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Wednesday, February 27, 2013

Periphery is doomed to fail?

Below is an update from my British friend who has lived/worked in Greece off and on for about 40 years and permanently in the last 10 years (married to a Greek). So far, he has been spot-on with his predictions except for the one that Greece would exit the Eurozone on Friday, January 11 at 22 hrs. Well, you can miss one every once in a while...

Is he spot-on with this?

"The bigger picture of the Eurozone is, in my view, going to be the crux issue of 2013 and, unfortunately for Greece, going to relegate our local issues to the sidelines. ....and even the re-established Eurozone crisis has no chance of any solution before the German election in September. My scenario of the Drachma returning could well be swept in with an overall breakup of the Euro any time after that. Thus Germany remains the lynchpin to all that will happen eventually - but I don't feel that Germany is the criminal player depicted in some of the writings you linked me to. Germany suffers from having been too successful and responsible economically - but its approach has to be admired not damned. Others should have tried to do something similar rather than just acting like irresponsible basket cases! Of course, the austerity straightjacket in which the offenders have been placed - without matching growth policies - is aggravating the crisis of economic decline, unemployment, etc. but, without a Eurozonewide fiscal plan to match monetary policy, the mess will continue. One should also say that, without the ability to devalue, the periphery is doomed to fail!!!!!"

Greece helped post-war Germany recover. Where is reciprocity?

This is a powerful article comparing the debt approach today with that which was applied to Germany in 1953. The argument that Germany's creditors were 'generous' in 1953 on the grounds that this would allow Germany to become strong again, something which everybody wanted, is correct.

I would only add two points to this.

First, the debt forgiveness of 1953 was for an economy which held full promise that, if helped through debt forgiveness, it would become strong again.

And, secondly, that debt forgiveness didn't come just 'like that'. It took 8 years after the end of the war for Germany to achieve it and, during this time, enough evidence could be gathered about the prospects of what would likely happen to the German economy if it were forgiven debt.

As far as I tell, that Greece will eventually be given a very major debt forgiveness is more or less a fact. Some Germans have suggested more or less openly that probably the entire debt of Greee will have to be forgiven (ex-Chancellor Schmidt said more or less that in a TV interview). For whatever reasons (mostly political with a view towards upcoming elections), one still prefers to kick the can a bit more down the road before major decisions are taken. I am not saying that this is ok; I am just saying that this is a fact.

I would only argue that a debt forgiveness alone, as an action per se, would not change much in the Greek economy. One could forgive Greece its ENTIRE foreign debt (of the public as well as of the private sector; i. e. banks) and the Greek economy would still not be able to employ its people adequately. The only benefit would be that, after a debt forgiveness, Greece could borrow again heavily. That would, indeed, make things a lot better in the short term. In the longer term, it would just be a repetition of what happened since the Euro.

If a miracle happened and Greece would turn overnight into a well-structured economy with an efficient and adequately sized public sector, a debt forgiveness would work immediately (and I would venture to say that electorates in the North would have understanding for a debt forgiveness under such circumstances because it wouldn't look like throwing good money after bad).

One could, of course argue "Give us the debt forgiveness now and we will prove to you that we will achieve miracles". The Troika seems to argue "We will give you a debt forgiveness later provided that you prove first that you can achieve miracles".

Like anything in politics, one will probably end up with a compromise somewhere in the middle.

Tuesday, February 26, 2013

Is Prof. Paul Krugman today's John Law?

Years ago I read about the Scottish economist John Law who, around 1700, introduced some revolutionary new aspects about paper money in France. This now came to my mind. I found this in Wikipedia and that in The Economist. For whatever reason, my gut tells me that Prof. Paul Krugman is saying today what John Law said about 300 years ago. Maybe he is right; maybe not. The only way to find out is to make Prof. Krugman Secretary of the Treasury (of the US; not of Greece...).

Italy and the world

Italy is top news in most European media. Probably with good reason.

I looked up today's hard copy of the NYT. Italy doesn't show up on the front page. And in the online edition, Italy gets exactly one small headline and two lines.

Italy may be the third-largest economy in the EU and it may have the ingredients to bring down the Eurozone but as regards top stories, that country seems to be a dwarf when comparing it to Greece!

Import-substituting industrialization - Prof. Paul Krugman

Prof. Paul Krugman posted this piece titled "WWS 543, International Trade Policy: Class 6" in his blog. The paper itself is titled "Import-substituting industrialization".

I take it that those are notes for a lecture he gave. I also take it from the notes that he is arguing against import substitution as a strategy to increase industrialization. He seems to question the concept of 'infant industry protection'.

I now find myself in the curious situation where I, as a convinced free marketer, support elements of a planned economy which even the most liberal Prof. Krugman criticizes. The only point is: I don't call it a 'planned economy'; I call it a 'managed economy'.

How can one possibly expect a country like Greece, not having much of an industrial history to begin with and having been decapacitated in recent years, to walk into world markets and announce 'hey, we'll now compete with your industrial production'?

I liken it to a very talented regional soccer player in Greece whose talent is recognized and who is transferred to Real Madrid to compete with the stars (and once he gets used to the standard of living there, he is told to shape up his game or else be kicked out of the team). That can't work! The right way to do it would be to first send him to a top team in Greece, wait for him to become a star there and then move on and only then have him compete with other stars.

One has to learn to walk before one can learn to run!

I think 'infant industry protection' with a focus on import substitution is the only way for the Greek economy to have a fair chance of getting itself into competitive shape in the near term. It can only work if it is 'managed' well, i. e. if it is employed to achieve longer-term objectives. If it is employed to achieve short-term profits for clever domestic profit-makers, then it wouldn't work.

"There will be an explosion of social unrest?"

This is one of the most troublesome articles which I have read of late. Particularly since I was told by a reliable Greek source that Mr. Leonidas Chrysanthopoulos, who is quoted in this article, is not a hot head. Instead, he is described as a conservative, intelligent career diplomat.

