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Friday, January 31, 2014

Income Down, Spending Up?

Sometimes news happens so fast that one can hardly keep track of it.

On January 27, I read that disposable household income was down by an enormous 8%. And on January 31, I read that retails sales had increased for the first time since March 2010.

Obviously, a trend of spending increases while incomes go down is a trend which cannot go on forever. I am sure that there are good explanations for the above seeming contradiction.

In any event, I sometimes wonder how much one should make of official statistics in an economy where such a large portion is transacted in cash. 

Thursday, January 30, 2014

Oops! Austrian (Karas) Picks A Fight With A Greek (Tsipras)!

Question: How can one trigger a political storm?
Answer: Go to Greece and announce publicly that Alexis Tsipras has no ideas as to how to solve Greece's problems!

It's hard to believe but this seems exactly what the Vice President of the EU parliament, Othmar Karas, just did. And, I am embarrassed to admit, Karas is Austrian.

The expansion of power of the Habsburg's is often explained by the saying "Let others wage war: thou, happy Austria, marry!" (referring to the success of the Habsburg's dynastic marriage policy).

I am happy to report that I followed the Habsburg's philosophy --- I married a Greek almost 40 years ago (but, in fact, diminished my parental power as a result of it...).

Karas has opted for the opposite. He has, indeed, picked a fight with Alexis Tsipras. One is tempted to think of the Latin question "Cui bono?"

Perhaps the answer is that Karas was politically raised in Austria's conservative party which considers everything left of center as a threat to political stability. And now he seems to have decided that the best way to strengthen political stability is to pick a fight with those who are deemed to be a threat to it.

Mission accomplished! Or perhaps not?

Retired Judge of Germany's Constitutional Court Presents Artistic Views!

Udo di Fabio, who served as a judge on Germany's Constitutional Court (GCC) from 1999-2011, gave a speech which is a bit of a piece of art. Below are a couple of his themes:

* di Fabio predicts that the GCC is unlikely to rule against the OMT outright. Instead, he says that "the particular issue Karlsruhe will be looking at is national budget sovereignty".
* "Budgetary self-determination of a nation is fundamental and cannot be transferred".
"Parliaments were put in place so monarchs cannot use people's money as they please. National parliaments have to be sovereign in controlling the use of taxpayers' money".
"If Rome decides on an expenditure, it cannot be that the Netherlands and Germany are held liable for it".

While all of this makes a lot of sense, in principle, it is incredibly removed from the reality in today's Eurozone. Or do Greeks really feel that they have 'budgetary self-determination'?

'Budgetary self-determination cannot be transferred' --- what about current EU intentions to move much of budgetary self-determination to Brussels?

If the Netherlands and Germany could not have been held liable for expenditure decision of, say, Greece, financial history would have taken a completely different turn in May 2010. Does Udo di Fabio not know what turn financial history took in May 2010?

As I said above, di Fabio's themes are really a piece of art!

Saturday, January 25, 2014

Greece's International Investment Position

The respective data base about Greece's International Investment Position can be found by following this link to the Bank of Greece.

The International Investment Position shows all foreign assets which residents of Greece (institutional, corporate and private) have outside the country's borders as well as their liabilities to foreigners. The below numbers are as of 3Q2013 (in BEUR).





Assets
Liabilities







Direct Investment




Abroad/In-country
33.371
17.008







Portfolio investment




Equity securities
4.807
7.716

Debt securities
101.195
46.856







Derivatives

3.322
0







Other investment











Monetary authorities
1.303
52.884

General government
1.306
222.818

MFIs

37.523
72.049

Other sectors
35.031
16.993







Reserve assets

4.559
0




---------
---------
TOTAL ASSETS/LIABILITIES
222.417
436.324















NET INTERNATIONAL DEFICIT

-213.907


Greece had foreign assets of 222 BEUR and foreign liabilities of 436 BEUR. Thus, Greece owed 214 BEUR more abroad than it owned abroad. That should come as no surpise for anyone who has been reading newspapers about Greece's debt in the last 4 years. Figuratively speaking, if Greece were to fall into the Aegean and disappear, the rest of the world would be out of 214 BEUR (provided that there is no successor entity which could claim the assets).

