Not a recommended way to raise the export share of GDP

Flicking through the World Bank data for the previous post, I noticed Greece.


A very substantial –  10 percentage point –  increase in the export share of GDP in just a few years.

Unfortunately, of course, almost all the action is in the denominator.

Here is real GDP for Greece –  not per capita.


And here are real exports.


Domestic demand collapsed, and there just hasn’t been much real improvement in competitiveness (or probably policy certainty, of the sort that might encourage much new investment).

Greece’s impressive economic performance

There was nothing new on this blog yesterday because

  1. On Wednesday evening I accidentally hit “publish”, went I meant to schedule it for release yesterday, on the post about the striking anomalies between the fairly heavy penalties the Reserve Bank Act provides for breaches by bank directors of the Reserve Bank’s disclosure requirements, and the somewhat derisory penalties the Superannuation Schemes Act provides for scheme trustees for breaches of the disclosure obligations under that Act, and
  2. Because I’ve been dealing with a bunch of historical events, which included what has now been established to have been a breach of the disclosure requirements of the Superannuation Schemes Act by past trustees of the Reserve Bank staff superannuation scheme.  Unfortunately, this involved, inter alia, some people with strong (and otherwise well-deserved) records on issues around transparency and disclosure.    Current trustees have now issued an apology.  As I noted on Wednesday, “You wouldn’t want to be in a scheme where the rules could be changed without you being aware of it”.

But this post is about Greece.

I’ve just finished reading Mark Mazower’s book, Salonica: City of Ghosts.  the story of Greece’s second largest city, and its hugely varied past. In Christian history, it was the first city in which the apostle Paul is recorded as having preached the gospel.  Little more than 100 years ago it was still a major city in the decaying Ottoman Empire, birthplace of Mustafa Kemal, with a population that was much more heavily Jewish and (to a lesser extent) Muslim than it was Greek. Earlier in the year, I reading Twice a Stranger, an account of the brutal and murderous expulsion of hundreds of thousands Greek Christians from Turkey to Greece, and of the (rather less brutal but just as effective) removal of the Muslim population of Greece to Turkey, in and around 1923.   We might think of Greece as an ancient country, and it certainly has many ancient places, but modern Greece became independent only in 1832 – just a few years before the Treaty of Waitangi and the British annexation of New Zealand. Greece’s current borders weren’t settled until the 1920s.

And within whatever boundaries it had, Greece’s history has hardly been a settled one. Reinhart and Rogoff have documented the history of sovereign debt defaults. But I had in mind foreign wars, occupation, civil war, political assassinations, suspensions of democracy, and a military junta that gave up power little more than 40 years ago.

And yet…. as Scott Sumner pointed out recently, in some ways it is remarkable that Greece has done as well economically as it has.  Add to the turbulent history, scores in any of the global competitiveness indices that are really very bad

The Heritage Foundation publishes an annual ranking of 178 countries, in terms of economic freedom.  This ranking has some flaws, but it gives a ballpark estimate of how “market-oriented” an economy is.

The three countries directly above Greece in economic freedom are Niger, India and Suriname, the three right below are Bangladesh, Burundi and Yemen. It’s a strange neighborhood for a developed European country.

Here are the Angus Maddison estimates of GDP per capita for Greeece and New Zealand since 1913.  They are only estimates, and no doubt could be contested on many details, but the general picture seems plausible.

Greece maddison

I found the chart striking for two reasons.  The first is that in 1913, Greece is estimated to have had GDP per capita less than one-third that of New Zealand.  That is a really large gap.  Of course, at the time New Zealand had some of the very highest living standards in the world.  But, by comparison, the poorest EU and OECD countries today (Mexico, Turkey, Romania, and Bulgaria) now have incomes about half those of New Zealand’s.

