Thursday, February 21, 2019

Current Account 2018: A Forebearer Of Bad News?

Below are the figures for Greece's current account during 2018 as compared with the previous year (in BEUR).

2018 2017
Revenue from abroad
Exports 32,4 28,0
Services (e. g. tourism) 37,2 33,7
Other income 6,4 6,6
Current transfers 2,0 2,0
-------- --------
Total revenue from abroad 78,0 70,3
Expenses abroad
Imports 54,9 47,9
Services (e. g. tourism) 17,8 15,6
Other expense (e. g. interest) 8,0 7,4
Current transfers 2,5 2,5
-------- --------
Total expenses abroad 83,2 73,4
Net foreign deficit (current account) -5,2 -3,1
Trade balance -22,5 -19,9
Services balance 19,4 18,1
Other balance -1,6 -0,8
Current transfer balance -0,5 -0,5
---- ----
Net foreign deficit (current account) -5,2 -3,1

What stands out are: (1) a very significant jump in exports to 32,4 BEUR, the highest level of exports ever and over 50% above the pre-crisis levels; (2) an even more significant jump in imports to 54,9 BEUR, which comes close to the pre-crisis record imports; leading to (3) a deterioration in the trade balance from minus 19,9 BEUR to minus 22,5 BEUR; and (4) a drastic deterioration in the current account from minus 3,1 BEUR to minus 5,2 BEUR.

Does that sound familiar? Yes, it does!

We remember that Greece got into its foreign debt predicament primarily because of huge current account deficits. Current account deficits which were the result of the national economy's not producing enough of those products which national consumers wanted and which they, therefore, bought offshore. In simple terms: Greece purchased from Germany and Germany provided the buyer's credit. A game where everyone seemed to win, at least as long there was an unlimited supply of buyer's credit.

I have argued for many years the following: if we really want to know if the Greek economy has been structurally reformed, we have to wait until purchasing power returns to the national economy. If the return of purchasing power is matched by significant increases in imports, we know that the structure of the Greek economy has not changed very much.

Greece will continue to import capital for the purpose of financing imports. Economic value creation, jobs and profits will be in those locations where those imports are produced. Job growth in Greece will be slow and the foreign debt load will increase significantly. At least as long as foreigners provide the capital required by Greek importers.

Saturday, February 9, 2019

Andreas Papandreou In The Context Of Juan Domingo Perón And Bruno Kreisky

Prof. George Kassimeris of the University of Wolverhampton wrote this article about Andreas Papandreou, Greece's first socialist Prime Minister who would have turned 100 this month. I have to take Prof. Kassimeris' opinion at face value because my own knowledge of Andreas Papandreou and his policies is superficial, at best. Thus, intuitively (and not scientifically) I always associated Papandreou with 2 other political figures who have left their marks on their respective societies.

Juan Domingo Perón came to power in Argentina in 1946 and left a legacy for his country which is still alive today, 45 years after his death. Perón was a 'caudillo' (the gentleman equivalent of a 'macho'), a natural leader. Today, he probably would be classified as a populist. Perón, with the clever assistance of his wife Eva, could manipulate people's minds and seduce people's hearts. Perón's genius was to discover a simple truth: if, in a developing country, one aims to achieve a democratic majority, the most promising target group are the underprivileged. Not any particular kind of underprivileged but, instead, ANY underprivileged. And certainly in underdeveloped economies, there will always be multitudes of people who feel underprivileged. Perón coined a term for his underprivileged, the 'descamisados" (the shirtless ones) which, in retrospect, can be viewed as a genial marketing gimmick. There was no objective definition of what identified a shirtless one. Instead, a shirtless one was one who felt underprivileged for whatever reason. In marketing terms: that broadened the target group.