The first question which comes to mind is why does Greece owe 'only' 214 BEUR abroad when the sovereign debt alone is over 320 BEUR? Well, a country is more than only the central government; a country also has foreign assets and not only foreign liabilities; and, finally, some of Greece's sovereign debt is owed to Greek residents.

Direct Foreign Investments would be investments by Greek residents (such as Greek banks) in other countries (such as subsidiaries in neighboring countries). The 'liabilities' from direct foreign investments represent that part of foreign assets which was not sourced out of Greece (such as profits retained abroad).

The really interesting category is Portfolio Investment. The assets would be foreign securities which Greek residents (institutional, corporate or private) buy through their Greek bank.

Greeks held 101 BEUR of foreign debt securities at 3Q2013. Interestingly, back in 2011, this figure was about 50 BEUR lower. Since then, the Greek banking sector had lost about 80 BEUR in bank deposits, 25-30 BEUR of which was capital flight according to the Bank of Greece. Consequently, the 50 BEUR could well be former bank deposits which the customers converted into foreign debt securities to hedge against a bank collapse and/or Grexit (instead of saving cash under the mattrass).

The liabilities under Portfolio Investment would be Greek securities held by foreigners at a Greek bank. What is interesting is that the debt securities, now 47 BEUR, are dramatically lower than the more than 200 BEUR at the outset of the crisis. It shows that foreigners reduced their holdings of Greek securities massively.

Other Investments represent the foreign debt of Greek residents (government, institutions, corporate, private). The assets are loans, currency, deposits, etc. which Greek residents have transferred abroad officially and the liabilities are Greece's foreign debt. The figures would suggest, for example, that 'only' 223 BEUR of Greece's sovereign debt of over 320 BEUR is held by foreigners.

Anyone who wants to know how Greece's international investment position stacks up with that of other countres should open this link to a Wikipedia article.

Friday, January 24, 2014

Greece's Current Account - January-November 2013

Below is my usual table:

(in BEUR)


January-November
November









2013 2012
2013 2012
Revenue from abroad





Exports 20,7 20,0
1,8 2,0

Services (e. g. tourism) 26,2 26,0
1,5 1,5

Other income 3,2 3,5
0,3 0,4

Current transfers 6,9 4,8
0,4 0,3


---- ----
---- ----

Total revenue from abroad 57,0 54,3
4,0 4,2







Expenses abroad





Imports 36,6 38,7
3,2 3,4

Services (e. g. tourism) 10,0 11,3
0,9 1,0

Other expense (e. g. interest) 5,9 5,1
0,5 0,3

Current transfers 3,0 3,4
0,2 0,2


---- ----
---- ----

Total expenses abroad 55,5 58,5
4,8 4,9














Net foreign deficit (current account) 1,5 -4,2
-0,8 -0,7

Essentially, similar comments as in my previous anaylsis can be made. One addendum, though:

In November, non-oil imports increased 4,4% while non-oil exports declined 7,8%. Falling exports with increasing imports would be a terrible trend, if it were a trend. More likely that it was just a one-off month.

And the Culprit Is??? --- Lack of Competition, Of Course!

So it's really quite simple, according to the OECD: Greece must only dismantle barriers to competition and everything will be fine. At least according to the OECD, which also says that 2,5% more GDP would be the reasonably quick consequence.

This sounds very convincing to a superficial observer like myself. I have always wondered in the last few years of austerity why certain consumer prices remained so high. Now I know why --- it's the lack of competition!

Unfortunately, I continued reading this article from the Ekathimerini and read about some of the most important reforms which, allegedly, the OECD has in mind:

* extend permissable shelf-life of fresh milk
* liberalize exclusive distribution of medicines
* open new pharmacies
* allow Sunday openings of retail stores

Allegedly, the OECD made 329 recommendations. I sincerely hope that they don't consider the above 4 recommendations as examples of the better ones. Yes, prices should come down much more in line with the decline in incomes but the above 4 recommendations are not going to achieve that, I don't think.

When I ask Greeks why they think prices don't come done, they mention things like cartels, crony networks and so forth. Is that because they are conspiracy fanatics or is it perhaps because they are right?

