Tag Archives: Greece

Greece’s other economy.

Underground economyThe Economist recently wrote about Greece’s informal economy. Here are some interesting points from the article:

* 24% of all economic activity went undeclared in 2013. After the recession the the economy shrank by 30% – government debt is 174% of GDP

* Greeks feel that their taxes are wasted – you only have to think back to the hosting of the Olympic Games in 2004. Greece’s ‘tax morale’ is the fourth lowest of 26 countries and its public sector is renowned for being the most corrupt in the EU.

* What has been the catalyst for the informal economy is the fact that Greece has a high level of self-employment – this makes it easier to evade income tax. Also government levies account for 43% of labour costs, compared with the rich-country average of 26%.

However it is important to remember that over 25% of Greeks are officially unemployed and the informal economy is a lifeline to many of them. Over two thirds of shadow earnings are spent instantly with companies that do pay tax. The best way to encourage Greeks to declare tax would be a sustained economic expansion. If there is growth and falling unemployment the temptation to go underground should dwindle.

Cartoon from ‘The New Yorker’ magazine.

EU unemployment levels on the rise

From the Wall Street Journal Graphics page. Unemployment in the EU hits record highs – joblessness in the 17-nation currency area rose to 12.2 percent in April. Reuters stated that the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors. What is of significant concern is that 5.6m young are without employment although it is getting desperate for Spain and Greece.

EU Unemp

Stockmarkets then and now – 2007 – 2013

Here is yet another graphic from The Economist showing the change in stock markets since the peak before the financial crisis in 2007/8. Although Dow Jones Industrial Average surpassed its previous peak (though it is still around 7% off once inflation is taken into account) – see previous post. As you can see some stockmarkets are still struggling and Greece is more than 80% below its peak in 2007.

Stockmarkets

If only the Greeks could be like the Dutch at growing tomatoes.

Time magazine ran an interesting article on the tomato market in the Holland and Greece. The Greeks produces twice as many tomatoes than the Dutch but very little of it is sold in export markets. This is a concern in that it is a missed opportunity for the Greeks to earn income. What is more ironic is the fact that in the summer imports of tomatoes come in from Holland because the Greek farmers are still struggling to grow a crop during the hottest time of the year – Holland employs high-tech green houses and is able to produce significantly more during the summer months than Greece.
Tomato Production

However, Greece has the potential to produce tomatoes for domestic consumption as well as for export but only has two harvests a year and is at the mercy of the elements – poor weather = poor harvest. The Dutch in contrast have temperature controlled greenhouses helping to create ideal growing conditions and they can produce 70kg of tomatoes in a square metre of his greenhouse whilst the Mediterranean grower gets approximately 7kg. They can also produce all year round.

Single Currency and Productivity

With the introduction of the euro in 2002 Greece could no longer devalue its currency to control the price of its products. With a weaker currency their exports were much more competitive but this had the effect of making the Dutch work even harder to achieve more efficiency and greater economies of scale. Therefore the only way that the Greeks can now compete is by cutting costs and embracing technology.

Tomato ExportsBut it is not just the tomato market that has been hard hit. Greece’s agricultural sector’s productivity levels are 44% below the European average and labour costs have increased by approximately 90% and this is in contrast to Germany where unions agreed to a 3% rise. What is more concerning is that the acreage given over to growing tomatoes in Greece is 10 times that in Holland but they hardly export any of them. The Dutch have seen their exports increase by 30% since 2005. Some economists have laid the blame on the oligopoly market structure that controls the distribution. These middlemen pay farmers low prices and take a big mark-up on tomatoes even as they have failed to put in place a more efficient distribution system, including for exports.

The Greeks could become a thriving exporter of tomatoes once again but will need to embrace the Dutch technology and make use of its natural conditions – sunshine.

Credit Rating Agencies – how countries stack up.

Rating Agencies Feb 2013Here is a list of the latest ratings by the three main rating agencies. Notice that Australia and the three Scandinavian countries have top ratings. The UK lost its top rating from Moody’s but maintained the top rating from the other two. New Zealand comes in further down with a top rating from Moody’s but has lost its top grade from the other two. When you get to B status your are talking high risk or junk status and this is quite evident with the PIGS counties.

If you have watched the movie documnetary ‘Inside Job’ you will remember that these 3 credit rating agencies also rated high risk investments – sub-prime mortgages – as AAA, up to a week before they failed. The same could be said about their rating of investment company Bear Stearns.