In the first decades of the 20th century, Argentina was among the world's 10 largest economies, the peso was considered like a reserve currency and Buenos Aires was often called 'the Paris of the rest of the world'. Argentina was truly a rich country and yet, millions of Argentines were truly shirtless. Progressive policies aiming at an evening out of wealth and incomes, providing social security and strengthening a middle class were certainly called for. Classic politicians have to struggle to achieve parliamentary majorities for their progressive policies. A 'caudillo', on the other hand, rouses the shirtless ones with fiery speeches. And Perón was the best among the many 'caudillos'. Progressive policies evolving from rational debate and parliamentary majorities generally have a fair chance of improving society overall. The manipulation of a 'caudillo' is much more prone to economic failure. The 'caudillo' Perón assumed government in 1946 of one of the richest countries in the world and when he died in office almost 20 years later (with one short interruption of governing), Argentina was considered a failed state. If Argentina is considered a failed state even today, the roots of that would go back to Perón who truly changed the paradigms of society.

Bruno Kreisky became the first socialist Chancellor of Austria in 1970 and he remained in that position (much of the time with an absolute majority) until 1983. Although of rather unattractive physical appearance, Kreisky magnetized people with his mind, his mouth and his mimic. He could explain complicated things in simple ways which everyone understood and he could articulate his views in such a way that it was easy to agree with him. Whereas Perón was a 'caudillo', Kreisky was referred to as the 'Sun King'. Having been rather revolutionary in his youth while coming from a family of industrialists, Kreisky had the ability to communicate comfortably with workers as well as with industrialists. He won the support of intellectuals and artists. Kreisky often replaced the term 'my government' with 'my team' ('team' was a revolutionary term back in 1970!). Kreisky proudly described his team as a collection of supreme competence and he promised that 'Kreisky and his team' would modernize Austria. Before I ever saw Kreisky on TV for the first time, I had been warned that he was a 'dazzler of the worst kind'. I definitely was not going to fall for his dazzles but, still, it did not take long for me to start enjoying being dazzled by Kreisky.

Like Perón, Kreisky set out to improve the lives of the underprivileged. He was a champion of nationalized industries (of which Austria had many at the time), of protecting the economy from too much (foreign) competition, of the Welfare State. Never in the history of Austria were so many social benefits spread throughout the population as during Kreisky's reign. When the conservative opposition warned that Austria was headed for bankruptcy if the state borrowed so much money to finance social benefits, Kreisky told the workers of Austria's largest (nationalized) steel company: "A few more billion in debt cause me less sleepless nights than a few thousand more unemployed." The workers cheered and that sentence is referred to even today whenever there are economic clouds on the horizon.

Why did Austria not go bankrupt? For one simple reason: Kreisky had indeed some competent people in his team whereby the key player was Hannes Androsch who became Finance Minister at the age of 29. As regards mind and mouth, Androsch was nearly on par with Kreisky. As regards physical appearance, Androsch was a movie star compared with Kreisky. As regards charisma overall, I would rate Androsch higher than Kreisky, particularly his appeal to the younger generation. While raised with socialism in his milk, by profession Androsch was a certified public accountant. In short: he understood numbers. He argued that, if the nationalized steel company had substantially higher production costs than foreign competition, this might offer some benefits in the short term but for the long term it spelled trouble. When Kreisky argued that Austria should devalue to become more competitive, Androsch held against that devaluation always leads to higher inflation. Against Kreisky's fiercest opposition, Androsch pursued a 'hard Schilling policy', i. e more or less pegging the Austrian Schilling to the Deutsche Mark. The resulting financial discipline pervaded the economy and was the major reason why Kreisky's free spending intentions could not lead to a financial crisis. Androsch forced the economy to begin the adaptation to international competitiveness. Joining the EU in 1994 was the second step and joining the Eurozone was the final step. Having managed these 3 steps successfully, Austria became one of the wealthiest countries worldwide but that might not have happened without successfully completing the first step.

How would I compare Andreas Papandreou with Juan Domingo Perón and Bruno Kreisky? In terms of leadership traits, similarities with both but a lot more similarities with Kreisky than with Perón because Papandreou, like Kreisky, was an intellectual and Perón was not. Where did they differ? Kreisky appointed a competent Finance Minister and allowed him to exercise his power where Perón and Papandreou did not (or had they done so, the question is whether they would have allowed the Finance Minister to exercise power). One could go so far as to argue that if Kreisky had not had Androsch as his Finance Minister, Austria would have, economically, followed the trend of Greece. There is no way to prove that but one could argue it.

