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.