Wednesday, September 29, 2010

Truth Commission for Greece’s Finances?

More and more I wonder whether Greece needs a Truth Commission to study economic policy since 1974. Jacob Funk Kirkegaard at the Peterson Institute recommended this in April, and he lists several precedents. The obvious goal is to cleanse, to form a narrative on what happened. But there is more. Without such a commission, blame might be spread either too broadly or too narrowly.

Perhaps a useful starting point is the recent comment by Theodoros Pangalos (whom I generally find repulsive by the way); when asked about where all the money went, he said, “We ate it all together.” In some ways, he is very right. And in other ways he is very wrong.

He is very wrong for three reasons. The first is that not everyone cheated. Not everyone evaded taxes, not everyone built homes illegally or received generous benefits from the state. Not every businessman was a thief or politician a fraud. The second is that cheating is not binary - cheating is bad but more cheating is worse than less cheating. To say we all cheated equates the big cheats with the little ones. Third, to say that we all cheated is like saying no one cheated. We are all responsible, so no one is responsible.

And yet he is very right for two reasons. The first is that Greece's financial woes are not a story merely of stealing at the top. The rich stole but so did the poor, at least the formerly poor. They got jobs, were shielded from competition, were prevented from being fired. And that's the second reason he is right: much of what went wrong, many people would not classify as “bad.” Just look at the protesters. The truckers are saying, please do not take away our fat profits by boosting competition. Public sector employees say do not fire us. Professors say do not judge us. Yet they all were part of the problem.

So here is the problem. Too broad a responsibility lets everyone off the hook; but too narrow a blame risks those broader insanities that perpetuated Greece's economic demise. It is easy to be outraged by a million Euros bring paid in a bribe; but what about a million Euros paid to public sector employees who did nothing all day. Can society be outraged equally with both? Commission or no commission these are truths that Greece will have to confront.

Monday, September 27, 2010

Debating the Greek Current Account Deficit

Greece has run persistent current account deficits for the past thirty years, but there is a debate about whether these really matter. George Alogoskoufis, Greece's finance minister, claims that these are not a big deal - in his book "Greece After the Crisis" he says that these deficits merely reflected the faith that foreign investors placed on the Greek economy. Costas Simitis, former prime minister, thinks differently: for him, Greece is importing more goods and services because there are no domestic alternatives that can compete on price or quality.

In a sense, Mr. Alogoskoufis is right. But he is right insofar as his point is a tautology: when a country imports more than it exports, it is borrowing from abroad. That a country can borrow is a signal of faith. So what the finance minister has said is trivial, although what he *means* to say is this: if borrowing was supply driven (money flowing into Greece for good returns) rather than demand driven (over-consumption and under-saving leading to borrowing) then no need to worry. But if this net inflow was driven by (a) lack of ability to grow exports or (b) lack of savings from which to finance investment, then the implications are worrisome.

Before assessing the two competing viewpoints, some basic numbers are useful. The first graph below shows the deterioration in the current account that basically started after 2004. The main driver of that deterioration was clearly the increase in imports while most other variables remained relatively flat.

Looking at this import bill in more detail shows that imports rose from ~ 33 bn in 2003 to a high of 63.8 bn in 2008. About 37% of that increase could be attributed to oil. Another 20% could be attributed to "ships" which presumably refers to "imports" of ships into the Greek economy. There is another 42%, however, or 13 bn that belong to the "other category."
How was this current account deficit financed? Clearly, it was not financed by foreign direct investment, which would signal a true "faith" in the long-term prospects of the Greek economy. Net FDI was almost zero this past decade. It was clearly financed by portfolio investment (in equities), but this variable did not grow enough between 2004 and 2008 to explain the growth in the current account. So one cannot even argue that growth in the Greek stock market produced an inflow of funds into Greece which created a current account deficit. This leaves most of the financing - especially from 2005 to 2008 to "other investment." This is an expansive category but it consists mostly of advances and loans. Hardly the stuff which shows much faith in the Greek economy.

There is one final way to look at the data. The Bank of Greece just published a volume on Greece's external position. It is a long text (and I am still reading and digesting it), but from the start it provides evidence that Greece's rising current account deficits were demand, rather than supply driven. This graph below best encapsulated the issue.

Looking at the period since Greece's entry into the eurozone, it dissects the current account deficit by looking at the borrowing needs of the government and the private sector. In terms of investment (the red line for those who do not read Greek), it remained more or less stable in the 2000s, although one can detect two sub-periods before and after 2004. Higher investment was obviously not a reason for a net inflow of money.

