Sunday, November 23, 2014

What Makes Greece Special?

BRUSSELS – The euro crisis seems to be largely over. Risk premiums continue to fall across the board, and two countries – Ireland and Portugal – have already exited their adjustment programs. They can now finance themselves in the market, and their economies seem to have started growing again.

By contrast, Greece is still having problems fulfilling the goals of its adjustment program and is engaged in seemingly endless negotiations over yet another multilateral financing package. The problem can be summed up in one word: exports (or, rather, lack of export growth).

The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus (the fiscal balance minus debt service) in 2013. For the first time in decades, the Greek government has been able to pay for its expenditure with its own revenues.

This is indeed a milestone. But another, much more important news item has received much less attention: Greece exported less in 2013 than in 2012.

This lackluster performance, which followed years of decline in market shares, is difficult to explain, given that all other countries on the eurozone periphery recorded solid export growth. For example, Portuguese exports increased by about 5-6% per year over the last years, despite challenging external conditions (Spain is its biggest market) and a credit crunch, which made it difficult for exporters to obtain financing.

Neither weak foreign demand nor a lack of financing, therefore, can be the reason for Greece’s poor export performance. Low competitiveness, too, is not an explanation, as real (inflation-adjusted) wage costs have declined by more in Greece in recent years than in any other eurozone country, with the exception of Ireland.

But it would be strange to conclude from Greece’s experience that wage deflation is a useless tool for improving competitiveness, given the widespread assumption that Germany benefited massively from it. So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.

This lack of adjustment capacity is crucial. In Ireland, Spain, and even Portugal, exports grew strongly when the domestic economy collapsed and wages adjusted. But these countries were already more flexible and, in some cases, undertook strong reforms.

In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated.

The facile argument that Greece has little to export is irrelevant here. The problem is not that Greek exports are low, but rather that they have failed to grow, which should have been possible, especially from a low base. Several years ago, Greek exports of goods and services were equal to those of Portugal. Today, Portugal is ahead by almost €20 billion ($27.5 billion). This represents a potential loss of more than 10% of output for Greece.

Lack of export growth thus has made the recession in Greece much longer and deeper than it would have been otherwise. If Greek exports had increased at the same rate as those of Portugal (or Spain), the recession would have ended by now.

Moreover, the lack of export growth made the fiscal adjustment much more difficult. Higher exports would not only have yielded directly higher revenues; they would have had a multiplier effect on the domestic economy as well, thereby increasing consumption tax revenues.

Greece now has a balanced current account – quite an achievement after double-digit deficits (as a percentage of GDP) a few years ago. But, in contrast to other economies on the eurozone periphery, this improvement was achieved entirely through import compression.

This implies that there cannot be any hope for a sustained recovery unless exports start growing. It is often argued that with less austerity, domestic demand would be stronger. That might be true, but stronger domestic demand would lead to higher imports, which would need to be paid for with higher export revenues, because the country cannot afford to accumulate more foreign debt. No exports, no growth: Greece’s debt sustainability ultimately depends on this key parameter.

What went wrong in Greece was not the fiscal adjustment. On the contrary, austerity was perhaps too successful (and painful). But it was the wrong target.

The really important target for any country starting an adjustment program with a double-digit current-account deficit must be export growth. Missing this target is what has set Greece apart.

Unfortunately, there is very little the outside world can to do to ensure that the Greece exports more. The government can be forced to pass decrees, and Parliament can be pressured to adopt all the reform legislation known to humanity. But, in the end, it is how reform is applied on the ground, and how the economy responds, that counts. An adjustment program succeeds or fails at home, not in Brussels or Washington.

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    1. CommentedJamel Saadaoui

      Since 2008, we observe an INCREASE (not a decrease) of export prices measured relatively to the euro area partners. The real effective exchange rate based on export price deflator moves from 115 to 125 (calculations based on European Commission data, basis 100 in 2000).

      In these conditions, it is quite difficult to argue that the Greek economy has regain competitiveness against its main trade partners…

    2. CommentedStamatis Kavvadias

      This is amazing nonsense for an economist.

      Comparison of Greek reduced labor cost effects with those of German depresed wages, is at least naive, if not prejudiced. Greece is not and has never been an industrial country (actually, by explicit political choice). When the financial crisis has set in doubt the productive capacity of Greece, pointing to need for retargeting the economy, there were only so few things the Greek economy could achieve with investment pumenting *all years* in the data the author sites himself!

