Sunday, 26 July 2015

A nice bit of research on Greece.

This paper on Greece is quality stuff. Clearly a lot of research has gone into it and the paper is easy to understand (not that I’ve read the whole thing). Plus there are pleny to charts, and tables with facts and figures.

However I don’t agree with part of the authors’ conclusion, namely that, “The rise in (relative) unit labour costs did not lead to the higher current account  deficits in the Eurozone periphery. International competitiveness is not about wage costs, but  about technology and innovation. Given a country’s technological capabilities as reflected by  its productive structure, export growth and import growth are overwhelmingly determined,  not by unit labour costs…”.

The idea that QUALITY is much more important than PRICE, in the case of manufactures may well be true. However, a significant proportion of Greek exports are not high tech: namely tourism.

Plus a significant proportion of potential import substitution isn't high tech either, namely food production.

That point can be nicely illustrated by reference to islands off the West coast of Scotland. No doubt there are numerous such islands where the only form of employment is tourism or agriculture. Now assuming any of those islands declared independence from the UK and became independent countries, would they be able to pay their way? Of course they would!

They might, for the sake of argument, continue to use the pound Sterling, in which case precious little would change. The same holiday makers would turn up in Summer time. And as long as farmers on those islands didn’t raise the price of their produce, they could continue as if nothing much had happened.

Of course if Greece were to rely JUST on tourism for its foreign exchange earnings, vastly fewer Greeks would be able to buy Mercedes cars. I.e. there’d be a big cut in Greek living standards. But devaluation (normal devaluation or internal devaluation) ALWAYS involves a standard of living hit for the relevant country. That point is explained in the economics text books.

Conclusion: a sufficiently large devaluation would get Euros flowing INTO Greece rather than OUT OF Greece. And that would solve Greece’s debt problem sooner or later.


  1. Thanks for pointing out this paper.

    A quick skim makes me think the paper attributes excessive debt to the private sector rather than the public sector, a reversal of commonly expressed views.

    I need to read this paper more carefully, hopefully later today.

  2. After the second read of the paper by Storm & Naastepad, I would judge it to be a paper worth reading. I do have a few observations:

    1. Excessive private borrowing is blamed for the 2007-8 crisis. Excess public debt became a problem when government elected to resolve the private excessive debt problem by taking the private debt public.

    [S and N waste ink demonstrating that public debt decreased during the period leading into the crisis. This should be no surprise if excessive private debt formation was occurring. Increasing private debt results in increased tax revenue to government,directly reducing the need for government borrowing. ]

    2. The paper is filled with statistics referenced to GDP. This is a problem. GDP is a moving reference point while debt, once incurred, is a fixed reference. In a moving GDP environment, individual incomes move on average, with half losing ground and half gaining ground. Fixed debt is an increasing problem for those entities losing relative position. The bottom line here is that the statistics offered do not fully capture the magnitude of the displacements that have occurred.

    3. If we agree that private borrowing prior to 2007-8 provoked the problem by initiating a bubble, then we would describe the effective economic goal (following the crisis) as being an effort to maintain the conditions generated by the bubble. This may not constitute wise policy.

    Again, I think the paper is worth reading and carefully evaluating.


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