Savings meanwhile experienced a near collapse (in black). Granted this started before the entry into the euro, but it accelerated after 1999. What entry into euro did, among other things, is lead to an overly expansionist monetary policy since Greece's higher than average inflation meant that real interests (set centrally by the ECB for all the eurozone) were too low for Greece. The dissaving was split between the private and public sectors.

Putting all this information together, then, paints a very specific picture for Greece's current account: imports, in part driven by oil and ships but also for other goods, rose from 2004 to 2008, while exports failed to keep up. There was a corresponding net inflow which was financed by loans rather than direct or portfolio investment. And this inflow was necessary between households and the government were not saving enough to finance investment.

Sunday, September 26, 2010

Qatar Fever and Foreign Investment in Greece

My reaction to the recent deal signed between Greece and Qatar is this: what are people thinking? Not the Qatari or Greek government, but the press and the analysts; how come no one can do a basic reality check on this deal?

Here is what I mean. Parties sign memorandum of understandings (MOU) all the time. Too often in fact. If two parties meet and do not sign an MOU, there is no future. But an MOU is akin to, “I like what I hear, keep in touch.” The numbers quoted are usually back of the envelope calculations. Most MOUs just lead to more MOUs to keep discussions open. An MOU says little about whether any investment will happen.

So what to make of the supposed $5 bn that Qatar will invest in Greece? For the Greeks, the case for enthusiasm is clear. Not only does this move signal faith in the Greek economy, but the sums are huge: from 2000 to 2009, the Greek economy absorbed ~$2.2 bn annually in foreign direct investment (FDI). So $5 bn is a big number. But is it too much? How can a country whose absorption capacity is $2.2 bn a year absorb $5 bn? Hold that thought.

Now look at the Qatari side. The Qataris have lots of money, no doubt about that. But over the last three years and they have invested an annual average of ~$5 bn abroad. So this proposed investment in Greece would equal the amount of money that Qatar spends annually everywhere the world. In fact, if Qatar invested $5 bn in Greece in 2010 (obviously not going to happen), then 25% of Qatar’s stock of investment would be located in Greece (Qatar’s stock of FDI was $16 bn at year-end 2009).

So the thing to say about the Qatari-Greece deal is not, “Yes, we have been saved” or “Oh no, we are selling everything to the Qataris,” but rather, “I like what I hear, but say more.” These are big sums for sender and receiver alike and anyone who takes away only that Qatar is ready to invest $5 bn in Greece gets excited too easily.

Friday, September 24, 2010

Trucking Reform and Greece’s Transport Mess

As parliament passed a bill on trucking reform, I wanted to mull over some numbers on Greece’s transport mess.

Begin with a macro comment, and the fact that Greece’s freight transport is the most dependent on roads. In Europe, 76.4% of freight transport is conducted via roads, 17.8% via rail and 5.9% through inland waterways. In Greece, by contrast, 97.3% of the transportation happens on road, which puts Greece in fourth place in Europe, behind only island countries (Malta, Cyprus, and Ireland). So Greece has a very low share of rail transport for freight and a heavier dependence on roads than other European countries.

A simple explanation is regulation. The graph below shows the latest numbers by the OECD on product market regulation for energy, transport and communications. This index captures the extent to which regulation favors competition, and it ranges from 0 to 6, with six being most restrictive.


Several items are apparent from this data. First, Greece has more restrictive regulation (i.e. more anti-competitive) than its European peers in every sector except postal services. In fact, Greece’s score is on average 3.1 versus a European 1.9. Second, Greece’s most restrictive practices are, in order, rail, airlines, gas and road services. For road and airline services, Greece has the most restrictive practices in Europe; for gas, it ranks second, and for rail fourth.

Delving more deeply into the trucking sector is a bit hard to do because there is little available data, and so there is limited ability to make comparisons with other countries. I wanted to touch on two main issues, however.

The first is growth. The IMF has noted that, “No new licenses have been sold since the 1970s,” which is a statement that I cannot reconcile with the trucking fleet data reported by the Greek Statistical Agency. In 2009, according to the Agency, there were 1.3 million trucks in Greece (a number that seems exceedingly high, by the way, and which must take a pretty expansive view of the word “truck”).

