Greece - three holes in a barrel!

Just picture the Greek economy like a bucket, or rather like a barrel, which has 3 holes at the bottom, about 5 cm from the bottom.

The water level in the barrel represents economic activity (=living standard) and the water being poured into the barrel represents foreign funding. Finally, the 3 holes represent the budget deficit, the current account deficit and capital flight.

If no water is poured into the barrel, the water level will remain rather stable at about 5 cm from the bottom. In practical terms: a low level of economic activity and/or living standard.

If a lot of water is poured into the barrel, the water level will rise to perhaps 10 cm, i. e. substantially increased economic activity and/or living standard. However, there is now more pressure in the barrel and more water will flow out of the 3 holes.

If Greece wants to have a sustainable living standard, it must repair the 3 holes. Once that is done, a lot less water needs to be poured into the barrel in order to increase the water level.

Dimitris Kontogiannis - a sole voice in the wilderness!

The Ekathimerini journalist Dimitris Kontogiannis has done it again! He has once before written about the current account as the key economic variable for Greece and he has now written about itagain. If only political and other opinion leaders would wise up to that simple fact!

Since independence almost 200 years ago, Greece has had current account deficits; i. e. Greece has depended on funding from abroad. The US has had a current account deficit for decades. So where is the problem for Greece?

The US (still) has the creditworthiness to attract foreign debt and it is one of the best places in the world for foreign investment. Thus, the US can live with a current account deficit for a long, long time. Greece has no creditworthiness at this point and it is the worst place in the EU for foreign investment (according to the World Bank).

Thus, two things are crystal clear: Greece must reduce its need for foreign funding (current account deficit) and of the funding it still needs, as much as possible of it must come by way of foreign investment instead of foreign debt. Why? Because every country reaches at some point its maximum debt capacity (and Greece has already reached its; at least for the time being).

Thus, and thank-you Dimitris Kontogiannis, the current account must be at the center of all short- and long-term economic planning for Greece.

I am not sure that Greeks understand that their living standard is “imported”; i. e. Greece needs foreign funding to pay for all the imports it buys. If Greece didn’t get foreign funding anymore, the foreign revenues from exports and services would just about suffice to pay for essential imports like energy, medicine, etc. Not much left for cars, motorbikes, smartphones, etc.

To avoid that the living standard collapses for lack of foreign funding, Greece must first of all reduce the import of those products which could just as well be produced in Greece. And guess what? As you substitute imports with domestic production, new jobs are created; jobs which pay income taxes in businesses which pay corporate taxes and which belong to owners who pay taxes on dividends!

The nice thing about import substitution is that it can be implemented almost overnight. All it requires is that a business framework is offered to investors where they can produce domestically at competitive terms with imports. Particularly when it comes to agricultural products, no one could understand why that shouldn’t be possible right away.

The next step is to expand exports. Greek policy makers must fire up Greek farmers to produce for exports. That, too, creates jobs. It will take a little more time than import substitution but not all that much more.

Then Greece must increase revenues from tourism. If Greece were not a cult for many foreigners, Greek tourism would be in shambles because it is really not competitive with, say, Turkey. To improve that situation will require more time because, to an extent, it involves cultural changes. To put it bluntly: Greeks will have to run after tourists and thank them for their business instead of giving them the impression that they are doing them a favor when they allow them to visit Greece.

All of the above will not be sufficient, at least not in the foreseeable future, to make the current account balance. Thus, Greece will still need foreign funding. And this brings me to the most important point.

There are only 3 long-term solutions for Greece’s economic problems: foreign investment, foreign investment and, again, foreign investment. Foreign investment comes automatically when a country is a wonderful place to do business. As pointed out above, Greece is by far the worst place in the EU to do business (#100 in the world; between Yemen and Papua New Guinea). Can this be improved overnight? No way, because it not only requires reform but, above all, a change in attitudes towards foreign investment! One cannot expect an entire country to change attitudes in a short period of time.

My proposal is to establish Special EconomicZones where a business framework is offered to investors which would rank #1 in the world. While it may take a generation to change attitudes of an entire population, to establish in selective areas the right business framework with people sharing the right attitudes can be done virtually overnight. McDonald’s has been doing it for decades in the whole world. All it requires is the political will to do it.

