Mario Draghi - Mr. Competitiveness?

Much to my surprise, in the ongoing battle between the rest of the world and Germany (because of current account imbalances), Mario Draghi takes sides with Germany. In this article, he is quoted as saying:

"It is important to overcome imbalances in the Eurozone but it is the wrong premise to strengthen weaker economies by making the strong economies weaker. We must assure that the other countries improve their competitiveness so that they become as competitive as Germany is".

Well, Prof. Krugman's reply to this is probably already in the making...

Europe - Political Union or Trade Bloc?

Earlier this week, I attended a "Dialogue Without Borders - A Greek-German Live Debate Between Thessaloniki and Mainz" in Thessaloniki, organized by the Konrad Adenauer Stiftung. The subject was: "Europe - Political Union or Trade Bloc". On each of these two subjects, there were two speakers from Mainz and two speakers from Thessaloniki. One speaker argued the pro and the other speaker argued the con. The event was carried by a live video connection.

The speakers were university people; the audience on both sides were people with an average age half my own age. It was a rejuvinating experience for me.

As a general comment, I couldn't help but fall back in the earlier management roles in my life and I found myself assessing the speakers. Not necessarily assessing them in terms of specific, intellectual qualifications but, instead, in terms of how much they impressed me. The Greek side won; hands down (the Germans were 'very proper Germans' but they lacked the charisma).

To me, the most convincing case was made by a German who argued that the political union is a pipe dream and that the objective should be to form an optimal trade block. If such an optimal trade block would ever be achieved, a political union might follow automatically and naturally.

The most passionate case for a political union was made by a Greek. He argued that Europe, in contrast to other parts of the world, could look back at a history of values. Essentially all the values of the Judeo-Christian inheritage, and more. If Europe succeeded in forming a vision of how all Europeans could be brought together on the basis of these values, Europe could claim for itself a unique place in the global village called the Earth.

I felt compelled to comment during the discussion period. I addressed the (relatively young) Greek and told him that I admired the force and passion of his presentation. I told him that, back in the late 1960s when I graduated from Gymansium in Austria, I had shared similar passions. And that today I felt that those passions had been misplaced.

Afterwards, over drinks, the young Greek continued to explain to me his passions and I listend to him attentively. At the end of this, I felt that I had become really old and resignated and that it might be an idea to become passionate again.

Greece - The Next Weimar?

This article by Prof. Aristides Hatzis triggered some powerful associations with me. Prof. Hatzis describes all the tensions which presently stress Greek society (particularly the events surrounding Golden Dawn). And then he makes the following comment:

"If you visit Greece you will be mesmerised by the tranquillity of its residents. Most of us are watching these dreadful acts as spectators of a soccer game".

I spend close to half the year in my wife's country of origin and I can fully subsribe to this observation. If it weren't for the news which I read and for the many closed shops, I wouldn't get the faintest idea that Greece is in the midst of an enormous economic crisis.

When I drive to downtown Thessaloniki, I have to make my way through bumper-to-bumper traffic and, if I am lucky, I find parking somewhere in the second row. I see full cafés and shopping streets crowded with people. Cheerful people, I should add. On a Friday evening, the area near the harbor is overcrowded with young people sitting in small groups on the ground. There may be a coffee or a soft drink here or there but no alcohol. Those young people seem to simply enjoy friendship.

When I drive past IKEA or the huge Cosmos Mediterranean shopping mall, I see seemingly endless parking areas full with cars. When we visit my wife's village, I see normal life. My wife's brother and his 3 adult children are all self-employed. They have all seen better times but they are still doing ok. Last weekend, our in-laws took us out to lunch in a village taverna. The place was full to the last seat and the tables were bending over with food and drinks. And - everyone seemed to enjoy life.

The ability of Greek society to live with economic tension is nearly unbelievable to me. One wonders how wonderfully this society would work if it only worked wonderfully.

The following what-if thought crossed my mind. What if one chartered a few jumbo planes and flew a couple of thousand Greek politicians and their cronies to places in the Greek diaspora and what if those planes picked up a couple of thousand successful Greeks from the diaspora and flew them to Greece to take up the positions vacated by the above?

Would that perhaps quickly make a difference?

Romano Prodi Goes Overboard; ok. But Ambrose Evans-Pritchard?

Ambrose Evans-Pritchard posted a fiery article "Italy's Mr. Euro urges Latin Front" in his blog. Consider the following excerpt:

"As readers know, I have been arguing for a long time that the Greco-Latin Bloc and those with shared interests such as Ireland should seize control of the European institutions and dictate the policy with a very sharp knife held to the throat of Berlin's über-bully Wolfgang Schauble (sic). They have the majority votes in the EU Council of Ministers. They have a majority on the ECB's Governing Council, and indeed on other bodies such as the European Investment Bank, which could be mobilised for a Marshall Plan".