But looking at fleet growth, one can see the relative rise in passenger vehicles and motorcycles versus trucks and busses – the former capturing private use and the latter business purposes. Relative to 1985, there were in 2009 eight times as many motorcycles on Greek streets and three times as many cars. By contrast, there were only twice as many trucks and just 42% more buses. These numbers suggest that there has been relatively little growth in business transport relative to private transport.

The second is profitability. Again, the IMF noted that regulation lead to “high-price, low-quality transportation services … and large private rents accruing to incumbents.” Estimating this on a macro level is hard. But the Greek statistical agency does report some figures, including profitability, for transport enterprises. Between 1999 and 2007, the gross operating surplus of the 20-odd thousand trucking companies in Greece was 28%, which is quite healthy. What is also apparent is although there was growth in the fleet, the number of companies has been flat, again suggesting no entrepreneurial push to enter the marker. I realize that without a meaningful international comparison, it is hard to put these numbers in context, but I still think they hint towards something troublesome when combined with all the above.

Wednesday, September 22, 2010

Greece’s Revised Debt Forecasts

In its first review of Greece’s performance, the International Monetary Fund praised Greece, saying that “the program has made a strong start.” Looking at the revised numbers, there are several changes worth noting.

For one, the IMF has revised downward its projected debt for Greece. From a peak of 149% of GDP in 2013, the Fund now thinks debt over GDP will peak at 144% in 2012 and 2013. This is obviously not much to celebrate about, but it does mean that in the baseline scenario Greece at least ends up in 2020 with less debt than it started in 2010 (111% vs. 120% in the initial projections for year 2020 versus a 2009 debt level of 115% of GDP).
Two variables have really changed in the IMF’s outlook: inflation and the current account. Let me focus on inflation here since that is the variable that most explains the change in debt as higher than anticipated inflation – of which I have written before – has helped shrink the real debt burden. While the IMF previously expected inflation in 2010 to average 1.2%, with the country slipping into deflation of -0.5% in 2011, the Fund now forecasts 3.5% inflation in 20210 and 1.3% in 2011. No more deflation.

Since I noted before that this rising inflation was likely due to price hikes from tax increases, it is worth pointing that the IMF’s estimates that, “Inflation at constant taxes is falling and has declined below the euro-area average for the first time since the creation of the euro.” This is a major development, especially when one considers that (a) price adjustment is necessary to restore external competitiveness and (b) that domestic product market reforms have yet to start, which means they have yet to exert their expected downward pressure on prices.

Alongside these positive changes, however, comes also a negative one: contingent liabilities. These are liabilities that the Greek state may be responsible for. In its May 2010 analysis, the IMF estimated about €25.8 bn (11% of GDP) in contingent liabilities from the “debts of public enterprises and identified guarantees to the public sector.” This has now grown to over €85.5 bn due to “past swap operations of €5 billion [and] the state-guaranteed liquidity support of the ECB to the financial system of €55 billion.” If the state had to assume these debts, its debt-to-GDP ratio would peak at 191% of GDP in 2014. Minimizing these debts – which requires baking stability and the orderly re-organization of the public enterprises – is a central to Greece’s ability to remain on the baseline debt-over-GDP path. 

Monday, September 20, 2010

Greek Debt In the European Context

This graph, from a recent roadshow presentation by Greek Finance Minister George Papaconstantinou, caught my attention. It speaks not only to the overall challenge of managing debt in Europe, but it also touches on the positive reality of the relatively low level of private sector debt in Greece. When adding public and private debt, Greece ranks 2nd from the bottom in a group of 14. Needless to say, liabilities of over 250% of GDP are huge, but in the grand scheme of things, what the graph shows is that Greece is distinctive not for its profligacy but by the fact that in Greece it was the public sector that went on the same borrowing binge that most other countries experienced in their private sectors.

Focus on Unemployment: Regional Disparities

As the Greek economy contracts, unemployment has risen from a low of 6.6% in May 2008 to a high of 12.1% in February 2010. But this overall figure masks several important sub-trends. In the fifth of a series of posts on unemployment, I look at regional variation in unemployment rate, and in particular, at the challenge of creating permanent employment in the periphery. 
Begin with some basic statistics on regional employment. Compared to the national average unemployment rate, there is significant variation: people in Crete are on average 24% less likely than the average person in Greece to be unemployed. On the other extreme, people in Western Macedonia are 48% more likely to be unemployed. Interestingly, Attica, which includes the greater Athens region, is below the national average but by a mere 5%. 

As always, these single-point estimates mask significant variation, so I have added to the graph the standard deviation of the differential between the regional and the national rate. Two sets of regions, in particular, stand out: the islands and Western Macedonia.