I cannot close before making my usual side blow against Greek political and opinion leaders: they worry about all sorts of things but they do not spend resources on those possible solutions which are called for (and, actually, quite simple). Except for Dimitris Kontogiannis, of course!

Don't forgive them for they know what they do!

Greece's political leadership has managed over the last years to totally destroy the country's creditworthiness and to severely damage the reputation of Greeks.

After 2 years of playing games with foreign creditors, it seemed that the leadership had finally come to reason when Mr. Papademos took office. Even Mr. Samaras gave up his "njet" to everything which his political opponents proposed.

Suddenly it looked like Greece's leadership had a consensus about what had gotten the country into trouble (clientele politics, among others) as well as a consensus that those practices had to be stopped. The rest of the world started getting impressed with the changed behavior of Greek leadership.

And then this: the Ekathimerini reported that 92 amendments had been submitted by Parliamentarians, allegedly most of them seeking special benefits for clientele groups! This in the hope that they would pass unnoticed.

How on earth can any member of the Greek political leadership look into the mirror in the morning and live with the face that is staring back at them? How on earth can any member of the Greek political leadership expect to ever be trusted again? By their citizens or by foreign creditors?

Mr. Dimitris Christoulos gave his answer to that kind of political leadership by shooting a bullet into his head. He left a note stating his belief that "one day the youth without future will take the arms and hang upside down at Syntagma Square the national traitors as the Italians did with Mussolini in 1945 Piazza Poreto in Milan”.

Such kind of political leadership, formed and shaped in their value structures over decades, will never change in an evolutionary way. It needs to be replaced in toto. That does not only apply to the government but to all members of Parliament.

Greece must find a way to reinvent itself similar to how Charles de Gaulle reinvented the French Republic in 1959. Perhaps a new Greek Republic needs to be put in place. All candidates for political office should be screened by a committee of "unquestionably decent Greeks" before they can stand for election.

The present political leadership will, of course, not initiate this process and they will resist any movement to that effect. However, I doubt that they can resist when, one day, over one million Greeks are filling the streets of Athens in perfectly peaceful protest and with everyone carrying a sign stating that "You must leave office!"

I would give everything to see that day!

Greeks should learn from Austrians?

Mr. Philip Andrews recommended in a letter to the Editor of Ekathimerini that Greeks should learn from Austrians. As an Austrian, I felt compelled to respond to Mr. Andrews as follows.

Dear Mr. Andrews, 

you suggested in a letter to the Ekathimerini that Greeks could learn a lot from Austrians. Undoubtedly so! The first thing which Greeks could learn from Austrians is to “package” things the right way. Let me explain.

By now, it is probably known in the most remote island of the world that Greeks are corrupt; that Greeks work with “fakelaki”. Now that is really poor form on the part of Greeks. Austrians would never engage in blatant corruption like this. Instead, Austrians will talk about Mozart and Beethoven when they visit a dentist in Salzburg. When the dentist has his cost estimate ready, he will ask – sort of between Mozart and Beethoven – whether he should do it “in black”. Now that is gentlemanly! Greeks should learn from that! If you are a gentleman, there is no way that you cannot accept the offer of the dentist to do it in black! By golly, you might offend him if you didn’t go along!

The EU does not allow import tariffs. Austrians would never violate EU-treaties! That’s for people like the Greeks to do. Austria doesn’t manufacture cars and it hurts to pay so much for car imports. So Austria, the world’s trendsetter as regards environmental concerns, implemented an environmental charge on cars. Of course, there was no discrimination against foreign cars. The rule applied to all cars. But when all your cars are imported, you understand what I mean. And that is, I believe, about 20% per car.

Greeks don’t pay taxes; in fact, they openly cheat. Now, Austrians would never do that! However, in Austria there is a thing called “neighborhood assistance”. This means that if you help your neighbor to build a house and he helps you, you don’t have to pay taxes on the mutual earnings. And one is amazed to see that apparently all Austrians are neighbors! And many of the suppliers of building materials are neighbors, too! Estimates are that up to 30% of the economy bypasses official books that way (it is called “Pfusch”). Members of the Austrian government have repeatedly stated over the years that without “Pfusch” there would be a lot less houses in Austria (thereby implying that “Pfusch” was good).