If I have ever read an excellent argument supporting the position of the new German party Alternative für Deutschland (AfD), this has got to be the one! Nothwithstanding possible merits of AEPs arguments, just consider the lack of sensitivity! Here is the population of a country (Germany) which had been very fearful about joining the Eurozone, fearing that 'the others' might take over their own preferred way of doing business. And now 'the others' might be suggesting: "Take a very sharp knife and tell the Germans that they have to change their preferred way of doing business! Take control and dictate!" This is simply poor form on the part of AEP!

Just suppose that a German politician would say something like: "We will dictate our policies with a very sharp knife held to the throats of all those who believe in free lunches!" Critics might argue that, while the Germans are not saying this explicity, they are doing it in practice. What is it that the Germans are doing in practice? They are taking advantage of a currency which, many Germans feel, was rather imposed on them against their will and which they accepted only after making very specific conditions (most of which have since been breached). That may not be good form but is it good form of the US to take advantage of a currency which they more or less imposed on the rest of the world? The late John Connally, as US Secretary of the Treasury, once told Europeans who were complaining about dollar manipulations by the US: "It's our currency but it's your problem!" That was straightforward, indeed. Has any German leader ever told the South "It's our currency but it's your problem!"?

Readers of this blog know that I consider current account balances (and the resulting capital flows) as the crucial factor in regional and global economies. From that standpoint, I have absolutely no disagreement with the notion that Germany's excessive current account surpluses are harmful to the global economy. Germany is to blame for not admitting this basis fact of Economics 101; for denying its validity. The untested question is what Germany would do once it admitted this basic fact of Economics 101. AEP - like Prof. Krugman - suggests that there is only one way to correct this situation; i. e. fiscal stimulus in Germany. Well, I apologize for saying it but this goes to prove that not only financial commentators but even Nobel Prize winners can have limited horizons...

Germany's enormous current account surpluses are not only a problem for the global economy. They are an equally important problem for the Germans themselves because they force Germany to hold a very high net foreign investment position. Germany's net foreign investment position is approaching 50% of GDP, and continues to grow. Perhaps one ought to explain to the German people that much of their wealth is not in Germany. Instead, it is lent/invested abroad. Since Lehman, a fair portion of that net foreign investment has evaporated (sub-prime; Iceland; Greece; Ireland). What if Germany were to need that wealth in the future in order to, say, pay pensions and if it couldn't get it back? As soon as someone suggests to Germans that their pensions might not be 100% safe, they will quickly listen.

When AEP gets to the point of suggesting that 'the leadership must come from France, still the great and generous heart of Europe', he is beginning to make a joke of himself. What kind of leadership can one expect from France or Italy! Perhaps courses like 'How to deprive economies of their competitiveness'? France, Germany and Italy make cars as well as the tires that go with them. They operate in the same currency. Until not too long ago, France and Italy were definitely on par with Germany; sometimes even ahead of Germany. And today? Why in the world are German automakers booming and French/Italian ones struggling?

Perhaps AEP should re-read what an American CEO had recently written to the French Minister of Industrial Renewal after discarding the idea of buying the French subsidiary of Goodyear: "I have visited the factory a couple of times. The French workforce gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three, and work for three. I told this to the French union workers to their faces. They told me that's the French way!"

Read more at http://globaleconomicanalysis.blogspot.com/2013/02/incredible-letter-from-ceo-of-titan-to.html#K7PjmlADJpsJmP5q.99

I have visited the factory a couple of times. The French workforce gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three, and work for three. I told this to the French union workers to their faces. They told me that's the French way!
Read more at http://globaleconomicanalysis.blogspot.com/2013/02/incredible-letter-from-ceo-of-titan-to.html#K7PjmlADJpsJmP5q.99

AEP seems to accept Romano Prodi's argument that 'Germany's exchange rate will double and they will not sell a single Mercedes in Europe' if Germany were to leave the Eurozone. Mr. Prodi has probably never analyzed the level of imports contained in Germany's industrial exports. Those imports will get a lot cheaper if Mr. Prodi turns out right. And corporate and real estate assets in the South will get a lot cheaper, too...

The lamentable M. Hollande also gets AEPs attention. Hollande, AEP expects, will ultimately stiffen his spine but 'if he cannot rise to the challenge, his governing authority in France will collapse, and perhaps the Fifth Republic will collapse with it. We must not let this happen to France'. What has the Grande Nation come to! It has become powerless and helpless. The Fifth Republic might even fail if 'we' did not prevent this from happening. I am reminded of the American saying "Who is 'we', paleface?"