What is interesting about the islands is not that they face a seasonal employment challenge, but that even with this seasonality – they experience about as much unemployment as the rest of the country. Crete, in fact, has the lowest unemployment rate in the country; the North Aegean and Ionian islands follow (with the Peloponnese). Only the South Aegean has more unemployment than the country as a whole. In both Aegean regions, moreover, unemployment rates spike to 15% in the wintertime, illustrating that even though on average unemployment may be similar to the country average, there is still a seasonal employment challenge, especially given the fact that these areas account for ~12% of Greece’s total population.
Western Macedonia is a trickier story. For one, the region has the highest unemployment rate of any other in the country consistently since 1999; the high volatility, therefore, can be understood in the context of a progressively worsening employment picture, when, at times, a person in Western Macedonia is almost twice as likely to be unemployed as the average person in Greece. This is the only region in Greece which is landlocked and it is also the smallest – by population – on Continental Greece. How these facts impact unemployment is hard say in an easy way however, so let me add this also to my list of unexplained puzzles for now. 

Overall, what these number show is that there is significant variation in employment and that the problem is most acute in Continental Greece, which lacks the seasonal boost enjoyed by the islands. Besides Attica and the Peloponnese, all regions in continental Greece face a consistently higher unemployment than the national average.

Saturday, September 18, 2010

Focus on Unemployment: Does Education Help?

As the Greek economy contracts, unemployment has risen from a low of 6.6% in May 2008 to a high of 12.1% in February 2010. But this overall figure masks several important sub-trends. In the fourth of a series of posts on unemployment, I look at the statistics by education level and what they tell us about Greece’s ability to find employment for people with different educational levels. 

The first chart shows the unemployment rate for groups based on their education relative to the national average. So if the national unemployment rate is 10% and the unemployment rate for university graduates is 5%, the number would -50%, meaning a university graduate is half as likely as the average person to face unemployment. I have also added an error bar with the standard deviation to show the range around this single point estimate. The wider the standard deviation the more volatility there is around the singly number shown here. 
The numbers show is parabolic relationship between education and unemployment rates. At high levels of education, there is a significant differential in unemployment rates: university graduates and those with post-graduate degrees are 31% less likely to face unemployment than the average Greek. As we move down the educational ladder – for those with at least a 9th grade (γυμνάσιο) education but no university degree (ΑΕΙ) – the likelihood of unemployment rises from 14% more likely than the national average for those with just a 9th grade education to 26% more likely for those with a vocational degree. Finally, the scale is inverted at the bottom of the educational ladder as people with no education or less than a 9th grade education face lower probabilities of unemployment versus the average.

It is worth pointing out here the standard deviation on the two extremes. For those with no schooling at all, unemployment rates have gone through two periods: from 1998 to 2003, people in this group were 35% less likely to face unemployment versus the national average. In fact, there were times in early 2003, when the unemployment rate in this group was below 2% versus a national average of 9-10%. After 2004, however, it is a completely different story with people in this group facing a 24% higher chance of unemployment. And this number becomes greater as we move towards 2009 and 2010, where the differential is as high as 54%, indicating that those without (much) education are hardest hit by the current economic downturn. 

On the other extreme, the volatility is harder to explain. The unemployment rate for those with post-graduate degrees is seasonally volatile: on average, the unemployment rate in Q2 and Q3 of any given year is 1.1 percentage points higher than it is on Q1 of the same year and Q4 of the previous year. This is a systematic observation that occurs almost every year. As far as I can tell, there is no obvious explanation for this – one hypothesis I had, which is that the labor force increases as people get their degrees but haven’t found jobs, is not borne by the data. Let’s retain this as a puzzle to return to at some point. 

In certain ways, these overall numbers are predictable, so it is always useful to put them in a European context. Greece had an average unemployment rate of 9.5% in 2009 versus an EU average of 8.9. Looking at education levels, however, reveals a much different picture: for university graduates, the unemployment rate in Greece is 6.6% versus a European figure of 4.5%. In other words, someone with a university degree is 47% more likely to be unemployed in Greece than in Europe as a whole. 
For those with a high school diploma and vocational degrees, the differential is still substantial but narrower: in Greece there is a 30% greater chance of unemployment. For people with an educational level below 9th grade, however, the chance of unemployment is lower in Greece than in other European countries, which can in part be explained by seasonal employment during the summer months.