I could go on but let me now be serious. Almost 50 years ago, we had a teacher in Gymnasium who explained the Austrian economy to us the following way:

"Children", so he called us teenagers, "we (Austrians) don't have oil and we don't produce cars, but we need oil and want to drive cars. Thus, we have to import a lot. Since we need foreign currency to pay for those imports we must find ways to obtain foreign currency. Thus, we have to try to export as much as possible but, as a small economy, we cannot export enough to pay for all the imports. So we have to find other ways to obtain foreign currency and one of them is tourism. The more tourists come to our country and the more foreign currency they leave here, the better our chance to close the hole between the imports we need and the exports we have. And since that hole cannot be closed even after tourism, we need to be a very attractive place for foreign investment so that foreign investors bring us their money and the government needs to keep its household in order so that it can borrow money abroad".

This is exactly the challenge which Greece needs to get serious about. Why, when there is now the Euro? Because the Euro is a foreign currency to every EZ-country (none of them can print it on their own). The amount of money which Greece spends abroad (imports, etc.) is phenomenally greater than the amount of money which Greece earns abroad (exports, tourism, etc.). That is what “living above one’s means” is all about. There are many things which Greece must import because there is no local availability: oil, cars, smartphones, etc. But there are many other things which Greece should not import and, instead, produce domestically. Above all, Greece should not import agricultural products. That is like Cuba importing sugar. Greece should become one of the premier exporters of agricultural products!

And then there is another thing. Austrians, like Greeks, have a complex history. The idea of an “Austrian nation” stands perhaps on similar grounds as the idea of a Greek nation descendant from ancient Greeks. Austria decided to become a nation after 1945 when it was prudent to disassociate oneself from the terrible doings of Germans. I hope I do not offend anyone when I say that, 200 years ago, only few people living on the soil of today’s Greece were convinced that they were direct descendants of ancient Greeks. Populations moved all over the European continent in the last couple of millennia. I don’t know how many different ethnic groups moved through Austria (a lot of Slavs!) and there is no reason why this should not apply to Greece as well.

All Americans except native ones are immigrants. They come from all geographic areas and from all ethnic origins. However, they are Americans! Austrians have had a very tough time to find their own identity after 1945 because basing your identity only on the grounds that you were not German is not really good enough. The fall of the Iron Curtain and the new role of Austria as a bridge towards the East gave Austrians a new identity. It has dramatically changed Austrian self-confidence. Greeks should urgently attempt to find an identity which is oriented towards the future instead of creating illusions about a past which are not supported by facts! “Know thyself!” is one of the first things about ancient Greeks which we learned in Austrian Gymnasium.

Greeks, under Ottoman occupation, missed some of the key developments which shaped Central Europe (Reformation, Enlightenment, etc.). But it is never too late! Greeks should make every effort to follow the spirits of ancient Greeks: know yourself; accept yourself; and deal with the world as it is (instead of complaining why the world isn’t the way you think it should be and blaming others for that).

Who should finance what?

Two issues on which I have published before are:

(a) bond financing vs. loan financing, and

(b) raising public financing domestically or internationally.

Let’s just assume that all of Greece’s sovereign and other foreign debt had been held by banks in the form of loans. That would have been a rather simple affair, basically a “family affair”: have the banks elect a Steering Committee and negotiate with it. There would have been no vulnerability regarding the type of things one can do with public debt instruments (hedge funds, etc.). One would have known all the counterparties and every counterparty would have had something at stake – not only its loan but also its standing in the financial community (and in the loan syndicate).

Let’s also assume that all of Greece’s sovereign debt would have been financed domestically. From a liquidity standpoint, that would have been possible because there was enough liquidity in the Greek banking system to finance that portion of the sovereign debt which ended up on the books of foreign financiers. In that scenario, Greece would not have had to negotiate with all sorts of smart speculators worldwide but, instead, only with its own citizens.

The route of bond financing is normally chosen to open a broader market of investors. That was not the case in Greece because most of Greece’s sovereign debt was/is with institutional investors who could also have been included in a syndicated loan. Thus, that particular benefit of bond financing did not generate any significant added value for Greece.