Ultimately they could have ‘stopped the party’ but delayed ratings reports and made junk status investments AAA rated. But as they testified in front of congress their advice to clients are opinions ‘just opinions’ – I wonder do they share the opinions of those that lost huge amounts of money, including sovereign investments. Recently they downgraded Greece and Spain in the knowledge that the servicing of the debt would now become more costly for those countries and stifle any sort of recovery in the near future.

The Greek Economy – implosion was always on the cards!

The Greek economy is now into its sixth year of recession and it is no surprise that its economy is in tatters. Brian Gaynor from the NZ Herald wrote a very good summary of how Greece got into the mess that it is currently in. Below are some statistics over the last 6 years and this year sees a fifth year of recession – negative GDP for two consecutive quarters.

So what were the reasons for such a collapse on the Greek economy.

1. Tax avoidance has been endemic within the country especially amongst the higher income groups. Therefore there is a huge shortfall in government revenue relative to their expenditure. This means a government debt-driven recession.

2. The Greek economy boomed, like many others, with the availability of cheap credit in the early 2000’s and with the Olympics in Greece in 2004 economic activity was moving very nicely indeed.

3. Hosting the Olympics proved to be very costly in the long-run and there was little planning regarding the use of facilities post games. Many stadiums lie idle.

4. The Greek government was borrowing heavily overseas to fund its deficit.

5. Low interest rates and cheap money from overseas fueled a residential property boom – prices went up 100% from 2000-2008

6. Investment in assets with borrowed money that generated no overseas income.

Today the building industry has collapsed and residential property prices are down 20% from their peak in 2008 – isn’t this a familiar story worldwide especially with the sub-prime escapade. Also, as in Spain, there is a huge level of youth unemployment in Greece – 52.8% of under 25s are unemployed. As Brian Gaynor said at the end of the article

“The basic problem is that most Western countries, including New Zealand, have lived well beyond their means over the past 20 years, and Greece is just the worst example of this. The borrowing party is over and we are now experiencing the hangovers, particularly in Europe. These hangovers are not easily cured.”

Global Minotaur or Merkeltaur – Germans Kick Greece out of Euro

Ben Cahill of Senior College put a cartoon on the Tutor2u blog about the role Angela Merkel has in determining the destiny of Greece. The cartoon below has Merkel showing the Greeks to their only option ie. the labyrinth to be consumed by the minotaur. What she basically saying to the Greeks is that you have no choice but to stick to the reform measures and strict austerity measures. Furthermore one could say that after the soccer quarter-final on Friday “One gone, one to go”.

This cartoon also reminded me of book that I recently read called the Global Minotaur by Yanis Varoufakis. The Minotaur is a tragic mythological figure. Its story is packed with greed, divine retribution, revenge and much suffering. It is also a symbol of a particular form of political and economic equilibrium straddling vastly different, faraway lands: a precarious geopolitical balance that collapsed with the beast’s slaughter, thus giving rise to a new era.
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According to the myth’s main variant, King Minos of Crete, the most powerful ruler of his time, asked Poseidon for a fine bull as a sign of divine endorsement, pledging to sacrifice it in god’s honour. After Poseidon obliged him , Minos recklessly decided to spare the animal, captivated as he was by its beauty and poise. The gods, never allowing a good excuse for horrible retribution to go begging, chose an interesting punishment for Minos: using Aphrodite’s special skills, they had Minos’s wife, Queen Pasiphae, fall in lust with the bull. Using various props constructed by Daedalus, the lengendary engineer, she managed to impregnate herself, the result of that brief encounter being the Minotaur: a creature half-human, half-bull (Minotaur translates as ‘Minos’s Bull’, from the greek taurus, ‘bull’).

When the Minotaur grew larger and increasingly unruly, King Minos instructed Daedalus to build a labyrinth, an immense underground maze where the Minotaur was kept. Unable to nourish itself with normal food, the beast had to feast on human flesh. This proved an excellent opportunity for Minos to take revenge on the Athenians whose King Aegus, a lousy loser, had had Minos’s son killed after the young man won all races and contests in the Pan-Athenian Games. After a brief war with Athens, Aegus was forced to send seven young boys and seven unwed girls to be devoured by the minotaur every year (or every nine years according to another version). Thus, so the myth has it, a Pax Cretana was established across the know lands and seas on the basis of regular foreign tribute that kept the Minotaur alive.

Beyond myth, historians suggest that Minoan Crete was the economic and political hegemon of the Aegan region. Weaker-city states, like Athens, had to pay tribute to Crete regularly as a sign of subjugation. This may well have included the shipment of teenagers to be sacrificed by priests wearing bull masks.
Returning to the realm of the myth, the eventual slaughter of the Minotaur by Thesus, son of King of Aegeus of Athens, marked the emancipation of Athens from Cretan Hegemony and the dawn of a new era.