"At a certain moment, quite soon, there will be an explosion of social unrest. It will be very unpleasant,” Mr. Chrysanthopoulos is quoted as saying. He predicts the spark will be when new, retroactive and sizeable tax bills come due in the coming months that people simply cannot pay. “There will be further increases in armed actions. There will be bloody demonstrations", he says.

Does that sound plausible? To me it does. It might not sound plausible if it were Latvia, Iceland, Ireland or others but I think the case of Greece and Greeks is special.

Greece is still at point 'A' on its path to make it within the Eurozone and, to me, it is certain that once Greece reaches point 'B', things will get better on a sustained basis. To be sure, no economic miracle will occur and unemployment will persist for a long time, but things will get better. I would not expect point 'B' to occur before 2014 (at the earliest). 

Can Greece get from point 'A' to point 'B'?

It could, if no accidents happen along the way. Mr. Chrysanthopoulos feels that there are accidents only waiting to happen. Could there be some accident insurance? Yes, the EU could provide it if the EU found a way to support the Greek people without at the same time supporting a failed system. This has certainly not been happening in the last 3 years.

Would a return to the Drachma make it easier? As much as I have always opposed a return to the Drachma (and I still do), I am beginning to believe that this might be the only way out. It could be a defensible strategy if the EU provided 'financial aircover' during the transition period.

Is a return to the Drachma going to happen? I doubt it for the near term. Above all because I am sure that Greece understands that the primary reason why it has leverage against the EU is its membership in the Eurozone which no one can take away from Greece according the EU treaties. 

Adding one thing to the other, I conclude that the likelihood of something like a unilateral declaration of default is increasing. If it were handled consensually and not antagonistically, it might have benefits for all parties involved.

Monday, February 25, 2013

Meeting Greeks in Switzerland

My wife and I spent a few days in Zurich to celebrate birthday with our younger son. The good news is that we returned without having to declare bankruptcy: Switzerland is incredibly expensive in terms of Euros. Hardly a pizza below 20 CHF. Hardly a good main course in a reasonably good restaurant below 30-40 CHF. Wages/salaries are very high: median wage/salary 5.716 CHF. How a country like that could have recorded record exports in 2012 is a mystery to me. On the other hand, many, many foreigners in Switzerland. Message to Greeks who are in economic pain: look for a job in Switzerland; they need foreigners!

Shortly after arrival at the hotel, we went to the restaurant in late afternoon to have coffee. With unswerving intuition, my Greek wife found the one table in the full restaurant which was occupied by Greeks. Very pleasant Greeks!

Within minutes, it was like having been friends for our entire lives. Where do you live in Greece? We live here (about 300 Km from our home). Great! We'll get together the next time we are there! What are you doing in Zurich? Oh, your daugther just arrived for studies here? Is she perhaps lonely? Our son lives here and he can help her (I almost felt like hearing upcoming wedding bells...).

But there was a message in this encounter.

One of the Greeks told about his daugther who lived in Greece. She had completed her studies of law and she was now looking for a job; and she hadn't found one yet. My wife expressed sympathy for the poor girl who deserved better in life than what Greece could presently offer. The Greek father explained: "There is no need to worry. We have had a Golden Age for 20 years. The reserves we accumulated may not suffice to support our grand children but there is enough to support our daughter and her children". 

This reminded me of a cousin of my wife's who worked like horse for about 20 years in his own business to sell it and to retire at age 45. His business was to produce fashionable T-shirts. By the time he retired, he considered his net worth to be about 1,5 MEUR and he thought he could live forever on the rent. Today, none of his tenants pays rent; he has little income and the value of his assets (on which he has to pay property taxes) has collapsed.

I later asked my wife how many people she knew in Austria who could accumulate enough reserves in only 20 years to fully support one child, much less than supporting their grand children. I explained to her that a young Austrian who earns 4.000 Euro/month (way above the average!) has to save for at least 10 years to have enough equity to buy a house. And only when he gets into his fifties, he may have repaid the mortgage on that house.

My Greek wife thought that this was a typical 'Germanic' interpretation.

Then my wife requested support for another one of the Greeks at the table. He had 100 TEUR in his pocket and he wanted to make a bank deposit in Switzerland. I, having retired from banking 3 years ago, should be able to advise him. I told him that I didn't think any Swiss bank would accept that cash deposits anonymously over the threshhold for money laundering (about 15-20 TEUR). My wife didn't accept that for an answer. She wanted to call our son at Credit Suisse. I succeeded to prevent her from doing that on the grounds that our son was in corporate finance, that he was in the midst of major projects which required him to work about 16 hours a day and that he would explode if someone asked him to advise about how to invest 100 TEUR.

I offered to go with the Greek to a branch of Credit Suisse which was next-door to the hotel. They would be able to explain exactly what the rules where. That offer was declined.

It can be very difficult to make someone happy who doesn't want to be made happy.

The crux of the matter - Foreign funding

An apparently very informed person who writes anonymously (a British consultant who has lived in Greece since 1998) wrote the following in another blog:

"The Greek economy in its entire history has been dependent on loans, external aid, privileged access to markets, etc. At no point since 1832 has it ever been a viable economy, in the sense of balanced internal and external accounts while being able to employ its population. Even with massive loans and inflows, the economy was not able to achieve a reasonable employment rate. The closest was in the mid 1990s, with cheap, illegal and plentiful Albanian labour — which represented a form of subsidy to Greek small businesses."

I cannot confirm that this is correct, but it sounds very plausible. What is the lesson from that?

Picture an oasis in the middle of the desert where the water supply is sufficient to make everything blossom. Picture that very same oasis where the water supply declines and about one-third of the oasis is drying out. Now, there are at least the following two possible consequences:

One, foreigners send enough water to the oasis so that it can blossom again. Two, foreigners invest money into the wells of the oasis so that the oasis can produce enough water for it to blossom again.