On this measure, at peak, in 2007/08, Greece’s GDP per capita is estimated to have been around 80 per cent of ours.  On other (better) measures,  but for which there is no comparable long-term time series, Greece is estimated to have had higher GDP per capita than New Zealand by then.   Of course, New Zealand has been one of the worst performing advanced economies in the last 100 year, but even last year the Conference Board estimates that Greek GDP per capita was around half that of the United States.  Greece has managed a great deal of convergence

The other thing that struck me about the chart was the variability in the estimates of Greek GDP.  For New Zealand, the Great Depression of the 1930s was the largest dip.  Greek GDP fell then too, but it is barely noticeable.  And even the catastrophic fall in Greek GDP in the last few years is shaded by the earlier falls –  those associated with, first, World War One, and then with World War Two, the occupation, and the subsequent civil war.  Other occupied countries experienced a sharp fall in GDP per capita during World War Two –  France’s fell by around 50 per cent, but had surpassed 1939 levels by 1949.  Greece didn’t get past 1937 levels of GDP per capita until 1957.

Perhaps depressions of the magnitude Greece is experiencing now feel different with those sort of historical memories in mind?

My other recent reading about Greece was last week’s New Yorker profile of Yanis Varoufakis (here), until recently Minister of Finance in the Syriza government.  I didn’t find Varoufakis a sympathetic character, at all, but the profile is well worth reading, as background to the continuing crisis.  But it was some of the biographical stuff that really caught my eye.

As we drove, Varoufakis talked of his father, George, whose example of stubbornness had helped shape him. In 1946, during Greece’s civil war against Communist insurgents, George Varoufakis was arrested as a student leftist, and refused to sign a denunciation of Communism. He was imprisoned for four years, and repeatedly tortured. His signature would have freed him. I later met the senior Varoufakis—the courtly chairman of a steel company who, at ninety, still goes to the office every day. He told me that for years after he was freed he couldn’t listen to Johann Strauss: his torturers had “put on waltzes, very high, in order not to hear our voices, our screaming.”

After George Varoufakis returned to college, a female student kept an eye on him for a paramilitary right-wing group—“Stasi stuff,” as Yanis put it. But she fell in love with George, and they married. Yanis was born in 1961. During the military dictatorship of 1967 to 1974, Varoufakis’s uncle, a libertarian, was imprisoned for participating in small-scale terrorism. Varoufakis recalled his excitement when charged with smuggling notes to him on prison visits.

What a country.

Of course, plenty of other European countries had a bad time in the 20th century –  Spain, Portugal, and most of eastern Europe.  But it helps make more sense, to me at least, of why the Greek population seems so unwilling to leave the euro, despite the peacetime economic disaster they are now living through.

I’m now reading a contemporary account of the political situation in Europe written in 1936. It is widely recognised now that countries that came off the Gold Standard and devalued their currencies recovered fastest from the Great Depression.  France was one of the last to do so.  This book was written just after France had finally gone off the Gold Standard in mid-1936.  The author, John Gunther, observes

“Why did the rentiers, the small capitalists, the peasants with savings, swallow such a [deflationary] programme when devaluation of the franc might much less painlessly lighten the burden?  The reason is, of course, largely psychological.  The terrors of deflation were comparatively known; those of inflation [rife in France in the 1920s] were known and doubly feared”

And if I were a Greek voter today, remembering the extreme instability of my own country, perhaps I too might cling to the euro and the EU, even amid all the humiliation and economic dislocation, rather than risking a leap into what might reasonably be seen as an abyss.  It is easy for macroeconomic analysts to talk of real exchange rate adjustments, unemployment rates etc. But what are they against the memories of torture, betrayal, civil war, military government, occupation, forced mass relocations – a precariousness that is difficult for those in the handful of countries who’ve had settled boundaries, no military conflicts on our territories, and stable democratic government for the last century [1] to fully grasp.

The current arrangements, limping from month to month, seems no way to consolidate that 20th century closing of the Greece/New Zealand income gap. Staying on the Gold Standard until 1936 wasn’t that wise for France either, but it happened. History is context.

[1]  A list no longer perhaps than Australia, New Zealand, Switzerland, Sweden, Canada, and the United States?