Aegeus only grudgingly allowed his son to set off to Crete on that dangerous mission. He asked Theseus to make sure that, before sailing back to Piraeus, he replaced the original mournful black sails with white ones, as a signal to his waiting father that the mission had been successful and that Theseus was returning from Crete victorious. Alas, consumed by the joy at having slaughtered the Minotaur, Theseus forgot to raise the white sails. On spotting the ship’s black sails from afar, and thinking that his son had died in the clutches of the Minotaur, Aegus plunged to his death in the sea below, thus giving his name to the Aegean sea.
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This suggests a tale of a hegemonic power projecting its authority across the seas, and acting as custodian of far-reaching peace and international trade, in return for regular tributes that keep nourishing the beast from within. The role of the beast was America’s twin deficits, and the tribute took the form of incoming goods and capital. Its end came from the collapse of the banking system. The book is well worth the read and not too long either.

Paul Krugman on BBC Hardtalk

Here is the first half of an interview on Hardtalk. Nobel economist Paul Krugman continues to see that the way out of the economic crisis is to spend more. He says that Greece will have to leave the euro as there is no alternative but whoever makes the decision for Greece to go would simultaneously be ending their own political career. He does state at the end of this clip that somebody who tries to bring in Weimar German and Zimbabwe as examples of hyper-inflation with further spending should be ‘ejected from the conversation’. Well worth a look.

Euro Crisis – is it the Ultimatum Game all over again?

Jame Surowiecki in the recent edition of The New Yorker likened the euro zone crisis to the fairness trap. With Greek politicians looking at renegotiating its aid package and austerity measures, the German government has indicated that they are running out of patience and money to lend to Greece. Policymakers have talked about a Greek exit from the Euro – Grexit – which would mean they would default on their debts and no longer be part of the Euro currency.

As many economists have pointed out when economies go through a recessionary or contractionary phase their exchange rate starts to depreciate. This makes exports more competitive and imports cheaper which ultimately helps growth. However for Greece to leave the Euro it would destroy vast amounts of capital as well as costly for the rest of Europe. Greece owes almost half a trillion euros and containing the damage would mean the recapitalisation of banks, continent-wde deposit insurance and more aid to Portugal, Spain, and Italy. However it seems that this would be a much more expensive option than Greece staying in the euro zone.

Rationally there should be some sort of compromise with maybe a relaxing of austerity measures and giving Greece a bit more time to bring about some serious structural reforms especially to its tax system. However according to Surowiecki Europe isn’t arguing just about what the most sensible economic policy is but what is fair.

The Germans see it as unfair that they have to bailout Greece especially as the Greeks have continued to live beyond their means – how did they afford to host the Olympic games in 2004? Borrow more money? Why should the Germans be obliging when there is no meaningful reform in Greece?

From a Greek perspective it is equally unfair that for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbours.

This fous on fairnes could prove disastrous – remember the Ultimatum Game.

The Ultimatum Game by Werner Goth 1982
In this game somebody offers John £100 under the condition that he shares it with Sarah. The two of them cannot ex- change information and John can make a single offer of how to split the sum. Sarah, who is aware of the amount at stake, can say yes or no. If her answer is yes, the deal goes ahead. If her answer is no, neither John or Sarah gets anything. In both cases, the game is over and will not be repeated. You may not be surprised to learn that two thirds of offers are between 40 and 50 percent.

From research carried out (Karl Sigmund et al.), only four in 100 people offer less than 20 percent. Proposing such a small amount is risky, because it might be rejected. More than half of all responders reject offers that are less than 20 percent.

However, why should anyone reject an offer as “too small”? The only rational option for a selfish individual is to accept any offer, as £1 is better than nothing. A selfish proposer who is sure that the responder is also selfish will therefore make the smallest possible offer and keep the rest.

This game-theory analysis, which assumes that people are selfish and rational, tells you that the proposer should offer the smallest possible share and the responder should accept it. But this is not how most people play the game.

The fairness problem is exacerbated by the fact that our definition of what counts as fair typically reflects what the economists Linda Babcock and George Loewenstein call a “self-serving bias”. This is even more pronounced when both parties feel they are not part of the same community – known as “Social Distance”. For instance:

1. The Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging.

2. The Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again.

The pervasive rhetoric that frames the conflict in terms of national stereotypes is the following:

Hardworking, frugal Germans v frivolous, corrupt Greeks
Tightfisted, imperialistic Germans v freewheeling, independent Greeks

This makes it all the more difficult to reach a reasonable compromise.