Greece is the oasis which has lost the water supply out of its own wells (it may not ever have had it). The focus seems to be on sending more water to Greece. The focus should be on investing money into the repair of Greece's own water supply. 

From 2001-10, the Greek economy has received about 30 BEUR annually in the form of foreign water supply. Still, the economy never reached more or less full employment. One can imagine where the economy would be if it had not received water supply from abroad, i. e. funding from abroad.

Today, the foreign water supply, i. e. the foreign funding, has very much dried out. Greece was forced to live on its own water supply (i. e. the current account was brought into balance). The result is unacceptable unemployment. The conclusion is that, at the present stage of the Greek economy, it cannot employ its people unless there is water supply from abroad (i. e. funding from abroad).

What is 'funding from abroad'?

The unequivocal measure is a country's current account. The current account represents something like the 'cash flow from operations of a country'. It shows how much a country earns abroad by exporting products and services and how much it spends abroad for imports. If the current account is in surplus, the country will automatically export capital (net) in the capital account. If it is in deficit, the country will need to import capital (net) in the capital account. 

Typically, a country which is still very much in an economic development phase will need to import capital for the simple reason that its own economy does not generate enough savings to finance the necessary growth. Importing capital is not at all bad per se. On the contrary, it can become the gasoline to fire the engine of domestic economic growth.

What are the classic sources of capital imports? Here they are:

* Remittances by nationals working abroad - this is the classic story of the 'Greek guest-workers' in Northern countries. They literally worked their asses off, spent nothing on consumption and sent all their savings back home where they were invested in housing, perhaps new businesses and - above all - in the education of their children. From 1950-74, the remittances by Greek guest-workers were by far the largest source of foreign revenue of the country. I am still waiting for the 'Construction of a Monument in Honor of the Greek Guest-Workers'!
* Grants and subsidies from abroad - examples here would be EU-subsidies or, for that matter, the Marshall Plan after WWII.
* Direct investment from abroad - particularly in the last decade, foreign direct investment has declined dramatically in the case of Greece.
* Loans from abroad - this is the catch-all category. If nothing comes from remittances, from grants/subsidies, from foreign direct investment - then it has to come in the form of loans. Remittances, grants/subsidies and foreign direct investment have the great advantage that they carry no obligation to repay them nor do they carry interest. Loans carry both - the obligation to repay them and the obligation to pay interest. The Greek economy was brought to where it is today by the wrong choice of capital imports, i. e. by loans which carry the obligation to repay them and to pay interest.

Now, someone like Alexis Tsipras may well convince Greeks that they should be giving foreigners 'the shaft', that Greece could live very well within its own means if it only were given the freedom to choose. Maybe yes, maybe no. I would argue that Alexis Tsipras is up against the facts of economic history of Greece of almost 200 years.

Greece MUST pursue a strategy of importing capital to finance the economic growth which it needs (I hasten to add that 'importing capital' includes the return of foreign deposits of Greeks). However, there are provisos:

One: to import water because one's own wells have dried out and to use the water only for drinking is not a good idea because one makes oneself totally dependent on others who send water.

Two: to only borrow water is not smart because someone will sooner or later require that the water is given back.

And the conclusion is...
Greece MUST focus on capital imports which stay in the country because the importers of capital think that their capital is put to profitable use in the country.

There is only one alternative to this. Greeks could discredit foreign investment (or investment in general because investment is ideologically bad per se since it only make the capitalists rich). That would be a legitimate choice.

Whoever proposes this choice ought to understand that they will put Greece on a road to become something like a Cuba in Europe.

Sunday, February 24, 2013

Fighting for a share of the Direct Foreign Investment cake

The CEO of the German Allianz Group said in an interview about 2-3 years ago something to the tune of "We (Germany) will have to re-direct some of our foreign investments away from the East and the Far East to the South". That, of course, would be a very important part of the solution of the North/South imbalances.

If the numbers I researched are correct, then Germany makes foreign direct investments of about 60 BEUR annually. I don't know how much of this FDI goes to other problem Euro-countries and it wouldn't make sense to take investments away from them in favor of Greece. However, there ought to be a good portion of those 60 BEUR which might as well be re-directed to Greece. Why isn't it being re-directed to Greece?

This is only one country, Germany (albeit probably the largest foreign direct investor in the Eurozone). Other surplus countries in the Eurozone undoubtedly have their own levels of foreign direct investment, part of which could be re-directed to Greece.

I repeat what I have emphasized on innumerable occasions: the debt is only the 'derivative'; the 'underlying' is the real economy. Playing around with the derivative will not solve any problems of the underlying. To solve the problem of the underlying, the flow of products/services within the Eurozone must be re-balanced and the first step in such a re-balancing effort would be a re-directing of investments.

"The solutions lie outside of Greece". Pro's and con's.

I recommend reading the comments to this article and I draw particular attention to the comments of a reader who writes anonymously under "Xenos" (a British consultant who has lived in Greece since 1998). Here are some quotes:

"I am in complete agreement about the need for reform for the long-term benefit of Greeks and Greece. This reform cannot come from the current regime which is destroying the private sector in order to maintain the corrupt and useless public sector. Short of putting Greece as a colony of the EU, there is nothing the Troika can do to change that."

"The cause of these problems is that the Greek state has created jobs en masse for political reasons, but refuses to create employment (even time-limited) for skilled personnel actually to complete a specific task of important work. Everything takes second or third place to political parties, and this has not changed."

"The fundamental problem is really a scientific one: that you cannot modify institutional structures once they have been established."

"Greece will always remain dependent on its politicians, because that is in the culture of the society. The horrendous bureaucracy and incompetent management structures are taken straight from the Ottoman period, and Greece has had 180 years to lose them. Conservatism is a good thing if you want to keep things as they are: in the case of Greece, this lack of innovation is a disaster. However, I see no change in mentality, nor has the Troika done anything that would help."

"With serious structural reforms, which need to include the appalling judicial system, Greece could benefit from FDI and serious investors. But it’s not happening, as far as I know."

