Wednesday, March 23, 2022

The Perennial Problem of Greece's Current Account

The statistics published by the Bank of Greece go back to the year 2002. During those 20 years, Greece did not even once record a balanced current account (not to mention a surplus). In fact, I remember reading in history books that Greece has not once in its 200-year existence as an independent nation recorded a balanced current account (not to mention a surplus). 

What is a current account and why is it important for a national economy? The simplest description is that the current account represents the cross-border operational cash-flow of a national economy. Operational cash comes into a country as proceeds from exports, revenue from tourism, transfers from the EU, etc. Operational cash leaves a country as payment for imports, for interest on foreign debt, for transfers to the EU, etc.

When the cross-border operational cash-flow is negative, there has to be a 1:1 offset through a positive cash-flow in the capital/financial accounts. This is not a matter of economics but, instead, of mathematics. Again: if the current account is negative, there have to be, on a 1:1 basis, positive capital/financial accounts. If there were no positive capital/financial accounts, there could not be a negative current account. Put differently, a national economy which runs out of foreign currency can no longer import. Below are the Greek statistics since 2002.

During the 20 years since 2002, the Greek national economy incurred a negative cross-border operational cash-flow of 274 BEUR. Put differently, Greece paid 274 BEUR more for imports, interest on foreign debt, etc. than it received from exports, tourism, EU transfers, etc. 

That deficit was financed through a surplus of 45 BEUR in the capital account (e. g. EU subsidies), a 208 BEUR surplus in the financial account (e. g. debt) and another 20 BEUR which the Bank of Greece calls "balancing items", i. e. items which cannot be categorized.

Why is all of that important? It is important because it helps to explain the living standards in the national economy and what they depend on. Many of the capital and consumption goods which Greeks desire must be imported for the simple reason that they are not produced in Greece. In fact, when it comes to consumption goods, a walk through a shopping mall creates the impression that most of those goods are imported. Revenues from exports and tourism are not nearly sufficient to pay for all the goods which Greeks desire to import. Greece needs funds from other sources in order to pay for the imports which Greeks desire. Without those 'other sources', the living standards of Greeks would decline sharply.

As the above table shows, those 'other sources' are principally EU subsidies, foreign debt and some foreign investments. Without EU subsidies, foreign debt and some foreign investments, Greeks would have to accept significantly lower living standards.

The above table shows another 'Greek phenomenon': as domestic purchasing power increases/declines, the current account deficit increases/declines as well. During the heyday of the Euro-party (until the financial crisis), Greek consumers were awash with cash and imported nearly beyond imagination (excessive current account deficits). As austerity was imposed on the Greek economy, Greek consumers were short of cash and the current account deficit declined. 

During the last couple of years, things have improved for Greek consumers and, not surprisingly, the current account deficit returned to very high levels. Not excessively high, but very high nevertheless. That really leads to a disappointing conclusion: despite all the reforms in the decade of the financial crisis, the structure of the Greek economy hasn't really changed. It still has the characteristics of a developing economy, i. e. products which the consumers desire have to be imported and imports lead to indebtedness because there are not enough products/services which the national economy can export.

In short, the living standards of the national economy still depend on: (a) foreigners lending to or investing money in Greece and (b) various types of EU subsidies and financial support programs.

Is that a long-term perspective? Not really, at least not a very good one because it suggests that Greece will always be dependent on foreigners lending to or investing money in Greece. What if foreigners, for whatever reason, would one day stop doing that? 

There is only one way to make the Greek economy less dependent on foreigners and that is to increase domestic value creation. To produce more of the goods and services which Greek consumers desire so that they do not have to import them and to produce more of the goods and services which foreigners desire so that Greece can export them. 

There is no other way! And it is an urgent matter!