      Comparison of Greek and Portuguese exports on the basis of GDP %, not taking account of GDP decline in the two countries! 2009-2013 GDP decline in Portugal was ~16%, while for Greece the decline was ~27%. This means not absolute change in relative exports value. Portugal has *always* been ahead of Greece in absolute exports (e.g., see here The reported approximation of 20bn euro, has *always* been the case. This is *clearly* prejudiced and blind reading of the numbers!!!

      Exports have increased in exactly the same pace as in Portugal in absolute numbers and the fact that this is not so as GDP percentage should be easily comprehensible for a country suffering a cumulative GDP decline of little less than 27%, equal current unemployment rate, continuous investment reduction, and an impaired financial domestic sector that has not been capitalized yet! Furthermore, who says that this export-led growth model is attainable for all countries?

      Can the author read statistics at all? Greek current account *is not* balanced. Greece has a deficit of about 2%. There is only a primary surplus.

      a) Greece needs more investment, hopefully based on the recovery of the domestic financial sector;
      b) Daniel Gros is biased, possibly both because he is ignorant and a fanatic.

    3. CommentedAnthis Zogopoulos

      Wage cuts is a doubtful measure to boost competitiveness in capital and energy intensive industries. Labour intensive industries are gone long time ago. When direct and indirect labour costs contribute just a. say, 20% of a product's total cost structure, then halving wages you just decrease total cost by a mere 10%. ceteris paribus. If at the same time you have energy costs increase more than twice, financing cost at usurious rates, if the firm has any access to capital at all, add some increased taxation, then it shouldnt surprise anyone that the any savings from the wage cuts can be swept away and the overall product cost having been increased actually.

      Add some weak marketing, and you have a full explanation for the poor export performance.

    4. CommentedJason Gower

      "The Euro crisis seems to be largely over" ?! Apologies but I got all hung up on the first sentence here. Can you please explain how the crisis was resolved? Also helpful would be if you explained to me structure of the Eurozone.

        CommentedJason Gower

        Marc, I have always found hope to be the absolute worst strategy...with more than 325mn citizens in the EZ is it responsible for politicians to cross their fingers and hope that things work out without taking the needed steps to fix the structural flaws or move on to another system? Unfortunately markets will decide when it unravels and then it will once again be full crisis mode again...

        CommentedMarc Sargen

        You asked why the Euro crisis seem to be largely over. The simple answer is that few are calling it a crisis that needs an immediate solution.
        There are plenty of issues & unresolved problems. But people were able to kick the can, & hope that things will be better later. Still no one is saying, we need to fix this or everything will unravel. Without panic there is no crisis.

    5. CommentedCatarina Gusmão

      Well, Portugal has not yet exited its adjustment programme (scheduled May 2014) and only by then we can assess its "capacity" to finance itself in the market.

    6. CommentedCarol Maczinsky

      "Unfortunately, there is very little the outside world can to do to ensure that the Greece exports more."


    7. CommentedZsolt Hermann

      I don't fully understand the question in the title, indeed why would Greece be special?
      Are there no dozens or more other countries struggling right now?
      Actually are there any countries who are showing true signs of recovery, not cosmetic ones, are there any countries (apart from China as we saw this week) who even dare to make long term plans at east for a year ahead?
      Instead we see reactions, joy or despair week by week as conflicting numbers, statistics come alive, basically everybody is living, more precisely surviving day to day.
      And the most important sign is that despite more and more people coming to understand that constant quantitative growth is simply unsustainable in our global, integral human network locked inside a closed and finite natural system, still experts "prescribe more growth" as cure, as if drinking even more would be the medicine to a terminally sick alcoholic.
      We still try to pick details and philosophize on them instead of trying to see the big picture.
      We cannot pull ourselves out of the global crisis unless understand and accept the root cause.
      And the root cause is the excessive and artificial economic structure and its false supporting governing system, and it is all driven by our self-centered and egoistic human nature.
      So as long as we do not change our nature and instead of competing with each other, instead of making any calculation only based on self-interest we start mutually complementing each other and make the primary calculations towards the benefit and well-being of the whole, we will simply continue sinking deeper into crisis and very soon even the superficial, cosmetic measures will not yield results, not even for a short term.
      Paradoxically this "negative" state, this "crisis" actually gives us the opportunity for a restart, to create a completely new human system that is much wiser, fully conscious instead of being solely instinctive, a system that adapts to evolutionary conditions and provides unprecedented quality of life by the fact that humanity performs, operates a single, united, mutually supportive and complementing organism, opening up possibilities that were impossible to touch before.