Greece: fourth weakest export growth among OECD countries since 2007

I was reading this morning Robert Waldmann’s critique of Olivier Blanchard’s defence of the IMF’s involvement with Greece since 2010. I agreed with much of what Waldmann had to say, and remain fairly unpersuaded by Blanchard’s case.
But one of Waldmann’s comments caught my eye. It was the suggestion that Greece has achieved a massive internal devaluation over the last few years.

I’ve pointed out previously that that doesn’t seem right. The measure of a successful internal devaluation is surely in the degree of resource-switching that has gone on.

Those wanting to put an optimistic gloss on the data can certainly produce real exchange rate measures that seem to show some gains in competitiveness. Perhaps, but it is difficult to adjust for compositional effects (the least productive people will have lost their jobs, but presumably want to be employed again one day).

These two charts just look at some of the key aggregates, drawing from the OECD’s quarterly national accounts database.


Exports have been recovering somewhat since the trough after the global recession of 2008/09, but the volume of exports is only now back to 2007 levels. In an economy with unemployment in excess of 25 per cent, there is no crowding out of the export sector.

Import volumes have certainly fallen, very substantially. That might reflect competitiveness gains, and greater opportunities for domestic import-competing tradables producers. But it looks a lot more likely to mostly reflect a severe compression in demand. The collapse in real investment is particularly telling.

Out of curiosity I also dug out from the OECD data on export volumes for all the OECD countries since 2007. This chart shows export volume growth from the 2007 annual level to the most recent quarter (mostly the March quarter of 2015).

oecd exports since 2007

Of the 35 individual countries shown (OECD members, plus Latvia), Greece has had the fourth weakest export volume performance over that period. The result isn’t particularly sensitive to the starting point: I also looked at growth since the 2007-2008 quarterly peak, and Greece was second worst on that. With so much spare capacity, and no room to use domestic macroeconomic policy tools to stimulate demand, Greece needed export growth more than any other country in the group. But it has simply not achieved it –  and not even really begun to achieve it.

Who knows what the outcome of the weekend’s meetings in Europe will be. But it looks as if Greece still desperately needs a substantial real exchange rate devaluation. For Greece, resource-switching has not occurred within the euro, despite years of extraordinarily high unemployment. It is hard to see how any of the recent “austerity plans” will materially alter that situation any time soon. Flexible exchange rates tend to make the adjustment easier.  They provide no guarantee, but what does staying with the status quo offer economically?

In passing, the New Zealand export performance has not been that impressive – around the median of this group of countries, and not much different from the euro-area countries as a whole (and these aren’t per capita data, and we’ve had stronger population growth than most).

Greece: only the third worst performing euro-area country

Amid the focus in the last few days on Greece, I was reading an interesting New Yorker profile of Matteo Renzi, the Prime Minister of Italy   It is a very upbeat piece, so upbeat that the authors seemed not to have bothered to look at just how badly Italy has been doing.

From the IMF WEO database, I extracted the data on growth in real per capita GDP from 1998 (just prior to the 1 January 1999 start of the euro) to 2014. Not all the countries have been in the euro for the whole period, and there is no data for 1998 for Malta.

euro 98 to 14

The results were mostly unsurprising. The four countries formerly in the communist bloc have done best of all over that period, followed by Ireland. But at the other end of the chart, I was surprised. Greece has a 27 per cent unemployment rate, and has had one of the deepest declines in GDP in any advanced country in modern times. And yet over the sixteen years taken together, Italy has done slightly worse than Greece. It wouldn’t have surprised me if this had been a measure of real GDP per hour worked – Greek labour productivity has held up reasonably well through the recession – but this is GDP per capita.

Italy has had a less rocky ride than Greece: even now its unemployment rate is “only” 12.4 per cent. But it is not as if the economy is now rebounding either. In the last eight quarters, cumulative real GDP growth has been zero. No wonder people think that Italy might be the next link in the chain to break, if and when Greece leaves the euro.