This really presents the dilemma quite well. Everyone seems to always agree on the diagnosis and many, like Xenos, implicate that Greece will never change. Xenos even writes that "the solutions lie outside of Greece — and I suppose people just cannot come to terms with their powerlessness to change anything."

So there seems agreement on the diagnosis and some agreement that Greece will never change, that the solutions lie outside of Greece but --- when the outside does propose solutions it is villified.

Personally, I think the solution lies outside of Greece to the extent that the ouside must recognize that the economic well-being of Greeks will be - as it has been since Independence - dependent on foreign funding for quite some time to come. That is so obvious that it doesn't even deserve debate. What does deserve debate is in which form this foreign funding should come to Greece going forward. I argue that much of it should come in the form of direct foreign investment, others argue differently. But the foreign funding must come to avoid social disaster.

As regards everything else (i. e. all the domestic deficiencies which are described so well in the comments), I can see no way how they can come from the outside. Or is someone thinking about sending in the cavalry to free the Greek people from its establishment?

Like many others, I also have trouble seeing how the solutions can come from within Greece because the existing system would have to amputate itself in order to make this possible. Nevertheless, that seems to be the only avenue open for discussion and it should be pursued with positive and not destructive connotations.

Friday, February 22, 2013

'The Nation' on political corruption and media retribution

Below is an excerpt from an article published in The Nation.

In Greece, the so-called kleptocracy has taken intimidation to another extreme in an attempt to silence those who dare speak out against elite tax evasion and economic injustice. Journalist Aris Chatzistefanou had already raised the hackles of the Greek oligarchy with the documentaries he co-directed with Katerina Kitidi, Debtocracy (2011) and Catastroika (2012), which denounce austerity, corrupt privatization and elite tax evasion. In January, though, he published a piece in the new magazine Unfollow that has sent shock waves around the Greek business elite.

Chatzistefanou and fellow journalis Lefteris Charalampopoulos addressed a notorious method of tax evasion by sections of the Greek oligarchy: the resale of contraband shipping fuel, which enjoys tax deductions as part of the Greek state’s traditional support for the shipping industry. “Shipping oil is tax free, so if someone sells it at the regular price, he can double his profits, while the state loses billions in taxes,” said Chatzistefanou in a recent interview. “The article mentions the names of two companies controlled by a couple of the richest men in Greece—Spyros Latsis from ELPE and Dimitris Melissanidis from Aegean Oil. Melissanidis owns the biggest oil supply fleet in the world, and he is a major contractor of the US 5th Fleet.”

In Greece—two years further along the road to economic and political collapse than Spain—the elite’s bullying of journalists denouncing tax evasion is much more brutal than in Spain. In early February, a man who claimed to be Dimitris Melissanidis called the magazine and threatened to kill one of the reporters and his family. According to Charalampopoulos, the voice said: “I am Melissanidis. You will not be able to sleep. You will not be able to go out. I’ll be your nightmare. Fear of me will haunt you. They will come to your house and blow you up in your sleep. I am used to talking to big journalists. I looked you up and I will tear you down.”

Soon after publication, Melissanidis’s lawyer contacted Unfollow, denying he had made the call and demanding a retraction. But the magazine stands by the story and says it has traced the call to Aegean Oil’s head office in the Port of Piraeus.

Whoever made the call, such a violent tone suggests how unaccustomed the Greek elite is to being publicly accused in the media. “Elite tax evasion is equivalent to about a third of our public debt,” said Angelous Kourous, a tax inspector who supports the Coalition of the Radical Left, or Syriza. But “the media here prefer to talk about old men with two pensions or blind people who receive a disability allowance without being entirely blind.”

This is not so surprising, he adds, since nearly all the big media outlets in Greece belong to members of the business elite, many of them ship owners. Aristidis Alafouzos owns the daily Kathimerini, a partner of The New York Times. A rival shipping magnate, Victor Restis, owns 40 percent of the weekly Proto Thema. The ship-owning family Vardinoyannis has an ownership stake in the TV channel MEGA, the largest station in the country, and owns another channel, Star.

Unfollow is one of a new generation of outlets in Greece that are breaking stories the traditional media have ignored. Late last year Kostas Vaxevanis, the editor of another new rebel magazine, Hot Doc, was imprisoned briefly for publishing a list of more than 2,000 elite tax evaders with Swiss bank accounts that had been delivered to the government by Christine Lagarde, then French finance minister and now head of the IMF. Until the Hot Doc revelations, the issue had been swept under the carpet. 

Incredibly, the “Lagarde list” of fat-cat tax evaders across Europe, from Britain to Greece and Spain, has not led to any prosecutions. “Many of them are offered deals and amnesties by tax authorities,” says John Christensen of the Tax Justice Network, which is leading the campaign against tax evasion and avoidance in Europe. “Corruption is eroding everybody’s confidence in democracy and people’s respect for tax laws, because we know that people at the top are being protected.” This is particularly true in Spain and Greece, where polls show that confidence in the old political parties and institutions is at historic lows. Only the unhindered action of an independent media and judiciary can restore faith in democracy, but that’s maybe the last of the ruling elite’s concerns.

Thursday, February 21, 2013

NZZ reports on foreign investment in Greece

As far as I can determine, the venerable NZZ is the only European paper which has made major news out of the fact that foreign investors are beginning to again show an interest in Greece. This article highlights the investments which have been discussed in this blog several times:

Johnson & Johnson

A momentum has to develop. The above investments could turn out to be the catalysts of a change in trend but much more is required. What is required above all is that Greek media and opinion leaders spread the news that foreign investment is good and that foreign investment is something without which Greece will not have a positive future perspective!

Wednesday, February 20, 2013

Have you seen Greece's current account 2012???

