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.


  1. IHS Markit made a similar point in its recent study. They considered various scenarios for the Greek economy and they concluded that reducing the VAT and personal income tax rates stimulates household consumption, but it also leads to higher imports, which limits the positive impact on domestic growth and employment.

  2. I am still having an issue w/ posting comments on your blog (what I post does not seem to be received and published). This aside, regarding your concern on increasing imports for Greece here is a remark.

    The economy of Greece is about 75% dependent on energy imports (Greece's Achilles heel) and as such my suspicion is that increased imports have little to do with increased consumption and more to do with rising oil/energy prices for the period 2017 to 2018. I don't know how we can check this but I think Greece has a very high energy-related vulnerability.

    If my comment on your blog is not registering for some reason, you may want to post a note about this because it might lead to new ideas of addressing the underlying issue.

    Otherwise, the failure of Greece demonstrated by its current account might look like the typical political manipulation of the opposition which dislikes the current government but nevertheless, it (New Democracy) cannot provide any better and more convincing answers to the structural problems of the Greek economy. If we truly care to solve the problems of the Greek state in the long run then I am afraid we must look at the issues on the abstract without even a hint of political manipulation. I personally find it preposterous for the current Greek opposition parties to suggest new magical solutions when one has to navigate a serious set of constraints and structural long-term improvements; there no easy short term solutions for Greece.

    I could be wrong but I am just confessing to you my fears that politicians are not interested in improving Greece but rather secure a position for themselves(because governing Greece is the real trophy here for the ruling party). Your criticism is welcomed but let's try to go beyond the surface. What is really going on? An attempt to boost GDP so that debt issue becomes more sellable? There could be a number of factors which we are not aware of. Should we be looking instead at the 10yr Greek bond yield?

    We should also look at Cyprus (which is the better Greece, pretty much as Austria is the better Germany), whose economy is on fire but it has an even greater vulenarbility than Greece in its current account. The big difference in Cyprus is that its real estate sector is booming and in the case of Greece is non-existent.

    It's my opinion that focusing on the Greek trade balance is the wrong metric for judging the performance of the Greek economy, but of course I might be wrong.

    Dean Plassaras

    1. Just one point: if you exclude oil and shipping, exports exceeded 22 BEUR in 2018, very substantially above the pre-crisis level which was somewhere between 14-17 BEUR (up's and down's).

  3. Bring back the drachma. Then if the current-account goes south, Greece devalues, automatic correction. It worked in the past. More importantly, Greece will reacquire the ability to boost it's economy, since it can never run out of drachmas. The euro is too hard a currency for Greece's economy. The policy imposed (large primary surpluses) is nonsensical for an economy without much productive infrastructure and whose banking system is still non-functional. And before anyone says "then how do you explain the growing current-account deficit", the answer is that the Greeks have been dis-saving massively since 2012.

    1. The several sovereign external payments crises which I have observed during my career confirm your view. The sequence always was: (1) major restructuring of ALL foreign debt (sovereign as well as private debt) but no haircut; (2) major devaluation; and (3) the usual IMF reform package which was implemented or not. Within 1-2 years the economy got going again.

      In the early years after 2010, I was under the naive impression that Greece could accomplish the same result without having to revert to a local currency. I proposed that Greece should hold on to the Euro but simulate a situation as though it had returned to the Drachma: high taxes on imports and significant export promotion (funded with taxes on imports). Well, that was then.

    2. "high taxes on imports and significant export promotion (funded with taxes on imports)."

      Feeling blasphemous, are we?
      It will be a cold day in Hell before the EU (i.e. you know who) ever allows a thing such as this!

  4. The only time I know of that the Greek FX-reserves dwindled dangerously was in 1985, but a devaluation plus a wage-freeze fixed that. Other than that, post-war Greece never got in danger of import shortages.

    Thankfully, back in the 80's, Greece had the smarts to not join the European Monetary System (EMS), which only allowed for fluctuations of up to 6% with the benchmark currency (the Deutsche Mark).

    Returning to today, the current policy of internal devaluation (large primary surpluses, non-functional banking system) can only work in an export-orientated country, not in a country that needs to finance and create export infrastructure.

    I really don't understand the German obsession with said policy. What does the German populace get in exchange for these large trade surpluses? Nothing, really. Just flat wages, lots of marginal employment (the so-called mini-jobs), and a general lack of investments in the domestic economy.

    I fully support the US' desire to apply limits to trade surpluses/ deficits. Any country should have the ability to boost it's domestic economy without having to worry about import "leakages". The world will become a better place if this comes to pass. Germany and China should generate their own demand, not rely on other countries' consumption.

  5. I have tried to post as Anonymous at least 7 different times but nothing appears. So, if you please can you publish this finding?

    According to ELSTAT , Greece fuel imports in 2018 increased by 4 Bil. euros. Industrial good imports only by about 1 Bil. euros. So, the vast majority of increased imports for 2018 are fuel attributed.

    Dean Plassaras

  6. I am so frustrated that I can't register comments on Observing Greece.

    Here is my question: 40% of all Greek imports are oil based. Greece uses a share of those imports for domestic consumption and then through a value-added process exports higher value oil-based fuels and derivatives (about 37% of all Greek exports).

    I don't know why Greece got into such business in the first place (probably due to shipping and its fueling needs), but once you are in it to such serious degree (40% import dependence and 37% export dependence) it's very difficult to get out of it. So Greece is permanently exposed to oil price fluctuations and very vulnerable in this regard.

    P.S. Read the "Eurozone entry" section in the link below.

    Dean Plassaras

    1. P.S. Read the "Eurozone entry" section in the link below.

      How would you want us to read it? It is related to the oil import/export business?

  7. If you want to examine the imports issue please look at page 30 out of 35 of this attached pdf, Table 26.

    It shows that the difference in imports between 2017 and 2018 resulted in an increase of a bit less than 5 billion euros, of which 4 billion is fuel related and the balance of 1 Bil. is "Other manufactured Goods".

    Which means, absent oil imports Greece did better in other categories otherwise the current account would have been -7.2.

    Dean Plassaras

  8. Also, notice that Elstat reports the import number for 2017 as 50.37 and not the 47.9 Bil. (Bank of Greece figure?). Dean

  9. Here is more on the fuel import story for Greece:

    In 2018, Greek importers spent the most on the following 10 subcategories of mineral fuels-related products.
    Crude oil: US$12.4 billion (up 43.6% from 2017)
    Processed petroleum oils: $4.5 billion (up 30.2%)
    Petroleum gases: $1.3 billion (up 5.2%)
    Electrical energy: $497.9 million (up 37.7%)
    Petroleum oil residues: $96.9 million (up 5.6%)
    Coal, solid fuels made from coal: $49.1 million (up 34.3%)
    Peat: $8.4 million (up 17%)
    Tar pitch, coke: $8.3 million (up 16.2%)
    Coal tar oils (high temperature distillation): $6.8 million (up 8.3%)
    Petroleum jelly, mineral waxes: $5.2 million (up 0.8%)
    Among these import subcategories, Greek purchases of crude oil (up 43.6%), electrical energy (up 37.7%) and coal including solid fuels made from coal (up 34.3%) grew at the fastest pace from 2017 to 2018.

    These amounts and the percentage gains within parenthesis clearly show where the strongest demand lies for different types of imported energy among Greek businesses and consumers.

    Dean Plassaras