The Economic Predicament of Greece

09.02.2012

About a year ago I wrote a short paper (in Dutch) in which I briefly outlined the macroeconomic imbalances that lie at the heart of the European sovereign debt crisis. I argued that the sovereign debt crisis is in part, if not at heart, a balance of payments problem. Any solution to the crisis should therefore not only involve debt relief and bank recapitalization, but should also address the macroeconomic imbalances within the eurozone that ultimately manifest themselves in the balance of payments. This view is, of course, not original. I am happy though that it has now gone mainstream, as this BBC infographic illustrates. Unfortunately policymakers still seem to be in denial. They may know better, but they don't acknowledge it in public.

In an op-ed article in today's Financial Times (9 February 2012) Ricardo Hausmann nails it when he writes that "Greece must export its way out of the crisis or face ruin".

Over 2011 Greece has an estimated current account deficit of 28 billion USD or roughly 9 per cent of GDP. At some point Greece will have to bring its current account deficit down to zero (or convert it into a surplus). There are two ways of doing so: exporting more or spending less. As Hausmann writes, the first option would require Greece to cut GDP by around 25 per cent. The second option would require increasing exports by around 50 per cent. It is unlikely that tourism alone can account for such an increase.

The problem is that Greece doesn't have the products to export its way out of its current predicament. In their Atlas of Economic Complexity Hausmann and his colleagues argued that the wealth of nations is driven by what they call "productive knowledge". Out of a sample of 128 countries "Greece had the biggest gap between its current recorded level of income and the knowledge content of its exports. Greece owes its income to borrowed foreign spending it cannot pay back. It produces no machines, no electronics and no chemicals. Of every 10 US dollars of worldwide trade in information technology, it accounts for one cent."

Greece's main export partners are Germany 10.9%, Italy 10.9%, Cyprus 7.3%, Bulgaria 6.5%, Turkey 5.4%, UK 5.3%, Belgium 5.1%, China 4.8%, Switzerland 4.5%, Poland 4.2% (2010) (Source: CIA World Factbook). Austerity measures in these countries are bound to have an effect on Greek exports.

What's more, for its energy consumption Greece relies primarily on imports. In 2009 oil consumption came down to 371,300 bbl/day and natural gas consumption 3.824 billion cu m. Oil imports amounted to an estimated 496,600 bbl/day and gas imports to 3.815 billion cu m (Source: CIA World Factbook). Greece will thus be particularly hard hit by high (or rising) oil and natural gas prices.

So what is Greece to do? As Hausmann argues, Greece is at a level of income above its productive capabilities and so it needs to invest in those areas where it can gain a competitive advantage. It needs to identify missing knowledge that would make it possible to expand its product base. Of course, this is easier said than done, but Hausmann's quantitative analysis identifies some areas where such investments may bear fruit.

Links

Complexity matters. Brief outline of the Atlas of Economic Complexity at the Economist free exchange blog.

Category: Economics