The question of whether sovereign financing should be raised domestically or internationally is something which should be debated going forward.

My position is that the regular budget deficit should be financed exclusively domestically. The “regular” budget includes the expenditures out of the ordinary course of business. If a society cannot afford its expenditures out of the ordinary course of business, it should cut them. Why should foreign savers finance the ordinary expenditures of a society when domestic savers are not prepared to do that?

I take a different view on government investments. First, they are not “expenditures” and, secondly, their size often exceeds the resources of a national capital market.

When foreigners provide financing for the general budget, they have very little idea what their funds are really used for. Sovereign risk is something very difficult to assess. When foreigners provide financing for investment projects, they can assess the risk much better.

So who is going to finance the economy when the public sector sucks up all domestic liquidity for its own purposes (“crowding out”)? Well, the economy will raise such financing domestically and/or abroad. Private sector risks (corporations, projects) are much easier for foreigners to assess than sovereign risk. There is no reason why the economy should not take advantage of all the foreign funding it can get. Incidentally, only large corporations are able to finance themselves internationally. The rest of the economy will receive its financing from domestic banks which, in turn, borrow internationally.

Freeze bank deposits!

This article by Dimitris Kontogiannis addresses the problem of the continuing drain of deposits in Greek banks. Mr. Kontogiannis suggests that raising interest rates will increase bank deposits and, as an indirect consequence, reduce the current account deficit because of less consumption. My reaction? Good luck!

What we have seen in the last 2-3 years is a complete confidence crisis regarding Greece. Foreigners lost confidence in Greece and withdrew their financing, and Greeks themselves lost confidence in their banking system and in the government’s policy to adhere to the Euro. Should Greece exit the Euro, depositors would lose much of their wealth. Should a Greek bank go bankrupt, depositors would probably lose all of it.

Such a crisis of confidence cannot be overcome with higher interest rates. At the same time, the drain of funding for banks must be brought to a halt. If not, the ECB will become the exclusive funder of the Greek banking system at the end of the day. Learning from other countries in similar situations, the only alternative is to temporarily freeze bank deposits.

Freezing bank deposits is nothing other than to force a situation which would normally happen naturally, i. e. that deposits stay in banks. The deposits retain full value and they continue to receive interest. They just can’t be withdrawn for a limited period of time.

The current account deficit benefits only temporarily from less spending. As soon as spending goes up again, so will the current account deficit. Why? Because it is a structural one. Greeks buy abroad because these products are not available domestically or, if they are, they are much more expensive. This is why Greece is overspending so much, a trend whichmust be brought to a halt, too.

The current account deficit is improved by radically curtailing imports through domestic import substitution wherever possible. If the latter needs some start-help, special taxes on imports can be implemented.

Finally, Greece must start an export drive. A national consensus must be developed that imports hurt the country and exports help it. The import lobby needs to be weakened and the export lobby strengthened.

Who should Greeks vote for?

Since my Greek isn’t good enough, I need to rely on English news coming out of Greece (English media, blogs, etc.). Could it be that the English news coming out of Greece ignore one very important issue? Or could it be that this issue is being ignored by everyone, including the political parties?

I am talking about the upcoming elections. Normally, one would expect that parties competing for votes would inform the voters during the campaign about the things they plan to do if they get elected. I am not naïve enough to think that parties will always do what they promised during campaigns but at least there should be debates about competing plans/programs/ideas, etc.

Short of gimmicks like promising to cancel the real estate tax, I have not seen any economic plan proposed by any party, at least not in the English news coming out of Greece. Could it be that parties don’t have economic plans?

If the parties do not volunteer such information on their own, the media should pressure them to do it. It would actually be very simple: prepare a form listing the major issues of the day and request each party to state their position on each issue and argue the benefits of it.

To request their position on something like the overall Troika-plan would be wrong. To request their position on individual elements of the Troika-plan would be right.

I would guess that Greek voters are craving for perspectives where Greece will eventually recover. There is no single medicine which can accomplish that. Instead, there have to be competing plans and they and their benefits should be explained to voters. And this should happen soon because there is not so much time left!