28th May 2012 by Shaun Richards
As the crisis in the Euro area continues to spread and develop it is easy to forget the economic destruction that has been inflicted in Greece where the first signs of the current problems emerged. That is of course unless you live there! Politics is not my area so today I wish to look at the economics. If we look back we see a crisis which began with government overspending which the past New Democracy government hid and which the more recent Pasok government tried but failed to deal with the consequences of. This led to a call for international rescue the mishandling of which saw Greece’s economy spiral downwards. In short economic contraction led to austerity which led to further economic contraction and repeat. So far there is no sight of an end to this madness.
How is Greece’s economy doing?
According to the official statistics her economy shrank at an annual rate of 6.2% in the first quarter of 2012. To give an idea of the incompetence of the “rescue” effort the original “shock and awe” plan forecast 1.2% growth for Greece in 2012. If we look at industrial production we see that as of March it was falling at a year on year rate of 8.5% with the underlying index where 2005=100 being at 72.6. The volume index for retail sales looked even grimmer when it was shown to be falling at an annual rate of 13% in February with an underlying index of 79.2 where 2005=100. The only area of hope has been exports which have risen although sadly the rate of increase slowed to 10% in March. Indeed inspite of a collapse in import levels and genuine export growth and Greece still ran a trade deficit of just over 2 billion Euros in March which is pretty much what she exported. It is often ignored but another way of analysing her problems would be to start with her trade deficit.
If we move from official data to survey data to bring ourselves as up to date as possible we have seen that Greece’s manufacturing sector fell even further into contraction in April as her Purchasing Manager’s Index fell to 40.7 where 50 represents unchanged. Even worse there seems to be a complete lack of trade and credit finance inspite of all the various bank bailouts which only seem to have supported banks which have metamorphosed into Zombies. Perhaps the horror film The Day of the Living Dead represents them best as they soak up another 19 billion Euros. Or as Kathimerini puts it.
Loans to households and enterprises have fallen by about 11 billion euros in the last two years.
And her Financial Markets?
Both Greece’s stock market and its bond market have collapsed. That is not too strong a word for a stock market which on Euro entry was over 6000 and is now at 500 as represented by the Athens General Index. And her government bond market has fallen even further since her debt haircut with her ten-year bond yield being just under 30%. So investors and pension funds must have taken quite a caning overall and any wealth effects on her economy must be strongly negative.
It never rains but it pours
I guess all readers are familiar with the fact that luck very rarely appears when you most need it and in fact it seems to operate in an inversion fashion to need. Take a look at this from the Financial Times.
The price of premium-quality extra virgin olive oil in the wholesale market fell this month to $2,900 a tonne, the lowest since 2002 and down more than half from nearly $6,000 a tonne in 2005, according to the International Monetary Fund.
I guess you are already waiting for the next bit.
Spain, Italy and Greece are by far the largest producers of the commodity, accounting for 70 per cent of the world’s olive oil output.
A familiar list is it not? The cause has been reduced demand in those three countries (particularly Italy and Greece) due to their economic difficulties and a bumper crop in Spain. And if you add in the exchange rate it is even worse because in 2002 the Euro and US Dollar were approximately at parity but now if we take US $1.25 per Euro we see that US $2900 bought 2900 Euros then but only 2320 now. Ouch.
I wonder whether Spain now thinks it was a good idea to encourage and subsidise olive oil production. Oh what a tangled web we weave and all that!
If we consider the poor we see that olive oil producers in Greece will be having a hard time right now. However there is the other side of the coin which is that consumers of olive oil can buy it more cheaply and this will particularly help poor consumers. So whilst looking at Greece’s production this is bad news for her consumers it is good.
So is there a level of commodity prices we like? We need to be careful to avoid just complaining of inflation when they rise and producer pain when they fall! But for today’s purpose and Greece’s economy where proportionately there are more production than consumption it does not help.
So another problem for Greece and a thought for you to consider when you see The Euro Is Collapsing headlines as since 2002 it is still up by 25% or so.
I would be interested if any readers are regular buyers of olive oil and have noticed any price falls at the retail/consumer level.
This remains a serious problem with Kathimerini reporting this.
May has been a particularly bad month for state revenues as in the first 20 days of the month, which included a general election, the inflow to public coffers was at least 20 percent lower than in the same period last year.
State revenue from VAT in the period between January to April was down by 800 million euros compared to the same period in 2011.
The same VAT which has seen its percentage rate rise on more than one occassion. Greece is demonstrating it sown version of the Laffer Curve. And a familiar issue gets a mention too.
Officials will focus on those with debts of up to 3,000 euros in a bid to make a dent in a total sum of 45 billion euros in uncollected taxes.
All countries have some uncollected taxes but imagine the difference in Greece’s circumstances if she managed to collect even half of these arrears.
Greece’s Merchant Fleet
Symbolic of the issues described above was this.
Greek shipping retained its position as world leader in 2011, as it controlled 14.83 percent of the global capacity in deadweight tonnage……The Greek-flagged fleet amounted to 2,014 vessels with a capacity of 43.39 million dwt, constituting 39.52 percent of the total European Union capacity.
There is money around somewhere.
Step Back in Time
I took a look at the back data on taxes from Eurostat and we see that Greek tax revenue feel as a proportion of the economy into the crisis from 34.6% of GDP in 2000 to 30.5% in 2009 compared to a Euro area average of 38.9% in 2010. And here is another thought in 2010 the two countries Euro area countries with the lowest level of consumption taxes were Spain (14.6%) and Greece (15.8%).
Greece is currently trapped in an austerity/depression dance where one feeds into the other in a so far endless cycle. If we look back to only February we can recall that yet another 3.3 billion Euros of austerity was passed by her interim government which if it is ever implemented will only make things worse. If 2012 continues on its present trajectory then ever more will no doubt be called for.
As soup kitchens and poverty spread in Greece we see a carousel of people telling us that a Greek exit from the Euro would be a catastrophe! Somewhat bizarre and out of touch is my view on that. We are also seeing extraordinary estimates of what it might cost with the head of the IIF weighing in with a trillion Euros. What a load of rubbish! He doesn’t know that and it ignores the gains from it. You ‘s think his members (banks) had a vested interest in it….
As for me I remain of the same view that the best way out for Greece is to leave the Euro and devalue and default. There are dangers and risks in a devaluation but all roads are dangerous for her now and as well as an increase in competitiveness I would like to add another factor ,shock. We as human beings are often irrational and the shock effect of such a move would be likely to shake up Greece’s political and economic establishment and I certainly hope that it would. A new start can be a powerful motivation and compared to seeing an ever increasing debt burden it must be a turn for the better.
As to timing well she has a bank holiday next Monday so there is a long weekend….