I consider the year 1981 as one of the most crucial years in the history of Modern Greece because two events, each historical on its own, came together and they reinforced one another in such a way that at the end of the process which they initiated was Greece's bankruptcy in 2010.

One event was Papandreou's coming to power as the kind of charismatic, populist leader described above. The most important ingredient for implementing Papandreou's policies/visions was money and the Greek state's access to money, particularly in foreign markets, was limited due to Greece's perceived economic and currency risk. The other event was Greece's joining the EU because that brought, directly or indirectly, the money needed for Papandreou's policies/visions. Directly in the form of EU subsidies; indirectly as a result of Greece's increased standing as a borrower thanks to EU membership. Not only the state but all Greek banks found it easier to raise money offshore to finance a spree of domestic (mostly) consumer financing. The most fatal long-term aspect of EU membership was that the EU brought to Greece the famous 4 freedoms (free movement of products, services, capital and people). I have argued repeatedly that Greece was not ready and/or not equipped to handle 2 out of those 4 freedoms: free movement of products and capital. The radical increase on the domestic demand side as a result of Papandreou's policies could not be satisfied by Greece's supply side, neither in terms of quantity nor in terms of quality or price. Logically, the increased purchasing power would shift towards imports. Under normal conditions, external financing constraints act as a check on import explosion. EU membership loosened the external financing constraints and it is only natural that Greek consumers would prefer imported products of high quality and low price when such products where not even available in Greece or, if yes, at lower quality and higher price. At the level of Greek consumers, Papandreou and EU membership were a blessing. At the level of the national economy, Papandreou and EU membership initiated Greece's path towards eventual economic disaster. A national economy which is not yet ready for international competition will suffer extraordinarily if the borders are opened too quickly, particularly when open borders not only bring new products from abroad but, at the same time, the loans to pay for them. The products are quickly consumed but the loans remain. Parallel to that, domestic manufacturers fail as a result of foreign competition. They go bankrupt or are nationalized by the state (in which case public sector employment increases).

To sum up: the stage for eventual economic disaster was set under Papandreou (already back in 1993, Yanis Varoufakis described the Greek economy as being in a state of terminal decline), facilitated by concomitant EU membership. The Euro put a turbo on that development by expanding an increased flow of foreign debt into a tsunami of foreign debt (more than half of Greece's foreign debt was contracted from 2001-10). A one-sided blame on Papandreou/PASOK would be one-sided, indeed. The other large party (ND) was equally responsible because when they were in power, they only copied Papandreou/PASOK instead of correcting a wrong development and with their reckless financial conduct from 2004-09 they put the final nail into the coffin of the Greek economy.

The cases of Perón, Kreisky and Papandreou show how one person, literally alone, can shape the destiny of a country for a long time because such leaders can set in motion a long-term shift in paradigms. Shifts in paradigms are welcome (or even necessary) when they replace negative or wrong paradigms of the past. Kreisky correctly explained to Austrians that the fetish of balancing the budget can be bad for the economy when it is a fetish, but the paradigm shift was that Austria didn't balance its budget for the next 45 years and accumulated high debt. If, as Prof. Kassimeris argues, Papandreou replaced the nationalization of resentment with the nationalization of pride, that was most positive for society except when it leads to a paradigm shift towards a "search for national grandeur bringing about economic stagnation, double-digit inflation, a bloated public sector with colossal deficits."

Kreisky stands out in the group of 'caudillos' or 'Sun Kings' for having chosen a self-imposed check on one's follies by appointing a competent Finance Minister and giving him power, even power to oppose Kreisky' intentions. Now, almost 50 years later, Austria still benefits from the paradigm shifts which BOTH, Kreisky and his Finance Minister, had brought about albeit it in different ways. Perón and Papandreou did not self-impose checks on their follies which led to paradigm shifts which, like in the case of Austria, are still felt today. Only that they are felt in a negative way.