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Wednesday, May 22, 2019

Greece's Current Account On A Dangerous Path?

Arguably the most important economic variable of the Greek economy is the country's current account. The current account measures how much an economy spends outside its borders compared with its revenues outside its borders. If a national economy spends more outside its borders than it has revenues there (i. e. a current account deficit), it needs to import capital either by way of borrowing or attracting foreign investments. Since the Greek economy does not have a tradition of substantial and sustained foreign investments, any external gap caused by the current account deficit must typically be closed with loans from abroad.

Traditionally, Greek consumers' demand for products has exceeded the supply of products generated by the Greek economy by far, i. e. Greece had to import substantial amounts products resulting in a trade deficit. Greece has the benefit of substantial foreign revenues from services, mostly tourism service. However, the positive balance in services has never been able to completely offset the negative balance in trade. Thus, the Greek economy was always short of foreign capital; it always had to borrow offshore.

The absolute record was set in 2008 when the Greek economy spent 37 BEUR (!) more outside its borders than it earned there, i. e. a current account deficit of over 15% of GDP! Probably a world record among developed economies. In 2008, Greece imported 47 BEUR of 'other goods' (Greek exports other than oil and shipping). This was roughly 3 times the amount of exports of 'other goods'!

The financial crisis limited access to foreign capital and austerity cut down domestic demand, leading to a continuous decline in imported goods and an improvement in the current account balance. By 2015, the current account deficit was reduced to 1,5 BEUR, the lowest level since 2008. Since 2015, imports and current account deficits have increased again, reaching 5,3 BEUR in 2018. The first 3 months of 2019 show a 13% deterioration in the current account balance over the previous year.

To determine whether or not there is a dangerous trend in the making, one can compare imports of 'other goods' in the period January-March since 2008. The numbers are:

2008 11,0 BEUR
2009   9,1 BEUR
2010   9,5 BEUR
2011   8,1 BEUR
2012   7,2 BEUR
2013   7,2 BEUR
2014   7,2 BEUR
2015   8,0 BEUR
2016   8,1 BEUR
2017   8,9 BEUR
2018   9,5 BEUR
2019 10,0 BEUR

The numbers would suggest that there is a dangerous trend in the making: from January-March 2019, imports of 'other goods' were 10,0 BEUR and the trend line suggests that the record of 2008 of 11,0 BEUR will be reached soon. Put differently, Greece is back on a track towards setting records in the import of goods.

The situation is not as dramatic as back in 2008 because exports have increased as well but one has to bear in mind that, in 2019, Greece is on a trend line towards an annual current account deficit in excess of 6 BEUR, which is more than 3% of GDP. When comparing that to the 15%+ of GDP of 2008, it might look like peanuts but peanuts it is not!

A current account deficit in excess of 3% of GDP implies that Greece will have to import capital in excess of 3% of GDP every year. A current account deficit of 3% of GDP also implies that the Greek economy is spending 3% of GDP more outside its borders than it earns there. And, finally, a current account deficit of 3% of GDP can also be interpreted as meaning that Greece lives 3% of GDP above its means cross-border-wise.

Living above its means cross-border-wise is what got the Greek economy into trouble in the first place.

Tuesday, May 7, 2019

Corfu In Decline

The Irish author Richard Pine, who lives on the island of Corfu, wrote this devastating piece in the Ekathimerini: "The destruction of the real Corfu". Pine blames primarily unchecked tourism for what he calls the island's destruction.

Having just spent 10 days over Easter on Corfu, I can confirm the destruction but I am not sure that it is tourism, at least not tourism alone.

There is one word which, in my opinion, describes today's Corfu (particularly, but not only, Corfu-town) best: decadence. Wherever one looks, one sees decline: run-down buildings, roads in terrible condition, huge garbage piles all over the island, etc. In between, of course, one runs into 5-star luxury resorts here or there.

When one asks people in the Old Town of Corfu about this situation, one gets a uniform answer: it is all because of UNESCO which does not allow any structural changes. That may well be the case but I am sure that UNESCO does not disallow the maintenance of substance. In fact, there are a few traditional buildings in the Old Town which have maintained their original character to the fullest extent and, yet, they have been maintained and kept up (banks, for instance).

The impression one gets on the entire island is that its residents simply don't care about the inherited beauty of landscapes and structures. I have come to Greece for over 40 years and I have seen many places, above all villages, which seemed medieval 40 years ago and which are now very nicely maintained towns. The last time I was in Corfu was over 25 years ago and there has been a dramatic deterioration since then.

Our 10-day stay was overshadowed by the shame which my Greek wife expressed about most of the things she saw. That was not, that could not be 'her' Greece, she felt. Sadly, it was.