Hans-Olaf Henkel will be very happy to hear of AEPs recommendation that Germany should leave the Eurozone. He has been making this point for a long time. Not only for Germany but also for other Northern countries who have similar economic structures and policies. Henkel says that this would be good for the South because they get a weaker currency without being 'kicked out' and it will be better for the North as well because, as Henkel has often said, "the Euro is to cheap for the German economy". His suggestion is that, presently, the Euro makes it too easy for Germany to export which, in turn, means that Germany is not increasing its productivity and innovation as much as it should and could.

As a final warning, AEP predicts that Germany's departure from the Eurozone would destroy part of its banking system. Well, I would consider this as one of the most positive collateral effects. The German banking system is greatly oversized and overextended. A radical clean-out, even though quite costly, would have tremendous longer-term benefits for the German economy.

I have visited the factory a couple of times. The French workforce gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three, and work for three. I told this to the French union workers to their faces. They told me that's the French way!
Read more at http://globaleconomicanalysis.blogspot.com/2013/02/incredible-letter-from-ceo-of-titan-to.html#K7PjmlADJpsJmP

Prof. Krugman Lashes Out at Germany

Many Greeks will love this --- within less than one week, Prof. Krugman fired away 6 articles (so far...) about the bad Germans who are pursuing beggar-thy-neighbor policies. Below are the articles in chronological order:

The harm Germany does
More notes on Germany
Defending Germany
Sin and Unsinn
France 1913; Germany 2013
German surpluses - this time is different

Well, what can I say? Prof. Krugman's attack is certainly more convincing than Germany's defense. There is no question that Germany's current account surpluses have become a major issue in the global imbalances. There is no question that Germany should admit to that fact instead of denying it. What Germany could do about that is a different matter.

I recently read a cute analogy about trade imbalances. Suppose an observer from out of space looked down on Earth and tried to understand what's going on. He wouldn't see any money but he would see some countries where people work a lot to produce things and, when they have finished products, they ship them to other countries. Other countries work less and produce less. They can do that because they receive the products they desire from the producing countries. The observer from out of space might wonder why the producers do that.

I think it is wrong to attack current account surplusers for their sins. Instead, one should explain to them that, in the longer term, they are really hurting themselves. Germany's net foreign investments are already huge in terms of its GDP and they are getting huger with every passing day. One day, Germany may want or need to have those investments back in the country (perhaps to pay pensions?) and what if those investments have lost value by then? What if there are investments which Germany will have to write off instead of calling them back?

I enjoy following bloggers' comments to commentaries in the Ekathimerini. There are quite a few hot heads who can think of nothing other than blaming Germany's mercantilist policies for all of Greece's woes; who argue that Germany is increasing imports from all other Southern countries except Greece; who argue that Germany has done nothing to improve the trade balance in favor of Greece; who argue that Germany pursues a hidden agenda to destroy Greece. Numbers might suggest that this could be so.

I suggest a different look at the situation. The German economy has a very major representation in Greece through the German-Greek Chamber of Commerce. Now, these people are not in Greece to search for Greek products which the German economy might need. They are in Greece to promote German exports to Greece and, possibly, to seek Greek investments for Germany.

Does the Greek economy have a similar representation in Germany? Or in other potential trading partners? People who know how to analyse the needs of foreign markets and the potential of the Greek economy to respond to those needs?

Germany is very important for Greece but clearly not the only important country. Until the crisis, Germany accounted for about 15% of Greece's current account deficit. How about the other 85%? Who are they and how could they reciprocate by buying Greek products? (a hint: China's share of Greece's current account deficit is larger than Germany's).

Tourism would appear to be the number one area where Greece's external acounts could improved quickly: the Greek capacities and Greece's attraction are there; they just need to be brought effectively to the markets. Yes, tourism has been expanding of late but I don't see Greece's potential there as single-digit growth rates. I think they could definitely be double-digit, and they should be.

To improve trade balances is much more difficult than to improve the services balance because for trade one has to increase capacities and/or build up new ones. None of that is going to happen in and by itself. One has to develop a plan: What are Greece's existing capacities and where could be new ones? What are other countries (like Germany) importing and how could Greece adjust its capacities to those needs? Etc. etc.

Bottom line: let Prof. Krugman fight the global battle of current accounts and don't get side-tracked by it. Instead, focus on your own economy and how that economy could play a more important role in the global battle.

A small economy like that of Greece has one great advantage: it doesn't necessarily have to follow global trends; it doesn't have to move like an army. Instead, it should move like a guerilla and focus on niches.

Blasting & Rebuffing - The Battle of Current Accounts

At long last, the battle of current accounts seems to be on. It started with a blast ( (US blasts Germany's economic policies) and it was followed-up by a rebuff (Germany rebuffs US Treasury criticism).

It certainly is the right battle. The million-dollar-questions relate to the right solutions.

Before the Eurozone crisis began, my pet issue had been the current account deficit of the US. I had started my banking career in the early 1970s with an American bank. Somewhere at the beginning, I had to prepare a report on the US Interest Equalization Tax. That was a domestic tax measure implemented by President Kennedy in 1963 and it lasted until 1974. The design of the tax was to reduce the US Balance of Payments deficit (in short: some kind of 'infant industry protection' for the US economy).