Overall, Greece's current account deficit declined 73% (!) from EUR 20,7 BEUR in 2011 to EUR 5,6 BEUR on 2012. Whichever way one slices the details (and there is quite a bit to slice), the overall performance can only be described as remarkable! If one were to exclude the interest expense from the calculations, Greece would have been very close to a balanced current account in 2012. Below are the details (in BEUR):


2011 2012
2011 2012
Revenue from abroad

Exports 20,2 22,0
1,6 2,0

Services (e. g. tourism) 28,6 27,1
1,8 1,6

Other income 3,3 3,3
0,3 0,3

Current transfers 4,4 5,1
0,4 0,3

---- ----
---- ----

Total revenue from abroad 56,5 57,5
4,1 4,2

Expenses abroad

Imports 47,5 41,6
3,6 3,0

Services (e. g. tourism) 14,0 12,4
1,1 1,1

Other expense (e. g. interest) 11,9 5,4
1,3 0,3

Current transfers 3,8 3,7
0,2 0,3

---- ----
---- ----

Total expenses abroad 77,2 63,1
6,2 4,7

Net foreign deficit (current account) -20,7 -5,6
-2,1 -0,5

The above figures come from the Bank of Greece. I have mentioned before that these figures differ dramatically from those published by ELSTAT and Eurostat (and also quite a bit from those published by the Troika). Be that as it may, I will now focus on the BoG-figures.

* Total revenue from abroad increased by not even 2%. Had exports not increased by 9%, the result would have been worse. Why is 2% overall not an impressive figure and why is 9% for exports not a cause for jubilation? For two reasons. First, Greece must have become significantly 'less expensive' in the last couple of years due to austerity and, secondly, the Euro had declined quite a bit during this time, making Greece even more 'less expensive' relative to third currencies. Against that background, not only should exports have increased more markedly but, above all, services should have increased instead of declined.
* Total expenses abroad declined by 22%. Now that is an impressive figure particularly when considering that the base which is applied to is much larger than the revenue base.
* Imports delined by 14%. Had this been compensated through substitution via new domestic production, it would have been wonderful. Instead, it was the result of the collapse in domestic demand.
* To put the trade balance into perspective, Greece still imported 2.350 Euro for every 1.000 Euro it exported!
* The real relief to the current account came through the PSI and the debt restructuring. This can be seen in 'other expenses' even though it is no clear how much of the decline in this category represents interest.

Overall assessment
If one strictly looks at numbers, we are seeing numbers which only few people would have anticipated only a couple of years ago (certainly I would not have!). From that standpoint, great respect is in order.

Furthermore, if the Greek economy did not have to pay interest abraod, its current account would be more or less in balance. A signal that everything has returned to order and that the Troika-measures worked? Or perhaps not?

The price for bringing the external accounts into balance has been unemployment. Today, when both the primary budget and the primary current account are in (or close to) balance, it is clear that the structure of the Greek economy is such that when internal and external accounts are in balance, there is massive structural unemployment.

No better case can be made for structural reforms than the above figures.

Friday, February 15, 2013

Greed is not good but sustained foreign investment is!

This short editorial from the Ekathimerini reinforces the obvious need for new investment to reduce unemployment. The following sentence caught my attention:

"The state, society and the media must change their hostile stance toward investment and stop seeing it as something suspicious and profit as a bad thing."

I was not aware that there was such a hostile stance against investment on the part of the state, society and the media. Instead, I thought that stance did only apply when it came to 'foreign' investment.

If there is indeed a hostile stance towards investment on the part of the state, society and the media, then we are really back to square one of economic understanding. Then the government might indeed be well advised to start a propaganda blitz with tutorials, etc. to explain to the Greek public how jobs come into existence.

My point all along has been: it's not only investment in general which Greece needs. It is particularly 'foreign' investment which ought to be the top priority.

Why foreign investment? Two reasons. One is for Balance of Payments purposes and the other one for accelerating the know-how transfer which Greece needs in most areas of its economy.

When Gordon Gekko exclaimed that 'greed is good!', the audience should have been ashamed instead of amused. Should the Prime Minister go on TV a couple of times per month to explain to Greeks why 'foreign investment is good!', then he should be congratulated.

There is only one mistake one can make with foreign investment and that is - one attracts the wrong investors. That is investors who don't have a long-term investment perspective but, instead, a shorter-term profit orientation. Greece is well advised to stay away from the latter!

Wednesday, February 13, 2013

Return to growth in 2014. Good news?

In October 2011, one and a half years ago, I wrote a piece titled "Good news! Greece will grow again in 2014!" Here is the key passage of that piece:

Greece should return to growth in 2014, Mr. Reichenbach (Head of the EU Task Force in Greece) said. Perhaps that made some people feel good. Excuse me; feel good?

Another at least 2 years of economic decline? Put differently: another at least 24 months of a development which has already tested social peace quite noticeably every month? By the way, growth after 5 years of decline is not growth; it is only the beginning of getting back to where one already was before.

Now if that is not a final call that something needs to be done urgently to revive a dead economy, then I don’t know what is. Or does anyone really believe that social peace can survive another 24 months the experiences of the last 24 months?
Latest forecasts suggest that return to growth may indeed happen in 2014. These forecasts are announced with a degree of enthusiam. From today's perspective, such enthusiasm may seem justified.

Thinking back of the perspective of October 2011, it is quite incredible that Greece has come as far as it has without a major catastrophe. At that time, I could not envisage that social peace would survive such a prolonged period of depression.

Greeks have proved me wrong!

Tuesday, February 12, 2013

Consequences of Euro --- "Too many houses in Spain; too many civil servants in France; too many factories in Germany"?

The author of this article, Charles Gave of GKResearch, claims that he projected already back in 2000 that the Euro would lead to 'too many houses in Spain, too many civil servants in France and too many factories in Germany'.

The article further states that 'the euro project has led to massive divergences, with the strong getting stronger, and the weak getting weaker. For these trends to change, we would need radical change. We are not talking about retirement age being nudged up a year in one country, or a rules for firing people liberalized an iota in another. We would need to see bloated states firing 20% to 40% of civil servants, and the government spending share of GDP to plunge; the cost of labor to fall by at least –20% relative to the cost in Germany; the return on invested capital in Europe’s South to move above the ROIC not just in Germany but also in Eastern Europe. There is zero chance of these types of reforms taking place'.