Monday, January 20, 2014

Addendum To Deutsche Bank - An Exploding Cost/Income Ratio!

A bank's P+L statement is a most complex piece of accounting. However, it can also be explained in simple ways as follows:

A bank has net operating revenues (interest margins, trading profits and fees) and operating costs (ranging from personnel to depreciation). Once operating costs are paid out of net operating revenues, the resulting surplus can be applied to the following:

* risk costs
* taxes
* dividends
* retained earnings
(in that order)

Deutsche reported a cost/income ratio (CIR) of 73% at year-end 2013. That means: for every Euro earned, 73 cents went to cover operating expenses and only 27 cents were available for risk costs, taxes, dividends and retained earnings. The 27 cents are often referred to as 'risk absorption capacity' (the lower that capacity, the greater the probability that risk losses move right to the bottom line).

73% is a very high CIR for a bank like Deutsche (I had never checked it before but I would have expected it to be no greater than 60%). But here comes the shocker.

Back in 2012, Deutsche announced a cost reduction plan and in 1Q13, the CIR had declined to 64% (down from 77% a quarter before). However, since 1Q13, the CIR increased in following quarters to 72%, 72% and 87% (!) in the final quarter. This is a most dangerous trend!

A bank with high operating costs blows up its balance sheet to generate more net interest revenue. The leverage increases accordingly. When a bank, like Deutsche, decides to reduce leverage, the balance sheet is reduced, net interest revenue declines and leverage accordingly (unless operating costs decline in the same proportion as net interest revenue, which is highly unlikely).

And the conclusion is? Well, the conclusion is that, as Deutsche's CIR increases and/or remains high, its loss absorption capacity becomes quite limited. As evidenced by the fact that Deutsche reported a 1,2 BEUR loss in 4Q13.

Is Deutsche Bank Starting To Get Nervous?

Deutsche reported preliminary results for 2013. What stands out is that Deutsche shrank its balance sheet quite significantly over the previous year-end:

* total assets (IFRS) declined 18% to 1.649 BEUR
* total assets (adjusted) declined 11% to 1.080 BEUR
* risk-weighted assets declined 12% to 355 BEUR
* leverage ratio increased from 2,6% to 3,1%

Deutsche has felt the heat for quite some time now: it seems there is hardly a scandal which Deutsche was not involved in. The German Supervisory Agency (BAFIN) leaked last week that they would make a 'special audit' of Deutsche's foreign exchange operations. This in the midst of speculations that Deutsche was involved in manipulating exchange rates. A special audit by BAFIN is a very special thing!

Also, commentators had started (rightfully so!) to pick on Deutsche's leverage. Not capital adequacy according to Basel-2 but, instead, total liabilities to total equity. That leverage had well exceeded 40:1 in 2012, a leverage which is normally reserved for very highly leveraged hedge funds. Remember: a leverage of 49:1 means total assets of 98 and equity of 2 for a balance sheet total of 100. If assets devalue by 2, total equity is wiped out.

Since Deutsche doesn't report 'total equity' in its preliminaries, one can only guess that the above 'leverage ratio' of 3,1% refers to the same leverage which I talk about. It would mean a leverage of 37:1; quite an improvement! (*)

I presume the difference between total assets (IFRS) and total assets (adjusted) is explained mostly by derivatives which IFRS requires to be reported on a gross basis (i. e. no netting-out of matching deals). I would argue that the gross figure is the more important one because if a gross asset is wiped out, it doesn't necessarily mean that a corresponding gross liability is wiped out, too.

Lastly, check the amount of risk-weighted assets (355 BEUR)! I mean, here is a bank which shows total assets (IFRS) of 1.649 BEUR and total assets (adjusted) of 1.080 BEUR. But only 355 BEUR of those assets are considered as carrying risk. And all the rest is risk-free???

A double-digit decline in assets, at a bank the size of Deutsche, can be considered a crash effort. That requires unloading almost 200 BEUR of risk assets and another almost 200 BEUR of risk-free assets. I wonder how much of the unloaded risk assets were Greek bonds sold to the ECB at near-par? (probably none because Deutsche had sold those bonds long before...).