Thursday, September 16, 2010

Focus on Unemployment: Women in the Workforce

As the Greek economy contracts, unemployment has risen from a low of 6.6% in May 2008 to a high of 12.1% in February 2010. But this overall figure masks several important sub-trends. In the third of a series of posts on unemployment, I look at female participation rates and the relative unemployment of women versus men.

Begin with labor participation – how many women in Greece seek employment or are employed? In 2009, that number was 57% and, auspiciously, it has been growing since 1992 (earliest data point) when it was 42%. So in 2009 a woman in Greece was 35% more likely to be in the labor force relative to one in 1992. In that process the gender gap has narrowed as well: in 1992, a male was 80% more likely than a female to be in the labor force, but by 2009, that wedge had narrowed to just 40%. 
This improvement is substantial, but it still lags European trends. At 64.3%, female labor participation in the European Union in 2009 was much above the Greek rate. And while females in Greece narrowed the gap versus the European average in the early 1990s (from 14 percentage points difference in 1992 to 9 points in 2000), since 2000 it has remained the same, which means that increases in labor participation are similar in Europe as they are in Greece (no convergence or divergence).

Relative to all of Europe, however, Greece is ranked anywhere from 23rd to 25th in the last decade (in 27). In any given year, therefore, there are only two to four countries where female labor participation in lower than it is in Greece. In fact, in 2009, Greece was 25th when it came to the difference in labor participation between females and males – meaning that in Greece females were less likely than males to be in labor force than in any other European country except two (Italy and Malta).

The numbers on female unemployment are worse both in absolute as well as relative terms. In 2009, a female in the Greek labor force was almost twice as likely as a male to be unemployed (91% more likely to be exact). This was, by a wide margin, the highest number in Europe (in second place, Italy had a 37% ratio). If we look at a broader time sample, from 2000 to 2009, Greece retains its position as number one in Europe (at 133% more likely), but the gap with second place Spain is smaller (172%). A woman in Greece is more likely to be unemployed relative to a man than in any other country in Europe.

One aspect of the female unemployment problem is the lack of part-time employment: in 2009, only 10% of employed females were employed part time. This number is much below the European Union average of 31.5% and it puts Greece at the bottom of the EU scale on that issue (ranking anywhere from 23rd to 26th over the last decade). So while in the rest of Europe, part time employment is an important part of the overall labor force story, it is not so in Greece.

Focus on Unemployment: The Chronically Unemployed

As the Greek economy contracts, unemployment has risen from a low of 6.6% in May 2008 to a high of 12.1% in February 2010. But this overall figure masks several important sub-trends. In the second of a series of posts on unemployment, I look at structural unemployment and the duration that people spend looking for a job.

The first trend that becomes clear is that the majority of those unemployed in Greece are chronically unemployed, which means they have been looking for a job for 12 months or more. On average 53% of unemployed Greeks fall in this category (based on averages of quarterly data since 1998). A further 16.6% has been unemployed from six to eleven months. 
In other words, if a Greek is unemployed, there is a 70% probability that unemployment will last at least six months and a 53% probability that it will last over a year. To put a slightly different spin on it, 2.8% of the Greek population in Q1 2010 had been without a job for over a year (and this number is similar to previous years, so it is not skewed by the economic crisis). 

What is interesting – and somewhat depressing – is that Greece is no outlier in Europe. Compared to the European Union average, Greek structural unemployment is worse, but it is not off the charts. In 2009, for example, Greek long-term unemployment was 40.78% of total unemployment – in the EU as a whole, it was 33.1%. What this means is that if a Greek and a European were both unemployed in 2009, the Greek was 23% more likely to have been be chronically unemployed (over 12 months). 

Against the context of Europe more broadly, however, Greece is in the second quartile when it comes to long-term unemployment as a share of total unemployment (Greece was ranked 9th of 27 in 2009). It had better numbers than countries such as Germany, Italy and Portugal, but it had more structural unemployment than countries such as France, Ireland and Spain. In that sense, Greece’s challenge to integrate a large portion of people who struggle for long periods of time to find work is similar and only slightly worse than the challenge of other countries to do the same

Wednesday, September 15, 2010

Focus on Unemployment: Integrating the Young

As the Greek economy contracts, unemployment has risen from a low of 6.6% in May 2008 to a high of 12.1% in February 2010. But this overall figure masks several important sub-trends. In the first of a series of posts on unemployment, I look at the statistics by age and what they reveal about Greece’s ability to absorb younger workers into the work force.