Could it be that the future will be as bleak as this article suggests? Well, maybe yes, maybe no. Economists can debate this endlessly.

As a practitioner, I would argue that miracles don't have to be achieved overnight. What matters is that the trend is changed. If the Euro has caused a trend which led to the de-industrialization of Greece, a country which was never all that much industrialized, then that trend must be reversed urgently. I am not saying that Greece should become the home of chemical or steel corporations. Instead, Greece should become the home of many, many more small and medium size production companies than there presently are.

Is there no more than a zero chance of this happening? I don't think so. The flow of investments into productive enterprises is by far not only a function of cheap labor costs. Instead, investments flow because the whole 'package' is right. A proper package is the greatest incentive for the flow of investments.

Only when the day comes that I see discussions within the Eurozone focusing on the flow of investments within the Eurozone (possibly at the expense of investments outside the Eurozone) will I believe that a trend reversal has a fair fighting chance. So far, I don't see that.

Almost 3 years ago, the CEO of the Allianz Group said in an intereview: "We (Germany) will have to re-direct our foreign investments from the East and Far East to the South of the Eurozone". That would indeed be the answer to many problems. Has anything been accomplished along those lines?

Monday, February 11, 2013

A most remarkable new investment!

This very short article in the Ekathimerini received just a little attention in the blogo-/twittersphere but not nearly as much as it deserves. Below is a transcript:

Sunlight, a company owned by Panos Germanos which operates in the design, production and distribution of batteries, announced on Wednesday it is investing 20 million euros in the creation of a new unit for recycling lead batteries at Komotini in Thrace.

The new plant is expected to start operating this summer in the Komotini Industrial Zone and its main activity will be the recycling of used batteries from around the country for the extraction of lead, which constitutes 80 percent of a battery’s raw material. That will then be used for the production of new batteries.

While Sunlight’s annual lead imports amount to 40 million euros, the company now expects to stop importing lead altogether, becoming self-sufficient through the recycling of used cells, thereby increasing its profit margins.

Do you get what's being said here?

* a new 20 MEUR investment is made, obviously creating new jobs
* the new investment will recycle used batteries from around Greece
* the extracted lead will be used for the production of new batteries
* with that, the company will no longer have to import
* last but not least, the company expects to make a profit on this

In short, here you have in one example many of the ingredients which are necessary to turn the Greek economy around such as: new investment to create new jobs through import substitution; the positive environmental effect; new profits which will in one way or another have a positive impact on tax revenues. And, hopefully, the investor will not run into too much red tape when getting approvals for his investment. Otherwise, the EU Task Force should look into this.

And despite all of this, none of the learned people in the blogo-/twittersphere really get excited about something like this? No member of government broadcasts this investment as a showcase of something that should/could be happening in Greece? Everything just matter-of fact?

Let me phrase it politely: When public discussion goes overboard about what did or did not happen with Greek statistics back in 2009; when Greek brainpower dissects the question of whether the IMF had used the right multiplier; when members of the Greek intelligentsia write almost dissertations explaining that Greece can do nothing on its own in the present situation just like Ohio couldn't do anything on its own during the depression - well, when all such things are happening but no one finds time to spread positive news if and when they occur and to show how opportunties are used successfully, then one shouldn't be too surprised if surveys show that Greeks no longer have a future perspective.

Is that the fault of Greeks? No way! It's the fault of those who are in a position to change perspectives, typically the elites of all walks of Greek life!

Friday, February 8, 2013

State Audit Council - Wasteful spending in the public sector

The 2010 Annual Report of the Greek State Audit Council has shaken up the blogosphere quite a bit. No wonder, when it contains some real nasty things like spending 8.200 EUR for leasing buses to transport municipal workers from the provinces to Athens to protest an overhaul of local government.

This, however, is water under the bridge and we are now in 2013. The real nasty news would be if it were discovered that such misuses have not been stopped by now.

Have they?

A most remarkable interview with FM Stournaras!

In a remarkable interview with the NZZ (in German), Finance Minister Stournaras made the following statement which almost sounds like he had taken seriously some of the frequent appeals to develop a long-term development plan for the Greek economy made in this blog.

"When I was Director of a think tank of the Greek private sector, I wrote a book titled 'The new growth model for Greece'. All key elements for further development are included in that book. McKinsey took up those elements and developed them further. We have now requested the two leading Greek planning institutions, the private IOBE of which I had been Director and the public planning institute KEPE, to work with us and to provide answers to the following 3 questions:

* First, what should the Greek economy look like in 2020 - expressed in macroeconomic terms like fiscal and current account balances?
* Second, what is required to achieve these objectives? Are the Troika's proposals adequate? 
* Third, which branches of the economy will contribute to achieving these objectives? This is not at all an academic question because we will decide at the next EU summit about the distribution of Structural Funds. As a result, we want to have a plan in hand on the basis of which we can negotiate with the EU the steering of funds into those areas which have growth potential."

I take off my hat in respect of Mr. Stournaras! This is the first time since I have been observing the Greek situation that I hear of someone in government saying that they are working on a plan.

I once sarcastically quoted the phrase "We don't know where we are going but the faster we drive, the sooner we will get there" to describe my feelings about hectic Greek activities without an overall economic plan. There is now a chance that I may have to take that phrase back. That would be a good day for Greece!

Thursday, February 7, 2013

A spark lighting fires in shipping, transportation, etc.?

It feels so good when one feels vindicated...

Wherever capital flows (for direct investment or otherwise), there are so-called 'leading steers'. Market participants observe the behavior of leading steers and, generally, follow them.

The hardest part in attracting foreign investment is to get the first few investors of high repute; i. e. leading steers. Once that is accomplished, things tend to become a lot more easy. Are we seeing something like that developing in Greece?

