Angela Merkel, German
chancellor, meets Alexis Tsipras, Greek prime minister, Brussels, Feb 12, 2015.
Bank runs returned to modern economies from the outbreak of the financial
crisis in 2007 and about €100bn in deposits have been moved from Greek banks
since 2010 with the European Central Bank offsetting the loss in liquidity by
lending to Greek banks.
Remember Northern Rock — the first bank run in Britain since 1866? The panic
was prompted by Bank of England's confirmation in Sept 2007 that it was in the
process of saving the mortgage lender.
A decade after German hyperinflation, the accelerating collapse of the
American banking system in the weeks leading up to the inauguration of the new
president on March 4, 1933, also cast a long historical shadow.
In the boom years countries like Greece and Ireland appeared to be a lot
richer than they were — Ireland remains poorer than
Italy on a per capita basis. Greece's challenge is that
it is both a very poor exporter and a poor performer in
inward foreign investment.
It would likely take up to 20 years of good governance to fix the Greek
economy and because there does not appear to be support in the country for
exiting the euro, foreign investment in for example the tourism sector is
required to compete with neighbours like Turkey to justify a price premium.
In the short to medium term, the debt burden is not
a priority issue. Good governance is:
1. Zsolt Darvas of Bruegel estimated that net interest expenditure was at
2.6% in 2014 when allowing for the fact that Greece did not pay any interest on
some of the bailout loans and got refunds from the ECB and national central
2. Separate to the bailout, Greece receives a net 3%
of GDP annually in grants and subsidies from the EU budget;
3. The IMF said last year that recovery of Greek exports has been notably
weak relative to other “peripheral” euro area economies such as Portugal or
Spain. Exports from Greece had grown by only about 1/3rd the growth rates of
Portugal and Spain since the trough of 2009-10. Excluding tourism and oil (which
comprise about 2/3rds of total exports), the recovery of exports has been even
less over the same period.
4. In 2013 about 40% of Greece's goods exports were fuel as it has a lot of
refining capacity but it is not a significant oil & gas producer;
5. Shipping services exports have low value added as most of the crews are
from outside Greece;
6. Tourism accounts for almost a quarter of total exports compared with 18%
in Portugal and 16% in Thailand —
more detail here;
7. Despite creditor repayments and depositor flight, the net cash flow from
Europe has been positive since 2010;
8. It is a huge challenge to change from a kleptocracy but there is evidence
of improvement in tax administration and the World Bank now ranks Greece with
Tunisia in its key
Doing Business index for 2015 which has Greece at 61 of 189 countries — up
from 109 in 2010.
9. Pensions have also been reformed and outlays were among the highest in
Europe at 13.5% of GDP in 2009 and rising to
17.5% of GDP in 2012 because of the fall in
output. Greece’s creditors are now seeking changes that will yield annual
savings of 1% of GDP by 2016. They want health contributions to rise from 4% to
6% on average and subsidies for early retirement cut.
10. Per capita real GDP by US state in 2014 ranged from a high of $66,160 in
Alaska to a low of $31,551 in Mississippi. Per capita real GDP for the US was
11. Actual Individual Consumption per capita, a measure of
material welfare of households adjusted for price differences which is a proxy
for standard of living, had an index value of 106 in the euro area in 2014 and
100 in the EU28, Germany was at 123, Italy 98, Ireland 93, Spain 90 and Greece
and Portugal at 83.
Slovakia was at 74 and Robert Fico, prime minister, said
earlier this year that he would only accept concrete promises from Athens that
ensure it “will behave in a way that will guarantee that in 10, 15, 20 years,
Greece will be able to pay [back] what they get.” The former communist said:
“There is no possibility to cut debt in itself...why should the Slovakian people
pay some proportion of their debt?”
12.Not only was Greece admitted to the euro system
in 2001, in breach of budget rules with public debt in excess of 100% of GDP, it
had run a deficit every year since 1974 (France was in the same boat from 1975).
From the start Greek data was unreliable and big revisions were regular.
Between 2001-2008, Greece’s reported budget deficits averaged 5% per year,
compared to a Eurozone average of 2%, and current account deficits averaged 9%
per year, compared to a Eurozone average of 1%.
Growth was above the Eurozone average thanks to spending on credit.
13. Every poor country without its own natural resources, needs a strong
exporting sector as well as strong inward investment flows. In 2014 Portugal was
the fourth highest recipient of Chinese investment."
Whatever may be agreed today, Greece's prosperity cannot be willed from
Brussels. Debt repayments are scheduled out to 2057 and a Greece competently run
would likely get debt forgiveness as repayments arise.
However, stumbling from crisis to crisis while insisting on staying in the
euro system would be neither good for it or the rest of euro area.
A group called the
Commission on Growth and
Development that reported in 2008 and included US economists such as Michael
Spence and Robert Solow, said that sustained high growth in developing
economies is a recent, post-World War II phenomenon.
It said that using GDP figures, “high” is above 7% and “sustained” is over 25
years or more, that a similar picture emerges with variants.
Growth at these
rates produces very substantial changes in incomes and wealth: Income doubles
every decade at 7%.
There are 13 such cases of sustained high growth, and nine are in Asia.
These are Botswana, Brazil, China, Hong Kong (China),
Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan (China), and
Each and every one of these miracles had an export sector as a driver of growth
and an increasing share of trade in GDP. There are no exceptions. Every growth
miracle involves leveraging the demand and resources of the global economy.
This explains the rise of both the Irish and
Singaporean economies since the 1960s.
It does not mean that there should be long-term dependence in supplying to
global supply chains but it’s the best way to develop a modern international
trading structure and Singapore in particular is focusing on developing its own
indigenous sector while China’s electronics sector is still dominated by
Despite Greece’s superior infrastructure, Romania does
much better in attracting inward FDI (foreign direct investment).
Greece could become a failed state like Venezuela