Unemployment rates are obviously skewed: the young face higher rates than the old. This much is predictable and uninteresting. What is interesting is the degree of the skew and how it compares to other countries. Begin with the degree of the skew. The graph below shows the relative unemployment rates for individual age groups versus the average for all age groups. If the number is 0%, this means that this age group has a similar unemployment rate to the country as a whole; if the number is above 0%, that age group faces a higher average unemployment rate than the overall average.
This graph, therefore, tells us that younger workers aged 20 to 24 have an unemployment rate that is 157% higher than the national average (this is based on monthly data from 1998 to 2010). So if the average unemployment is 10%, the unemployment rate for persons 20-24 would be 25.7%. We can see, then, that Greeks aged 20 to 24 are two and a half times more likely to be unemployed than the average Greek. For those aged 25 to 29, the number is 59%, which could be read as saying that people in that age group are 59% more likely to be unemployed than the average Greek.

The question to ask is: at what point does the age-specific unemployment converge with the national rate? This is the same thing as asking: at what age is an employee integrated into the workforce so that employment status is no longer influenced by age. From the graph, it looks like that number is somewhere above 30 years (the data is too aggregated to pinpoint this more precisely). Given that the 25-29 differential is 60% and the 30-44 differential is -15%, the turning point is probably closer to 35 years.

To put this in context, I have added a note on where the values are for the United States. First of all, the graph shows that the United States faces a similar link between age and relative unemployment, which is to be expected. But the age at which workers are absorbed in the United States is much lower.

At the below-20 age group, the relative unemployment differential is very similar between Greece and the United States (for the US, this group refers to ages 16 to 19, not 15 to 19). In the 20 to 24 age group, the difference between the two countries becomes much greater, however: 80% for the United States versus 157% for Greece. By the time we get to the 25-29 group, the number for the United States is 18% versus 59% for Greece. In other words, a worker aged 25 to 29 is only slightly more likely to be unemployed than the average American, whereas in Greece, that chance is 59%.

Sunday, September 12, 2010

Did the 1980s Ruin Greece?

Dissecting the numbers on the Greek economy, it is hard to avoid the conclusion that the 1980s ruined the Greek economy, with successor governments sharing the blame mostly for failing to reform rather than further regression. But this post is no anti-PASOK rant; I thus have to accept that a counter-factual 1980s could have been bad as well.

That the Greek economy regressed in the 1980s is obvious. In fact, it is hard to find any economic measures that did not deteriorate sharply in the 1980s; these numbers should make the point:

  • Real per capita GDP growth was 0.23% a year in the 1980s, versus 7.9% in the 1960s and 4.64% in the 1970s.
  • In 1980, the average Greek had a standard of living that was 7% below their European peers; by 1989, the gap was 24% below.
  • Unemployment rose from 2.7% in 1980 to 6.7% in 1989.
  • Real compensation per employee was flat in the 1980s, while it had grown 4% in the 1970s.
  • Public debt climbed from 22.3% of GDP in 1980 to 64.2% in 1989.
  • Total factor productivity, an admittedly nebulous measure of how efficiently an economy combines inputs to generate output, fell by 0.85% a year in the 1980s versus a 6% average annual growth in the 1960s and 2.53% growth in the 1970s.
  • Net fixed capital formation, a measure of how much fixed capital was invested in the economy after depreciation of existing assets is taken into account, declined by an annual average of 0.17% in the 1980s, while it had grown by 16% on average in the 1970s.
  • Industrial production grew by a mere 1.3% a year in the 1980s while it had grown by 10% a year in the 1970s.
  • Average inflation in the 1980s was 19.5% versus 2% in the 1960s and 12.3% in the 1970s.
In 1989, therefore, the Greek economy was almost uniformly worse off than it was in 1980. Not only was there a real regression in key indicators, but the post-war boom that lasted through the 1960s and 1970s was gone. Greece had been transformed from a growing to a stagnant, even declining economy. This much should be obvious to anyone who looks objectively at the 1980s.

The corollary to this deterioration was a politics that was based on income redistribution and that created a sense of entitlement that disconnected reward from effort. The language and economic philosophy of the 1980s created much of the rigidity the country faces still. This is reflected not only in the strength of groups such as unions but more importantly in what a large part of the population considers as fair when it comes to wages and the role of the state in the economy. The greatest challenge in reforming the Greek economy is that the government needs to adopt measures that fall outside the spectrum of what many people conceive as even possible.

