.