Around the same time, I was observing how Americans started to import more and more from Asia, offset by less and less domestic production. I mentioned this in a discussion we had on the subject with colleagues at the bank. One of my American colleagues was totally unconcerned. He said "If the Japanese want to work 18 hours a day in exchange for us signing promissory notes, that's fine with me!"

The US has been doing a lot of signing of promissory notes since then. Easy for them to do because they can print the money when the notes fall due. Two things seems certain, though. First, had the US not run those enormous current account deficits, the rest of the world, in sum, could not have run enormous current account surpluses during this time. Secondly, US consumers might have consumed less and/or paid higher prices for their consumption products but certainly the rest of the world would have grown more slowly and with lower living standards.

Thus, the rest of the world actually ought to construct a monument in thanks to the consumption-addicted, no-fear-of-debt-having American consumer. At the same time, the rest of the world should look after the health of American consumers so that they can pay back their debt.

Fast-forward to the Eurozone and, specifically, to Greece. Clearly, Germany's current account surplus causes problems within the Eurozone. It would appear to be something which definitely cannot go on forever. Either Germany changes it or others will do it for it.

But what are sensible solutions?

The automatic reflex seems to be that Germany should increase domestic demand; i. e. run deficits so that imports from the South increase. Well, certainly with regard to Greece, I am not sure that this would change very much. Aggregate demand certainly stimulates aggregate supply but how does one make sure that Greece's supply is stimulated and not that of Asian countries? If Greece is to benefit from an increase in German aggregate demand, Greece has got to get its act as a supplier in shape!

My small home country of Austria has over 110 commercial delegation offices throughout the world; essentially, those are 'sales offices of the Austrian economy'. Also, Austria has an extremely active Business Location Marketing aiming at new foreign investments (so active, indeed, that Germany, Austria's major neighbor, has frequently complained about unfair competitive practices...).

A private Greek export consultant once explained to me that the Greek public export promotion agency is a huge apparatus but it is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them.

The Greek business location marketing unit (Invest in Greece) has a beautiful website and publishes wonderful prose. I have not heard of any major successes, though, and I am not aware that they are doing much by way of marketing Greek business locations abroad.

Well, these would appear to be two areas where some tough, neoliberal, efficiency-optimizing action should be helpful: install aggressive marketing people; streamline the organzation and get rid of everyone who stands in the way. Should that be 'commanded' by the Troika? Heck, no! It should be 'commanded' by Greek leadership and by everyone else in Greece who has an interest in getting the country's economy going again.

At the EU level, laws like the then US Interest Equalization Tax are unlikely to yield positive results. Wherever there is a new law/regulation, ways will be discovered to circumvent it. I am a firm believer in incentives because I believe that, essentially, economic behavior is driven by incentives. If Greece makes major efforts to export more and to attract more foreign investment (as described above), then the EU should set incentives so that Northern countries import more from Greece and invest more in Greece.

Barring gradual steps in the direction of balancing world-wide current accounts, I see a great likelihood that we may be moving into the direction of more controlled trade and capital flows.

Doing Business Report 2014

Greece ranks 72nd on the Doing Business Report for 2014. Good news? Ok news? Bad news?

Doing Business sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations. For 2014, a total of 189 countries were examined. With a ranking of 72, Greece clearly is in the upper half of the list, albeit quite close to the lower end of the upper half. During the previous 5 years, Greece had ranked around 100 with the worst ranking in 2011 (109). There has been consistent improvement since 2011.

Greece used to be the lowest European country on this ranking. Now, at least the following countries rank behind Greece: Romania (73), Czech Republic (75), Croatia (89), Albania (90) and Serbia (93). Below are some of the more important countries which rank ahead of Greece:

21 - Germany
30 - Austria
36 - Belgium
38 - France
52 - Spain
65 - Italy

Doing Business measures and tracks changes in regulations affecting the following areas in the life cycle of a business. Greece's rankings in those areas are indicated in ascending order.

36   - Starting a business
52   - Trading across borders
53   - Paying taxes
61   - Getting electricity
66   - Dealings with construction permits
80   - Protecting investors
86   - Getting credit
87   - Resolving involvency
98   - Enforcing contracts
161 - Registering property

The rather good ranking for starting a business seems a bit surprising. Foreign investors will probably look with concern at the low ranking for enforcing contracts. As regards registering property, that ranking is clearly Third World. This is of particular concern because solid property rights are always a top priority for foreign investors.

So what's the verdict? Good news? Ok news? Or bad news?

The ranking per se is ok news, at best. However, one also has to consider the trend and the trend since 2010 has clearly been in the right direction and the improvement since then quite remarkable.