Out of interest, here is how the euro area countries have done since 2007, just prior to the recession and initial crisis of 2008/09.

euro 07 to 14

A few thoughts on Greece

It is a pretty difficult period for the world economy. The new BIS Annual Report (on which more later) keeps repeating that world growth has been back at around long-run averages.  But a quick glance down the headline stories on MacroDigest this morning (and it is much the same on the FT or the WSJ) reveals this collection:

Puerto Rico “can’t pay $72bn of debt”

Greece threatens top court action to block Grexit

Double bubble trouble in China

A failed euro would define Merkel’s legacy

BOE’s Haldane: Record-low rates necessary for continued recovery

My 12 year old has asked me to start teaching him economics, and we are bombarded with stories to discuss. This morning, at least, there are no good-news stories.

Of course, most focus is on Greece.  I’ve recently lost a long-running wager on Grexit.  Three years ago I bet a senior official who was much closer to the politics of the euro area that at least one country would have left the euro by mid-June 2015.   His story was, essentially, that the European authorities would do whatever it took to hold the euro together and make it viable for the long run, partly because the alternative was so awful.  My story was that the economic stresses were sufficiently severe, and choices would ultimately be made in individual nation states, that euro was most unlikely to hold together, at least with anything like the number of countries it had then.

In 2012 I certainly underestimated the political determination, and probably also the extent to which Greek public opinion would want to stay in the euro, no matter how bad the economy got.  Getting into the euro seems to have been a mark of a successful transition to a modern democratic state.  This was, recall, a country that had been ruled by the colonels as late as 1974, and had had a civil war only thirty years prior to that.  Even now, there is no certainty that a “no” vote this Sunday –  in respect of a package which is no longer even on the table –  will lead to Greece quickly leaving the euro.  With tight enough capital controls, and the rudiments of a parallel currency, perhaps they will limp on for a while yet.  The political imperative still seems to be that if Greece is going to leave, the narrative has to be one in which “other countries forced us out”.   Greece doesn’t seem to be ready to positively embrace exit –  political dimensions aside, the path through the first year or two beyond exit is pretty difficult and unclear.  For those of you who have read Pilgrim’s Progress, it is perhaps reminiscent of Christian’s fear as the river rises around him –  the river he must cross to enter the celestial city.  Grexit is no path to nirvana, but it does promise something better.

Because if exit looks frightening, going on as things have been in the last few years shouldn’t be remotely attractive either.  The simple mention of 27 per cent unemployment should really be enough.  Add in no sign of any sustained growth in the external sector of the economy, and it is a picture of any economy that has made no progress at all in reversing one of the very deepest recessions of modern times.  None of that is to deny that there have been useful reforms. But, as I’ve said before, there is no sign of any politically acceptable deal (politically acceptable to creditor countries and to the Greeks) that in consistent both with Greece staying in the euro, and with securing a strong rebound in economic activity and employment in Greece.  “Tragedy” is an over-used word, but surely this is one?

Part of the sheer awfulness of the situation is realising the part that other countries played in bringing this about.  And here I include even remote countries like New Zealand, which did not speak out –  or even speak quietly – against the IMF involvement in the deal.  Without the bailout package in 2010, this crisis would have come to a head five years ago.  It is now hardly controversial to suggest that the case for the 2010 bailout package, rather than a widespread Greek sovereign default, was mostly about the French and German banking systems, and concern with the possible ramifications for the wider world economy and financial system.    None of this absolves the Greeks of some responsibility.  Technically, no one forced them to take the deal.   But as the Irish and Italian authorities also found, it can be very difficult to resist the pressure to accede to the wishes of the ECB and core euro-area governments.

Where to from here?  As Gideon Rachman put it in his FT column today

If the Greek people vote to accept the demands of their EU creditors — demands that their government has just rejected — Greece may yet stay inside both the euro and the EU. But it will be a decision by a cowed and sullen nation. Greece would still be a member of the EU. But its European dream will have died.

