"It's The Current Account, Stupid!"

When I started this blog in mid-2011, in the midst of the crisis, already my first articles focused on the importance of the current account for Greece. Since then, I have seemingly written innumerable articles on the subject.

A country's current account compares the spending outside its borders with the revenues from outside its borders. If the spending outside its border exceeds the revenues from outside its borders, it represents a negative current account balance. Mathematics, not economics, require that such a negative current account balance is 1:1 compensated by capital inflows from outside the country (foreign loans or investments, remittances from abroad, etc.).

Since the foundation of modern Greece almost 200 years ago, the current account deficit has probably been the major and continuous challenge for the Greek economy. It has always been negative (with perhaps 2 exceptions) which means that Greece always needed capital inflows from abroad. For the most part, these inflows took the form of foreign loans.

Put differently, the fact that Greece continuously spent more outside its borders than it had revenues from abroad made the country totally dependent on capital flows from abroad. When a crisis of confidence erupts, the capital flows from abroad tend to stop ("sudden stop"). And then the crisis becomes a real problem. 

Greece experienced that "sudden stop" in late 2009 and early 2010. The current account deficit then was about 15% of GDP, a horrendous figure! The Troika's austerity measures reduced that deficit to almost zero. As economic growth returned to Greece, the current account deficit started to grow again.

According to this article in the Ekathimerini, Greece's current account deficit currently runs at about 6,5% of GDP. While this is far less than the 15% of then, it is certainly a high level which will lead to problems in the future if it cannot be brought under control.

There are essentially two ways for Greece to improve its current account: (a) increase revenue from tourism and (b) increase production of goods and services which can be exported.

Tourism is already at record levels and sooner or later there will be the question of how much more tourism the country can absorb. Thus, the only meaningful alternative to bring the country's chronic current account problem under control is to increase domestic production of goods and services which can be sold abroad.