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.



  2. Greece's current-account never stopped being precarious. It's just that with the restrictive fiscal policies applied during the crisis, consumption of imports decreased (and unemployment soared). However, the state never bothered to plan a program for export-led growth.

  3. Let me add though that I wouldn't worry too much about the current-account.

    Fiscal policy remains restrictive, and will remain for the foreseeable future. Furthermore, the banking sector remains largely zombified.

    Therefore I conclude that the 3% current-account deficit is a temporary trend based on vaguely positive future expectations and nothing more. Consumption will soon decrease again.