In summary, it is highly doubtful that Deutsche would embark on such a crash effort without either (a) some very significant prodding from the outside (i. e. BAFIN) or (b) some significant worries about the bank's structure on the part of management and the supervisory board or (c) a combination of both.

Deutsche has made a remarkable achievement but it still has a very, very long way to go!


(*) I just read in Handelsblatt that the 3,1% refer to total assets (adjusted). Thus, my above praise of Deutsche was far too soon...

Sunday, January 19, 2014

The Banking Crisis Is Moving North!

Greece, Cyprus and Spain have been at the forefront so far as regards crises of their banking sectors. However, what we have seen there may appear as a tempest in a teapot once the ECB stress tests of 124 European banks are completed in the second half of this year.

Greece, Cyprus and Spain again? Forget it! It's may well be Germany, France and Italy. Those countries are much larger than Greece, Cyprus or Spain. Their banking sectors are, too. And so are their problems. Wait a minute! Haven't those banking sectors been bailed-out through the various 'rescue financings' and ECB bond purchases? Yes, they have been but it appears that there is a lot more!

This is what a German and an American professor say after having completed a research of 109 of those 124 banks. They come to the conclusion that, in sum, these banks need fresh capital of 770 BEUR! Top rank is taken by the French banking sector which allegedly needs 285 BEUR in fresh capital. Germany is in second place with 200 BEUR. Allegedly, ECB authorities see it in a similar way.

This is going to end in one of two ways: (a) either the stress tests will be performed objectively and free of any political pressure; or (b) Germany, France and Italy will exert all the political pressure they can in order to 'massage' the objective results.

Why is it that I think it will be the latter?

Topics for EU-Election Campaigns

Over the next few months, we will probably see the most interesting campaign for EU elections so far. According to opinion polls, 'EU-frustration' seems to be running high in all member countries. I sense, however, that the frustration in the South, i. e. in Greece, is somewhat different from the frustration in the North. The South blames the EU for all the economic pain they are suffering. The North blames the EU for more mundane things.

Below is a selecton of items which often drive EU-citizens in the North up the wall. Each one of them would make a popular campaign poster. Maybe some parties will make such posters. They will definitely raise these issues during the campaign.

Honey: the EU deemed it necessary to regulate the ingredients in honey. 
Smokers: at least 65% of front and back of a cigarette pack must show warnings and those warnings have to include shock pictures. While most people would agree that smoking is bad for health and that there should be warnings, they do not understand why the EU has to concern itself with such details instead of each member country on its own.
Horses: horse stables for more than 20 horses must now pay value-added tax. That will undoubtedly make every horse owner very enthusiastic about the EU.
Condoms: norms are in place for elasticity and length. Good thing that the users probably don't know about these norms. 
Water: toilets must not use more than six liters per usage. A similar limitation is being considered for showers. 
Menus: restaurants will have to indicate on their menus the existence (or non-existence) of 12 differents substances. 
Vacuum cleaners: new limits for energy usage have been put in place.
Gardening: the EU thought that lawn mowers were to loud and tractor seats were not safe enough. So they regulated both.
Light bulbs: the EU eliminated the traditional light bulbs and I have yet to meet one person who is happy about that.

An uninformed outsider might think that the EU should worry about the big things while the countries worry about the smaller things on their own. In reality, the EU is worrying about the small smaller things and no one seems to worry about the big things.

We'll hear a lot about that during the election campaigns!

Thursday, January 16, 2014

Oh Dear! Hans-Joachim Fuchtel Is At It Again!

The mayor of Thessaloniki Yiannis Boutaris is angry at Hans-Joachim Fuchtel --- Fuchtel is supposed to provide assistance and know-how in improving city government and, instead, the man prefers to spend his time eating octopus, drinking retsina and touring Greece.

I mean, what does the mayor expect of an easy-going, back-slapping, overweight Suabian who grew up in Sulz on the river Neckar? Evidently, the man has already accomplished a lot --- he changed from enjoying Suabian wine and 'Spätzle' to enjoying octopus and retsina. If that is not successful change management, I don't know what is!

Wolfang Münchau on Germany' Current Account Surpluses

I am very glad about this article by Wolfgang Münchau. He does not follow the trend of focusing on all the alleged damage which Germany' surpluses cause in the rest of the world. Instead, he focuses on the enormous risks and potential damage which those surpluses could (or will?) have on the German economy itself. A point which I have made for quite some time now.