And yet, this redistribution campaign – together with Greece’s entry into the European Economic Community, the settling of the monarchy question, and the legalization of the communist parties – helped consolidate democracy. The left, hitherto either marginalized or persecuted, not only became part of the mainstream but, arguably, became the mainstream. In fact, since 1981, parties of the left have gained over 50% of the vote in every election except in April 1990.

This is the flip side of the economic collapse: large segments of the Greek population, often with explosive tendencies, were brought into the political mainstream. Granted, several groups remained outside or at the fringes of the political system, as evidenced by bursts of violence or even terrorism. But there has been no serious systemic political (πολιτειακό) challenge that shook the foundations of the state.

To be sure, the last twenty years have been far from violence-free, and in fact, the inability of the state to respond sensibly to unruly crowds owes something to the crowd-control aversion that emerges from the post-war experience of state suppression. Yet Greece succeeded in establishing a framework where disputes were resolved, even though spending money became the primary adjudicator (even suppressor) of national antagonisms.

That the 1980s helped consolidate democracy is far from an original thesis, but it is rarely put in the context of “consolidate democracy by spending so much money it ruins the economy.” Clearly, it is impossible to test the counter-factual – could Greece have normalized the politics without massive state spending? We will never know this. But we know that history need not have turned out this way. While there were several factors helping to anchor Greek democracy, it is far from certain that political inclusion would have been accomplished either way.

To answer the question, then, did the 1980s ruin Greece, my sense is that the 1980s certainly derailed the Greek economy from a growth-driven convergence with Europe to stagnation. But in doing so, helped anchor Greek democracy and settle big political questions. Even so, the current reform program is very much an effort to undo what was put together from 1981 to 1989.

Saturday, September 11, 2010

Greek Budget Review: August 2010

The Ministry of Finance has published its monthly Budget Execution report with data to August. The report shows that while the government is making better than expected progress in slashing expenditures, it is having much less success with boosting revenue. The result is that, for the first time in 2010, the government’s deficit reduction goal is short of what has been achieved so far in the year. 

By August 2010, the government had succeeded in lowering expenditures by 7.7% relative to 2009. Not only is this considerably above the 5.5% expected by the government, but it is above the 2.8%, 3.5%, and 4.8% targets that the government has formulated throughout 2010. At the same time, however, the 7.7% reduction is the worst performance since March 2010, meaning that while the government remains on track to exceed its target, it is less than at any point since March 2010. 

On the revenue side, the results are uniformly grim. Against a 13.7% increase target, the government has shown a 3.3% gain. Not only that, but the fiscal gains are getting progressively worse and the gap between target and reality is widening month by month. Similar to spending, the August 2010 cumulative gain is the lowest registered since the IMF-EC-ECB package was announced.

The result is that the Greek budget remains on a haphazard path towards meeting its targets. For the first time in August 2010, however, the year-to-date record falls short of what needs to be achieved for 2010. Against a 39.5% reduction, the government has achieved just 32.2%.

It should be noted, however, that the budget is not linear, and there is considerable variation from month to month. According to the government’s numbers, its budget deficit reduction schedule is ahead of plans by €700 million. Even so, the trajectory of the budget is worrisome.

Friday, September 10, 2010

Inflation Squeezing Households

On September 9, the Greek Statistical Agency reported that inflation was 5.64% in August 2010, registering its sharpest year-on-year increase since April 1997 (using the Greek, rather than European, definition leads to a slightly lower number at 5.5%). Given that credit is highly constrained (see here), and that GDP shrank by 3.8% in Q2 2010, this inflation is not generated by too much money but by high taxes. 

High inflation has several implications. First, it contradicts what should be happening, which is deflation, as wages decrease and product market deregulation (still nascent) forces a downward revision in prices. That said, deflation should come later and this inflation is generated by taxes rather than loose monetary policy or too much demand. 

Second, inflation is squeezing households who are seeing, at the same time, wages stagnate or even decrease, credit being cut off as liquidity is low, and then prices increase. So households have less disposable income to begin with, have fewer options to smoothen their incomes via credit, and they need more Euros to buy the same amount of goods. 

Predictably, consumption is shrinking. Interestingly, the base-case scenario agreed to between the Greek government, the International Monetary Fund, the European Commission and the European Central Bank forecasted that GDP in 2010 would shrink by 4%. So far, statistics show a contraction of 3% in 1H 2010, so this is *better* than the base case scenario. 