The Cosco-investment in Piraeus has been my favorite example ever since I heard of it. It its wake, we have now seen names like HP, Unilever, Henkel and Johnson & Johnson. The Ekathimerini now reports the following:

More major international companies that have their products manufactured in Asia are being drawn to Piraeus as a transit hub for Eastern Europe and the Mediterranean following the deal between Hewlett-Packard, Cosco and TRAINOSE.

Sources say IKEA and Dell are among the firms that have expressed an interest to examine a possible deal similar to that of HP. Interest in a possible cooperation to the same end has also been expressed by LG, Samsung, Lenovo, Sony and Hyundai, but they intend to wait and see how the HP deal progresses.

Thus, it could well be that Cosco becomes the spark which lights a large fire in everything which is related to shipping, transportation, etc. with the according collateral benefits. All Greece needs is a few more Cosco-sparks which light fires in other branches of its economy. If Greece is lucky, they will come on their own.

The much better strategy would be to aggressively go after them!

PS: I just saw this piece about Philip Morris's plans to purchase 50% of Greece's tobacco production over the next 3 years. Could tobacco perhaps be another branch which literally needs a lighter?

Wednesday, February 6, 2013

Add Johnson & Johnson to the list!

I have commented before about Cosco, HP and Unilever as examples that foreign companies can indeed find Greece an attractive place to do business. Now one can add Johnson & Johnson to the list, according to this article in the Ekathimerini.

The chief executive officer of Johnson & Johnson Hellas Consumer Products SA, Gerasimos Kosmatos, revealed the company’s intention to transfer the production of some of the group’s products from other countries to its plant at Mandra in western Attica. “The company believes in Greece and bears the responsibility to support it in the effort it is making to stand on its feet again,” Kosmatos said. “We will continue to invest, as the unit here has proven that in spite of all the difficulties it can be productive and flexible,” he added.

Surprisingly, the Greek production unit is one of only three which J&J has in Europe. The factory in Greece is already highly active in exports, with the products it manufactures ending up in some 30 countries. The share of the plant’s output destined for export has risen to 90 percent, from 80 percent a few years ago. Some 500 people are employed at the Mandra facility.

It is interesting to note that none of these companies are from Germany or France, the two countries which - I believe - have the largest credit exposure to Greece and which should have the greatest interest in making their borrower strong again!

The reader Canutely King reminded me, that I had overlooked Henkel which indeed needs to be added to the above list.

Tuesday, February 5, 2013

Growth measures - what's that?

Goldman Sachs' President Gary Cohn is articulating one of the major themes of this blog from the start: the only way a creditor can get his money back from a troubled borrower is by focusing on making the borrower strong again! And yes, this elementary logic has been absent from all rescue efforts of Greece so far.

One of my first articles proposed a way to do that. That's just one blogger's proposal. There are many more authoritative experts to make proposals. Sadly, no one is making any!

To me, the key elements of a good plan for Greece would have to focus on the following elements: import substitution, export expansion, immediate focus on shipping and tourism, foreign direct investment as a source of finance and know-how transfer, and full utilization of the EU Task Force to bring the public administration into shape.

The debt is the 'derivative' while the 'underlying' is the real economy. Playing around with the derivative does not solve the problem of the underlying. It's the real economy which requires all the attention.

I do not believe that more deficit spending and/or recycling foreign funds through official bodies (like EIB-financings) is the answer to all problems. Of course, some major new infrastructure projects would help but the benefit will be diluted through the foreign sourcing of such projects and through the unavoidable misappropriation of some of such funds.

What is required are incentives for foreign private sector companies to invest in Greece. That assures that the monies are spent wisely and 'cleanly' and it brings along know-how transfer. There is no limit to the imagination as to what approprirate incentives could be. However, they should be plausible incentives and not 'perks'.

One day, I hope, the EU will wake up to the fact that only a blossoming Greek private sector can generate the resources to service at least part of the country's debt!

Public sector privileges - Greece is not alone. Not by far!

I have repeatedly made the point that one of  the collateral damages of the Greek crisis (actually, of the crisis of the entire Southern Periphery) is that it makes all those countries which are not in the news for being corrupt, for having an overdimensioned public sector characterized by cronyism and patronage - well, these crises make all the other countries look good. In actual fact, there are countries with similar structures of corruption, of cronyism and of patronage as Greece (except perhaps for the degree of them). My own country Austria is one of them. Below are some points from a recent analysis:

The President of Austria, a purely representative position without any constitutional power, has been touring the country for years calling for greater social fairness and justice. That's an easy thing to do when one has an annual gross salary of 328.000 Euro. Why Heinz Fischer would earn 11% more than Barack Obama and about twice as much as David Cameron requires some imagination.

The Chancellor of the Republic has to get by with a bit less than the President, or 'only' 286.000 Euro annually. Surely, he carries tremendous responsibilities as CEO of a country which spends almost nothing on its defense and which is not known for its influential role in the European theater. But does that justify Werner Faymann's earning 32% more than his colleague Angela Merkel?

The Vice-Chancellor is even worse off with only 252.000 Euro. His only consolation is that his US counterpart, Joe Biden, earns about one-third less than that.

The Governor of Austria's Central Bank, an institution where one doesn't quite know what responsibilities it carries since the local currency was abandoned, can collect 334.000 Euro annually. His US counterpart, Ben Bernanke, has to get by with about half of that. I guess running Austria's Central Bank or the Fed are not one and the same thing.

And, finally, the head of Austria's national TV & Radio, a totally politicized near-monopoly which has still managed to lose market share consistently over the years, is record holder with 350.000 Euro annually. The head of the German ARD must be jealous when he sees that because that's about one-fourth more than his own salary.

