Greece: the dismal European experiment

A recent article on Vox[1] [2], explains clearly the vision of the majority of German economists, though not all, about the fate of Greece. It is worth quoting the beginning of the article: " ‘Austerity has failed’ is the most popular narrative of many commentators, especially in the Anglo-Saxon world and in the European periphery….and it now serves as the principal argument for the Greek government …..This narrative is factually wrong and ignores the reasons underlying the Greek crisis. ".

In summary the thesis is as follows: in 2010 the primary Greek deficit was on 10% and the debt-to-GDP ratio to 127%, while the current account deficit was also on 10%, while the net debt to foreign countries to 87%. A catastrophic situation, such that for “an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone – in any case, adjustment was unavoidable, and it would be painful and accompanied by strong social tensions". This is a clear application of TINA philosophy, copyright Margaret Thatcher. And the austerity measures worked: in 2014, Greece has achieved a primary surplus and an equilibrium (even a slight surplus) in the current account. German economists compare the Greek experience with that of five countries: Korea and Thailand (1997-2002), and the three Baltic countries, Estonia, Latvia and Lithuania (2007-2012).

The adjustment of the Baltic countries is considered particularly instructive, because they defended the fixed exchange rate with the euro entering, at different times, in euro currency; Latvia has also received financial aid from the EU and the IMF by submitting to the adjustment program. It is clear that the adjustment was inevitable and expensive, but aid has made it less painful. But if we look at the graph on GDP growth, we see a fundamental difference: Korea, Thailand, Lithuania and Estonia have had only one year of the fall of GDP, and in the case of Estonia and Lithuania is 2009, the year where almost all countries came into recession. Latvia has had also a fall, more limited, even in 2010, and, coincidentally, was the country subject to the adjustment program.

In the 2011-2013 period the three Baltic countries have had positive growth rates; therefore, at the end of 2013, the GDP, compared to 2008, was slightly higher (+ 1.1%) in Estonia, lower (-2.5%) in Lithuania, and even lower (-4.4%) in Latvia (just the country that had received aid). As it is well known in Greece there has instead been a collapse of a quarter of GDP. To say, as German economists say, that the glass is half full looks like a macabre joke.

The reason lies in the differences between the economies of the Baltic countries and the Greek economy. The former are countries where exports are (almost) at Irish level, while in Greece the export is placed on 30%. Moreover, the majority of products exported agricultural products and raw materials. The ability to export growth is therefore much less than that of the Baltic countries, so the adjustment in the Greek case occurred also through the contraction of imports, unlike the Baltic countries:
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                                              2009-2013

                        Growth exports                   Growth imports

Greece                 22.1%                                 -13.1%

Estonia                 87.6%                                 101.3%

Latvia                    73.0%                                  74.7%

Lithuania             100.6%                                101.4% 
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In the same period, the average growth of Eurozone export was 34.2%. It is clear that Greek export responds less to the relative prices and more to the (growth of) demand. The same can be said for tourism, an important element of the Greek current balance; obviously low prices attract tourists, but the stagnation of incomes of European consumers is rather a brake.

The austerity policy, made in Berlin, is wrong, and this is an idea shared by most European and Anglo-Saxon economists, with some exceptions in Brussels and, indeed, in Berlin. But the application of the same policy for all countries also determines very different results, depending on the conditions of the individual countries. Greece would have need a process of fiscal adjustment much slower (at least four times slower) than that imposed, and a program of real investments to increase the weak industrial basis of the country. In no Federal country all different areas are in balance of its current account balance, the calculation of which is a purely statistical exercise.

But Greece was the perfect opportunity to apply the rules of the European right, that is the balanced budget and the reduction of wages, rules designed to make all Eurozone countries the image and likeness of Germany. And the results are there: the Eurozone current account balance has improved, in the period 2009-2013, around 400 billion. It does not seem that the German economists are concerned about the implications that this result entails at the international level, given that if an area is active some other area must necessarily be passive.

Finally, Greece has serious problems, and no one better than the Italians knows that: corruption, tax evasion, high degree of corporatism and cronyism (but the country doesn’t have a serious organized crime). To address these problems we need a new political class, and perhaps now it is emerging, as long as EU will  give to the Tsipras government the time required.