But the impact is more evident on government revenue, which is showing a shortfall of €2.2 billion relative to projected revenues (this is a 7% deviation). From January to August 2010, revenues increased just 3.3%, which is far below the 13.7% envisioned by the government plan. More than anything else this shows the real limits of taxation as a way to boost revenue.

Wednesday, September 08, 2010

Banking Sector Review: September 2010

In its July 2010 Financial Stability Report, the Bank of Greece showed continued stress on the Greek banking sector. The Bank’s financial stress index, which is based on variables such as “such as share prices, CDS spreads, interest rates, bank profitability and capital adequacy, etc.,” was at its highest levels in Q2 2010 (here). A look at some specific numbers reinforces the negative image for Greek banks.

Begin with non-performing loans (NPLs). These had trended downward and reached a trough in 2007. Since then, however, there has been a sharp increase in their occurrence. In Q1 2010, 8.2% of loans were deemed non-performing, up from 5% at the end of 2008. NPLs, moreover, come from all sectors with consumer loans leading the way in terms of deterioration (up to 13.4%), followed by business and then housing loans. 
Even if you look at an extreme measure – write offs and write downs – banks wrote off €917 million from January to July 2010. This is double the amount they wrote off in the same seven months of 2008 (€441 million) and 37% higher than the same amount in 2009 (€665 million). Given that banks adopt various measures to avoid a loan being classified as non-performing, it is clear that households in particular are having trouble meeting their obligations.

Greek banks are also facing a mini run with rising capital flight. There has been a noticeable drop since December 2009 in the deposits of corporations and households. A monthly reduction in deposits to the tune of €3.6 bn has produced a cumulative drop of 10.8% (€25.7 bn) between December 2009 and July 2010. The main driver is the drop in household deposits by 9.6%, while the decline in the deposits of non-financial corporations is more pronounced from a relative point of view, having contracted 18.5%. 
The net result is a contraction in credit growth. The amount of credit outstanding in the economy has been growing very slowly since Q4 2008. To put some numbers in context, the total amount of credit outstanding was just 4.3% higher in July 2010 versus January 2009. By contrast, from 2001 to 2008, the annual increases in credit were averaged between 15% and 20%. Further, the Bank of Greece shows a continued contraction in credit growth (at 2% in July 2010 versus 4.2% in December 2009), although the total amount outstanding has made a modest rebound in June and July 2010. 
All this paints a particularly grim picture for the banking sector and, more importantly, for the real economy. Non-performing loans demonstrate the stress under which households and companies are operating, while the reduction in deposits suggests increasing anxiety by residents about the security of their money. And the contraction in credit amplifies these trends by starving the market from funds necessary to make transactions.

Tuesday, September 07, 2010

Greece’s Tourism Decline

There is a persistent focus on tourism receipts to gauge the health of the Greek economy as it heads into the fall and winter. Tourism receipts have, in fact, been dismal in 2010, falling 12% on a year on year basis in 1H 2010 (earnings in January-June 2010 versus January-June 2009). But this cyclical downturn – which started in Q4 2008 – masks a broader decline in the sector that needs addressing. 
Start with the big picture. Over the past decade, tourism has made a progressively smaller contribution to Greek exports: in 2000, Greece received €10 bn from tourism, a number that grew just 3% over a whole decade to €10.4 bn in 2009. Given inflation in this period (the price level in Greece was 40% higher in 2009 versus 2000), in real terms, Greek tourism brought in 22.5% less revenue in 2009 than in 2000.

As a result of this stagnation (or decline), Greek tourism made up 25% of exports in 2000 but only 20% in 2009. Since 2003, the important of tourism as a share of total exports has fallen each year with the exception of 2009 – although this was because other exports fell more than tourism rather than because tourism performed well. The data to investigate this further is not very good (or at least not as easily available) but some high level conclusions can be generated from the table below.

Spending per night has been stable and in fact grew modestly between 2005 and 2009. However, spending per trip has fallen for independent travelers, who spent 10% less per trip in 2009 than in 2005. A similar, but less pronounced, trend is visible for packaged tours. Obviously the key here is duration of stay which fell 12% for independent travelers and 7.5% for packaged tours.

What these statistics make clear is that on top of a cyclical decline in tourism receipts generated by the economic crisis (and perhaps some image problems), the Greek tourism sector needs to face up to its broader decline in the Greek economy. With stagnant revenues in nominal terms and a real decline in real terms, Greek tourism needs a re-think if it hopes to remain the pivotal driver in the economy that it once was.