The above is only the very small tip of a very large iceberg. Austria has an enormous direct and indirect public sector which is still heavily politicized. A recent study said that 51% of the more senior positions are filled with political appointees. It would be interesting to see a study of how the total direct and indirect public sector of Austria stacks up with that of Greece. Austria can't be that far behind. And one can be sure that the salaries of all more senior positions in that sector are way above what could objectively be justified (and way above salaries in the private sector). Plus the fact that most of them have job security for life.

Why does that (still) work in Austria and no longer in Greece? Austrian political parties have operated very cleverly since WWII in that they never lost sight of where the money came from which they then happily recycled among their party members, cronies and voters --- the private sector. As a result, the Austrian private sector has always been rather competitive internationally. Greece probably has more strike days in a couple of months than Austria had in the last almost 70 years because Austrian politicians of all colors always honored the principle of consensus (at whatever cost to tax payers) and they shied away from dissens (which might have saved tax payers money in the longer run).

Many Austrians, particularly those who benefit from the system, think that this system is a prototype for how a peaceful social market economy should work. It's difficult to contradict that because how does one show the cost of patronage, cronyism and corruption; the impact on society of enormous preferential treatment here and enormous unfairness there?

Many Austrians think that this can go on forever. Many Greeks probably thought so, too, a few years back...

Monday, February 4, 2013

"Don't believe any statistics which you haven't forged yourself!"

People who have management experience in large corporations know what beautiful things one can do with statistics. In the extreme case, it can lead to a situation where all divisions report good profts while the company as a whole reports a loss.

Much excitement is currently under way in connection with the statistical reporting of the budget deficit back in 2009. That is undoubtedly an interesting case for experts.

The more ordinary people would probably prefer to just have a simple set of statistics; meaningful statistics which tell the story correctly. That seems to be impossible because different institutions have different ways of putting numbers together. None of them are probably wrong but the ordinary observer doesn't know what to make of them.

Below are the export/import statistics of Greece for 2011, as reported by the Bank of Greece, the Troika, ELSTAT and Eurostat. The comparison speaks for itself.

2011 (in BEUR)

BofG Troika ELSTAT Eurostat

Exports 20,3 26,3 52,2 56,6
Imports 47,5 55,5 69,1 77,2

------ ------ ------ ------
Balance -27,2 -29,2 -16,9 -20,6

This is obviously not a matter of 'cheating' but, instead, a matter of different reporting methods. It seems that the Bank of Greece and the Troika follow relatively similar methods, and so do ELSTAT and Eurostat. Personally, I rely on the statistics of the Bank of Greece because they have always been very consistent and credible answers to questions could always be easily obtained.

The question, however, is: which of the above statistics represent reality the best and why is there such a huge difference between them? Below is what my contact at the Bank of Greece had to say about that: 

This is everybody’s usual complaint. The reasons for the discrepancies between the two sources are:

1. Differences in timing. The ELSTAT figures are custom (or VAT) based whereas the Bank of Greece (BOG) ones are settlements based. This means that the former have a 3 to 6 months lead over the latter.
2. Differences in valuation. There are cases e. g. in which the BOG data translate exports or imports denominated in dollar terms as reflecting transactions to and from the US which is wrong especially when it comes to oil imports.
3. Differences in coverage. There are e. g. different views between the two sources regarding thresholds beyond which transactions are reported.

These differences, however, are more pronounced on a monthly basis and smoothen out when it comes to annual data. You must also bear in mind that the ELSTAT figures rely on the philosophy of “garbage in garbage out” without inquiring as to the reliability or reasoning of the reported transaction. Inevitably, therefore, they revise their data on a monthly basis and the picture often changes considerably from one month to another.

In short, rely on the BOG data. You know there is a Greek saying that goes, ”If you do not praise your own house the roof is bound to collapse on your head”!!!!!! 

All clear???

Saturday, February 2, 2013

Feeling of slight - a national syndrome?

"Getting the Greeks to "yes" on difficult issues generally requires a good argument coupled with cajoling and schmoozing.  The Greeks are susceptible to flattery and quick to be offended by a perceived slight." 

So wrote an analyst from the US Embassy in Athens in June 2008 in a cable to Washington, published by Wikileaks.

All of us have gone through experiences where, in personal and/or professional life, we perceived slight, slight which an objective third-party observer would not have confirmed that it existed. When this becomes a more permanent condition, one is well advised to seek therapy. The therapist will probably think of ways how the person can improve his feeling of self-worth. He will probably try to explain to the person that feelings of slight have much to do with feelings of self-worth (or the absence thereof). However, the greatest challenge for the therapist will be to get the person to recognize and accept his problem in the first place.

What can be done when the feeling of slight is seemingly a national trait? Are there therapists for nations?

Yes, there are therapists for nations. They are called 'leaders' and their instrument is called 'leadership'. At the end of Jimmy Carter's Presidency, Americans seemed to have resigned themselves to being the losers of the world. After only a few years of Reagan, Americans were convinced that they were God's gift to the world.

An outside observer can't help but get the impression that the current Greek government has done quite a few things quite well in only six months. Latest predictions are that the economic turn-around might begin even this year. It may not be much of a turn-around but, at least, things may stop getting worse. One could actually make quite a story of that.

And what story are Greek politicians making? Well, they are acting like managers in a turn-around situation who report to the supervisory board. No enthusiasm, no emotions - just the facts, Ma'am. 

"The gap between what we could be producing and what we are producing is higher than 25 percent,” the Finance Minister is quoted by the Ekathimerini, adding that he expected “a significant recovery in 2014." 

A miracle may be happening next year and one is mentioning that just in passing? As though it was a footnote so something else? 

Propaganda is a term with negative connotations, rightfully so when it builds on illusions and when it manipulates people in the wrong directions. But some form of lifting emotions seems to be called for, particularly when an entire nation seems to have lost its feeling of self-worth

Two bricklayers were asked what they were doing. One said 'I am putting one brick on top of the other'. The other said 'I am building a cathedral!'

Putting one brick on top of the other, however expertly done, is not good enough. One also has to talk about the cathedral.