A Brit's Current Views About Greece

My good friend from Greece (a retired Brit who lives in Greece with his Greek wife) has shared his current views on Greece with me: 

In a nutshell, events will be moving very quickly over the next six months or so in Greece - and within the EU. At the forefront will be the accelerating deflationary trend - obviously including Greece, but also increasingly evident in the Eurozone periphery - and I very much include France in this category!  The European Parliament elections at the end of May, for the first time ever, take on particular significance. They will be won - or almost won - by anti EU parties - notably The National Front in France, UKIP in Britain and SYRIZA in Greece. These results will serve as a severe warning for many EU countries ahead of whenever they hold national elections, that they must address growth and unemployment issues as a top priority ...... or else some of the European Parliament results could clearly be reproduced at national level.

In Greece, Samaras - and his forever 'bright sky' man, Stounaras, - do have an opportunity to show statesmanship during Greece's six-month EU Presidency - particularly as SYRIZA seems unable to elucidate an alternative policy programme  .......they continue to only complain. Whether the Greek electorate is savvy enough at the next national election [whenever that is - I'm not going to guess] to understand what 'the responsible reality' is  - is a real doubt.....so, the longer the current coalition can hang on and show some improvement in the overall economic and jobs sphere, the better for this country, I think. I still hold to the longer term view that Greece needs to return to the Drachma - and concentrate on really reforming Agriculture [including substantial food processing and export capacity]  & Tourism. That must therefore include a major focus on Small & Medium Size Enterprise development & related professional & supportive financing.

Wednesday, January 15, 2014

What Is the Real Gross Domestic Product?

I have been wondering what it really means when one states, as is often done, that Greece’s GDP collapsed by about 30% since the crisis erupted. For sure, it means that today’s GDP is about 30% less than it was back in 2009. But was 2009 a true reflection of the gross domestic product of the Greek economy?

Think of a village. Not a poor village but neither a particularly well-to-do village. One of the villagers hits the jackpot and gets 10 MEUR tax-free. Now he has to decide what to do with the money. Since he is 50 years old, he decides to spend all of it on consumption and enjoy the rest of his life. In fact, he spends about 1 MEUR annually and that, of course, allows him to lead a fantastic life. Life in the rest of the village improves a lot, too, because much of that money is spent in the village. Put differently, the village’s GDP explodes. Ten years later, the jackpot winner is 60 years old and he has run out of money. Unless he finds another source of income, he has to return to the living standard of 10 years earlier. And the rest of the village? That depends on what they did with the money recycled by the jackpot winner. If they spent it, too, they, too, will have to return to the living standard of 10 years earlier.

Where am I wrong?

Nigel Farage Welcomes PM Samaras to the EU Presidency

In a speech to the European Parliament in Strasbourg on January 15, 2014, the British MEP Nigel Farage had this to say: 

"Well I have to congratulate you, Mr Samaras, for getting the Greek presidency off to such a cracking start. Your overnight successful negotiation in the trilogue on MiFID (Markets in Financial Instruments Directive), I’m sure we’ll have them dancing in the streets in Athens, no matter that your country, very poorly advised by Goldman Sachs, joined a currency that it was never suited to, no matter that 30% are unemployed, that 60% of youth are unemployed, that a neo-nazi party is on the march, that there was a terrorist attack on the German embassy.

No don’t worry about all that because the trilogue on MiFID has been a success. And, in many ways, it sums up the two Europe’s: the Europe that’s talked about in here by the dreamers who want to impose a new United States of Europe with an identity and a currency, and the real world out there.

And you come here Mr Samaras and you tell us that you represent the sovereign will of the Greek people? Well, I’m sorry, but you’re not in charge of Greece, and I suggest you rename and rebrand your party – it’s called ‘New Democracy’, I suggest you call it ‘No Democracy’.

Because Greece is now under foreign control. You can’t make any decisions, you’ve been bailed out, and you’ve surrendered democracy, the thing your country invented in the first place.

