Sunday, 13 May 2012

The road to hell

I found an interesting chart from the World Bank this week. It shows Greek GDP since 1960.


And here's another chart showing the growth rate of Greek GDP. Note that it is currently shrinking (negative growth).

We hear a lot about the collapse of Greek GDP, and the second chart shows the dimensions of this. Greece is now in its fifth year of recession and things are only getting worse. Though it's interesting to note that Greece had a much sharper drop in 1973-5, probably due to the oil embargo, and also in the early 60s. But those were from a much lower GDP base than the current contraction. And therein lies the problem.

Greece was for a long time a poor economy. Its major industries were agriculture, shipping and tourism. But the first chart shows that after it joined the Euro in 2001, its GDP shot up. What caused this?

Well, it certainly wasn't improvement in exports. Here's another chart showing Greece's export performance:

Note that Greece was ALREADY running a trade deficit when it joined the Euro - in fact its current account deficit had been growing steadily since 1960. Externally it was already uncompetitive when it joined the Euro. And for a while after it joined, the trend continued - imports exceeding exports year-on-year. But it appears that from 2005-2008, Greece's trade balance fell off a cliff. It's not clear from the chart whether this is caused by a massive increase in imports or by export collapse due to the growing uncompetitiveness of the Greek economy versus its main trading partners. I suspect it was elements of both.

Here's Greece's capital account for the same period. Note the extraordinary increase in capital formation since 2001 and particularly since 2005. This capital increase mirrors the increase in the trade deficit. It seems highly unlikely that this capital was internally generated, so what we are in effect looking at here is external funding of Greece's trade deficit.

Capital growth has now stopped and since 2008 capital has been leaving the country. The trade balance is much better, but this is undoubtedly due to reduction in imports rather than export growth - as the second chart shows, Greece is deeply in recession. GDP is falling steadily. And this is the problem.

These charts suggest that the growth in GDP seen since Greece joined the Euro, and particularly since 2005, was caused by a consumption bubble funded by external capital inflows. In 2008 those capital flows abruptly reversed and the consumption bubble collapsed, leaving the country as a whole highly indebted and without sufficient domestic production to support its debt burden or maintain its Euro-generated standard of living.

Greece was already declining as an economy when it joined the Euro. All Euro membership gave it was a huge party at foreigners' expense. Its economy is no more productive than it was in 2001. But its population have come to expect a much higher standard of living, and many of their jobs are provided by a Government whose increased spending was also financed by external borrowing.  So as Greece's economy crashes, its population howls and blames the external people who financed their unsustainable boom. Well, I can blame them too - there is no doubt that the main beneficiaries from Greece's Euro membership have been larger Eurozone economies, particularly Germany, whose banks provided that funding as trade finance for exports and whose economic growth has been partly financed by Greece's imports boom.  But blame doesn't help. The fact is that Greece's economy became dependent on external capital flows. Now those have stopped, and there is no political will anywhere in the Eurozone for them to be restored in the form of fiscal transfers such as exist in other currency unions like Germany and the UK. Greece's economy is in the process of collapsing back to where it was when it joined the Euro, and possibly even lower since it has unquestionably lost competitiveness with regard to its main trading partners. And the first World Bank chart shows that the process has hardly begun. Greece's GDP is now about where it was in 2006. It still has an AWFULLY long way to fall.

The story that these World Bank charts tell is a terrible one. Euro membership has been an unmitigated disaster for Greece. It is now on the road to hell. It cannot stop, it cannot go back, and the only exit is a cliff edge. Leaving the Euro would result in sudden catastrophic currency devaluation, production collapse, probably hyperinflation as the Government was forced to monetize debt, terrible poverty, violent disorder (we are already seeing this) and lawlessness. But remaining in the Euro will result in exactly the same, just more slowly.  The Greeks think they are in hell now, but this is paradise compared with what is to come. It's just a question of how quickly they get there.


  1. Agreed. The Euro will go down as one of the great parties.....and a monstrous hangover. It will take a long time to clean up. Greece was a gatecrasher. Everyone knew it but it was ignored.

    Iceland survived and so will Greece but it's going to take some smart planning to avoid total chaos. The EU will have to put some serious support into the transition, Greece will have to sell whatever assets it has left and hope that the hotels will be full to the brim for the next few years.

    That's the best case scenario (unless they write off the whole debt). Worst case doesn't bear thinking about.

  2. If they exit the euro and devaluate, the slump will be terrible but then they have at least the hope of getting out of the pit.
    If they stay inside the euro, they are doomed to turn themselves in a failed state or a colony, or a mix of the two.

  3. No solutions from me.

    Interesting post I came across via Mr Dillow. Apparently Greece was by 2008 one of the world's leading arms importers, mainly from Germany and France. And if Greece was number 2 for German arms exports, who was number 1? Turkey of course. So that's where those French and German bank loans come from.

    1. I did know that Greece was rearming. Quite a bit of its debt burden comes from arms purchases from French and German manufacturers. It even used bailout money to pay for arms, and French manufacturers were doing dodgy deals to enable it to buy frigates as late as October 2011. German manufacturers objected to this, not because Greece was broke but because they wanted the business themselves:
      And Greece plans to buy more arms, according to this, even though it is totally broke:

  4. According to the World Bank again, Greek military expenditure was 3.1% of GDP in 2010, Turkey is 2.4%. At least Turkey has an excuse being next to Syria, Iran and Iraq, not to mention Georgia and Armenia with other ex-Soviet states across the Black Sea.

    I am not sure how this all squares with the massive Greek debt to German and French arms manufacturers mentioned here. Or was this expenditure just over the past couple of years which would have been particularly stupid on all sides?

    If so, I didn't realise the extent to which Greek debt has been driven by military expenditure and competition with their ancient enemy. None of this would have gone to increase the GDP of Greece at all - it is just big toys for the boys.

    That is seriously irresponsible not only of the Greeks but also of the French and Germans for funding these exports in competition with each other. If the argument of the French and German manufacturers was that if they didn't someone else would, that's pretty lame. Who signed off on these loans? There must have been some sort of export credit guarantee and some diligence or has Fred Goodwin been moonlighting?

    German banks hold some 600 billion Euro's worth of Greek debt which is an enormous proportion even of German GDP, I think French banks even more.

    It seems to me therefore that Germany and France are the architects of the potential destruction of the Euro by irresponsible lending. Mon dieu! What a bunch of idiots. Sarko and Merko have stabbed each other in the back competing for Greek military spend.

    End of?

    1. Frances and John,

      Above I said no solutions - but how about Germany and France buy those arms back? It's a start.