Monday, 27 July 2015

Richard Koo slips up on Greece.

Half the world is now being wise after the event on the subject of Greece. Trouble is that even hindsight hasn’t brought 100% pure wisdom in some cases. This article by Richard Koo is a case in point. (h/t to Wonkmonk).

He claims in his 2nd and 3rd paragraph that:

With its income falling to such low levels, the Greek private sector has been forced to dis-save for years i.e., living off the past savings, making it impossible for the country to pay back foreign creditors.

The drop in the nation’s real output is on a par with that experienced by the US during the Great Depression from 1929 to 1933.

I suggest cause and effect are being confused there. Greek “income” (if you can call it that) has only been the size it has been over the last decade because of ever increasing debts owed to private banks and more lately to the Troika. That flow of easily available loans has now been cut off, which means that many Greek household incomes have fallen.

But a fall in income caused by a creditor’s decision to be less generous  is not an explanation for “making it impossible for the country to pay back foreign creditors”. Quite the reverse: had the creditor continued to lend like there’s no tomorrow, then paying back the creditor would have been EVEN MORE difficult.

The idea that “income” enables an entity to pay off it’s debts sounds reasonable: for example an increase in a household’s income helps it to pay off its debts. However, there’s a flaw there.

It’s true that income deriving from OUTSIDE the household enables the household to pay off its debt. However, income earned by one member of the household off another member of the household DOES NOT.

Same goes for a country, e.g. Greece. Greece owes money to entities OUTSIDE Greece: mainly the Troika. And the type of income that enables Greece to pay off those debts is income earned from EXPORTS: i.e. earned from OUTSIDE Greece.

But there’s no reason to think that Greece’s export earnings will have been influenced by the lack of cash in the hands of the average Greek citizen or the above mentioned fall in Greek incomes. The main factors influencing Greek exports are first the competitiveness of those exports (which will have improved a bit given the cut in Greek wages over the last few years), and second, the general state of the world economy, particularly in countries to which Greece exports. As regards that second factor, one would expect exports to have dropped when the 2007/8 crisis hit and to have improved somewhat since then. And indeed that’s pretty much what happened. See here. Change the "start year" to about 2000 at the top left of the bar chart to get a better picture of the last decade or so.

Having said that, there is one particular form of income earned by one Greek off another that helps repay Greek debts, and that is import substitution. The latter will have been assisted by recent falls in Greek wages, but those wages have not fallen DRAMATICALLY (in terms of Euros) relative to other Euro countries. So we can expect a finite amount of import substitution to have taken place, but not much.

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