And if Greece does leave, who will be next, and when?  It might take some time, but with no sign of a strong or sustained rebound in European growth, it is difficult to see the euro surviving in anything like its current form.  It probably isn’t a risk in the next few months –  the ECB and the Commission can deploy support mechanisms to manage any resurgence of external market pressures.  The threat is more from public opinion –  of realising, a year or two from now, that there is viable life outside the euro.  Places as badly managed as Argentina didn’t lapse into permanent economic depression after default and the abandonment of a fixed exchange rate.

The euro has not delivered the promises of its advocates and founders.  Further integration of national policies seems increasingly unlikely to happen.  Breaking up is hard to do, and in this case could be very disruptive to the wider world economy (with so little policy firepower left anywhere)  But the end of the euro, one of the more hubristic policy experiments in the modern West, would probably be good for the longer-run health of the member countries, and especially for their ability to respond to future shocks.  What it might mean for the future of the EU itself is a bigger question.  One could envisage very bad outcomes – a reversion to the controls of 1957, before the EEC was first negotiated.  That doesn’t seem very likely –  trade barriers are much lower now than then around the world.  Perhaps over time what might emerge is something more like a free-trade area without the overlay of other controls and bureaucratic apparatus of Brussels.  For citizens, even if not necessarily for officials, politicians, and lawyers, that might be rather a good thing. It might even make membership of a much more modest EU attractive in the UK.

Greece: not exporting its way out of trouble

Gideon Rachman’s column in today’s FT suggests (if he doesn’t quite directly say) that for Greece to leave the euro would now be the best way forward for everyone. He uses the analogy of a struggling marriage in which both parties might be happiest apart, however traumatic the breaking up might be. Where I come from marriage is “until death alone parts us” and my reading of the literature suggests that many unhappy couples who chose to stay together end up happier than those who separate. But the euro isn’t a lifelong covenant. It is an act of foreign economic policy among a group of sovereign states. While it serves the interests of their respective peoples it should last, and when it doesn’t it should be dissolved or slimmed down.

Rachman’s line is similar to ones I’ve run in a couple of recent posts (here and here), although my focus has been more on the idea that there is no politically saleable path (saleable in Greece, and in the other eurogroup countries) that offers both a robust Greek recovery and the whole euro group of countries remaining together. There is no guarantee that exit would be in the long-term best interests of Greece, but the status quo looks pretty awful.

Everyone knows how large the fall in real GDP has been, and how high the unemployment rate now is, years on from the start of this crisis. With no scope for discretionary monetary policy, and limited fiscal room even if the sovereign debt is mostly defaulted on (since the near-term appetite of new lenders is surely going to be limited), the source of any sustained boost to demand must either domestic innovation and productivity, or external demand.

Those wanting to put an optimistic gloss on the data can certainly produce real exchange rate measures that seem to show some gains in competitiveness. Perhaps, but it is difficult to adjust for compositional effects (the least productive people will have lost their jobs, but presumably want to be employed again one day).

These two charts just look at some of the key aggregates, drawing from the OECD’s quarterly national accounts database.
Exports have been recovering somewhat since the trough after the global recession of 2008/09, but the volume of exports is only now back to 2007 levels. In an economy with unemployment in excess of 25 per cent, there is no crowding out of the export sector.

Import volumes have certainly fallen, very substantially. That might reflect competitiveness gains, and greater opportunities for domestic import-competing tradables producers. But it looks a lot more likely to mostly reflect a severe compression in demand. The collapse in real investment is particularly telling.


It is not quite all bad news. Greece has experienced an improved terms of trade over the last few years. But there is no sign of it translating into the sort of robust export growth, or business sector investment, that might enable the external sector to begin to pick up the huge slack in Greece’s economy. Whether that is because firms just aren’t competitive or because of rising uncertainty (or some combination of the two, as seems more likely) isn’t immediately clear. But note that these data go up only to 2014q4 – this was what things were looking like under the previous government and the old programme (for all its limitations). Any uncertainty has only become greater since then.

WIth almost nothing going well in Greek economy, and limited tolerance in the rest of Europe, the status quo surely can’t go on much longer.  One piece of good news today is reports that the IMF is no longer willing to extend and pretend, in this case at least.