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Home Publications Blogs Beat the Press Greece's Exports Rose Since Joining the Euro, but Its Imports Rose More

Greece's Exports Rose Since Joining the Euro, but Its Imports Rose More

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Thursday, 05 July 2012 04:54

The NYT Magazine has a piece discussing Greece prospects for increasing its exports. While it will certainly have to increase its exports to have a sustainable trade deficit, it is worth noting that a lack of exports was not Greece main problem.

From the inception of the euro in 1998 until the crisis hit in 2008, there was only one year in which Greece's exports fell (2002). In three years, exports grew at a double digit rate.

Greece has a serious trade deficit because its imports grew even more rapidly. The return to sustainable deficits will almost certainly mean that Greeks will again have to produce domestically some of the items that now import and do without others (e.g. fewer Mercedes).

Fifteen years ago the country had sustainable trade deficits. Its exports are considerably higher today than they were then. This should mean that there is considerable room for adjustment on the import side. 

Comments (10)Add Comment
Therefore, the correct treatment is austerity, n'est pas?
written by Kosta, July 05, 2012 10:05
It is true that one of Greece's problems is the unsustainable increase in their imports. Does it not follow that the cure should be for Greece to cut back on its consumption of foreign goods? Is this not the equivalent of austerity? Have not the draconian cutbacks in government spending led to a decrease in the consumption of foreign goods? Is the Troika on the right path after all?
Different Ways to Reduce Imports -- Austerity Is a Bad One
written by Dean, July 05, 2012 11:46
Kosta,

Greece will have to reduce its imports. Austerity does this by decreasing its total spending. My preferred path is to raise the price of imports by making German goods relatively more expensive through inflation in Germany.

By analogy, suppose we decide that we have to reduce our gasoline consumption by 10 percent. If we took away 10 percent of everyone's income, then we would probably see roughly a 10 percent decline in gas consumption.

Alternatively, we could raise the price of gas by 30 percent through taxes. That is also likely to lead to roughly a 10 percent cut in gas consumption.

Both routes imply some reduction in living standards, but the reduction in the first scenario is far larger than the reduction in the second scenario.
??
written by fuller schmidt, July 05, 2012 12:47
Does anyone know what portion of the increase in imports was related to construction, developers and subprime mortgages?
Austerity is bad, but so is inflation
written by Kosta, July 05, 2012 8:27
Dean,

Thank you for the reply. Let me probe a bit more on this topic. Normally I am an advocate of stimulus, but as I read this post of yours, I think the case for austerity is stronger than you and I have previously given it credit.

We agree that Greece must reduce its imports. You suggest that it could do so by having Germany undergo a bout of high inflation (say 6% for 5 years?). I agree that this would work, but it would also inflate German prices approximately 21% above what would be expected from a 2% per annum rate over five years. This is similar to decreasing Germany's real wealth by about 20% over those five years than what would be expected with a "normal" rate of inflation.

So the austerity plan condemns Greece to a decade of harsh measures, while the inflation plan reduces German wealth by about 20% over 5 years. Which plan has a higher cost? Now the German economy is about 11 times the size of the Greek economy -- I think it is unreasonable to argue that 80 million Germans should undergo high inflation for 5 years to salvage the economy of 10 million Greeks.

Going back to my original comment that I am in general a supporter of stimulus, I think the real take home message from your post is that it is very difficult to make a compelling case using Greece for Germany to change its behaviour. I appreciate your efforts to this regard, but deck is stacked against the small countries (i.e., Greece, Ireland and the Baltics). The compelling case to change the European strategy will have to come from Spain, Italy and France.
Inflation Does Not Reduce Germany's Real Wealth
written by Dean, July 05, 2012 8:43
Kosta,

How do you get that inflation will reduce Germany's real wealth by any amount at all. If all wages and price rise 26 percent, 36 percent or 46 percent, how has the country's real wealth been reduced?

If a person owns a home, then that home is worth more by the amount of inflation. The same is true of any other asset. Fixed debt is reduced in value. That transfers money from creditors to debtors, that is not a loss of wealth. Who do you see as losing wealth in this story and how?
...
written by Kosta, July 05, 2012 9:33
OK, I've been a little sloppy with the effects of inflation (I was thinking along the lines of a currency devaluation). But inflation does have effects. First, as you noted inflation transfers wealth from creditors to debtors. Germany is a very large creditor, both within and outside of Europe, having run massive current account surpluses for the last 10 years. If Germany increased its inflation by 20% over five years, then the value of its outstanding current account surplus would drop by 20%. Now why should Germany lose 20% on the real value of its accumulated surplus just to salvage Greece's economy? Shouldn't Greece do the heavy lifting?

The second effect of your suggestion to increase inflation by 20% is that it increases the cost of German exports to not just Greece but the whole world by 20%. Now while we agree that changing the competitiveness between Germany and Greece is a good thing, why should Germany become less competitive with the rest of the world? Again, why should Germany do the heavy lifting instead of Greece?
Germany's problem is with arithmetic, not Greece
written by Dean, July 05, 2012 10:08
Germany is exporting to countries who cannot afford to pay for the goods. It is not just Greece, it is also Spain and Italy. They should want to become less competitive because these countries cannot afford to pay for their exports. This is just like if I had a restaurant where someone came in and bought lunch on credit every day. Since this person has no means to pay me, if I know arithmetic I should want to change the arrangement. But, in a certain sense I think it would be wonderful if the Germans continued to give goods and services to their neighbors forever for nothing.

In terms of the loss of value of their debt, this is only true in a counter-factual where the debt would have been paid. There is no plausible counter-factual where this is true. This is like if I had lent someone $400k on a home worth $200k. I am not going to see that $400k. If I want to maximize my wealth, then I would negotiate some write-down so the homeowner will be able and willing to pay back the debt. But, if I think there is some important principle to be preserved by not negotiating, then I can let the person default and end up with much less than $200k after the foreclosure.

Again, I'm happy with Germany getting the latter. With their combination of ignorance and arrogance they certainly deserve it. But it is not the best outcome for them, Greece or the world.

Greece alone is not compelling
written by Kosta, July 06, 2012 8:26
Dean,

The point I'm trying to argue is that when one weighs the costs of the respective strategies (Greek austerity vs German inflation) it seems that the overall cost is less for the small country (Greece) to do the heavy lifting rather than the large country (Germany). While we can debate the proper counter-factual for the German debt, it is very hard to argue that Germany should take a loss on all of its debt just to salvage the Greek economy. Inevitably the argument will have to turn to Spain and Italy where a more compelling case for German inflation can be made (as in fact you have done in the first sentence of your last response). In that sense, it is somewhat pointless to continue to argue Greece's merits for German relaxation.

If it were just Greece default would be the answer
written by Dean, July 06, 2012 9:36
Kosta,

yes, if Greece was the only troubled euro zone economy then the logical answer would be for Greece to just leave the euro and default on its debt to Germany. That would make more sense than Germany undergoing a higher than desired rate of inflation.
If only Greece were the only troubled economy ...
written by Kosta, July 07, 2012 12:34
You are right that if Greece were only the troubled economy in Europe, then the Eurozone could let it leave without fear of a crushing bank run on their financial system.

Good discussion, thanks!

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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