And you can’t admit that joining the euro was a mistake – of course Mr Papandreou did that didn’t he, he even said there should be a referendum in Greece and within 48 hours, the unholy trinity (troika) that now run this European Union had him removed and replaced by a ex-Goldman Sachs employee puppet.

We are run now by big business, big banks and in the shape of Mr Barroso, big bureaucrats.

And actually that’s what these European Elections are really going to be all about. It’s going to be a battle of national democracy versus EU State bureaucracy.

Whatever you may say in this chamber, the people out there don’t want a United States of Europe, they want a Europe of sovereign states, trading and working together.

And I believe the European elections are going to mark a watershed. Up until now everybody has thought, much as they may not like, the development of the European Union, that it was inevitable. That myth of inevitability will be shattered by the European elections this year.”

The Odious Aspects of Greek Austerity

Below is an interesting listing of items which make the Greek austerity so much more odius than the Cypriot one, according to the author of this article:



Greece applies a so called crisis levy on profitable companies for 4 years to generate 600mn in additional revenue. That by and in itself is nothing less than the proverbial shot on the foot. Greece raids companies generating profit forcing them to pay over and above the 25% tax (which they normally paid), a disincentive to businesses discouraging them from investing in Greece or expanding their operations there. It is little wonder that huge Greek companies such Coca Cola-3E, Viochalko and FAGE have fled Greece.

Presumptive Tax, in a nutshell taxation on income is not based on normal accounting practises but on assumptions made by the country’s tax authorities. Tax authorities estimate how much tax is owed by the taxpayer based on a number of criteria (see link above) without waiting for the taxpayer to declare income.

It is unfair for a number of reasons. Assume 2 farmers growing wheat, they each produce on average 75 tonnes of wheat per year while the fields’ full capacity is 100 tonnes. One farmer has an exceptional year and produced 80 tonnes of wheat the other just 70 tonnes. By applying presumptive taxation the 1st farmer will pay tax on 75 tonnes (instead on his produced 80) while the other will also pay tax on 75 tonnes (instead of his produced 70).

As I searched through the literature I found that presumptive taxation is applied in countries where there is wide spread tax evasion and tax corruption (admittedly Greece fits the bill on both accounts), but that doesn’t make presumptive taxation any less unfair.

Move services from the reduced to the standard VAT tax rate. Now this is a big one and it is still a contentious issue in Greece. The effect was that tourism related businesses (restaurants hotels) now charged 21% VAT instead of the reduced rate.

Increase tax on wages in kind. Assume your employer gives you a car allowance (or a car) phone allowance etc. Greece taxes you on those allowances.

Excises on non alcoholic beverages, this is my favourite one. They even taxed soft drinks!

Reduction in public consumption and public investment. Admittedly reducing what one consumes is the quintessence of austerity however in Greece’s case that translated into delaying payments to suppliers scarcity of even the most basic items in hospitals such as syringes and bandages and even iodine .

Means Test Unemployment Benefits. A means test implies that the applicant for unemployment benefits will be scrutinised by authorities to ascertain whether he (or his immediate family) have the means necessary to sustain him (savings, property etc) . In the event they do then the applicant is rejected. This is particularly strange since it involves huge administrative costs; also the means test for unemployment is alleged to create a poverty trap. Under normal circumstances unemployment benefits aim to cushion the blow from the loss of income, so that the applicant does not slip into destitution. The means test unemployment benefits regime forces the unemployed to sell/divest any property savings they may possess before they can be eligible for the benefit. In other words the unemployed have to become destitute before they can claim unemployment benefits.

Anyone Wanting To Get Angry at Prof. Hans-Werner Sinn?

If anyone feels the strong desire to get mad at Prof. Hans-Werner Sinn, he/she should read this.

Monday, January 13, 2014

Greece - Move Up the Value Chain!

This article by professors Tse and Esposito is well worth reading. Largely thanks to Merkel/Schäuble, the expression 'competitiveness' has been reduced to a very narrow meaning --- become cheaper!

If 'becoming cheaper' were the only aspect of competitiveness, a country like Switzerland should be blown out of the water by now. Switzerland already was very expensive when the CHF/EUR stood at about 1,60 and now the Swiss National Bank has been capping the exchange rate at 1,20 for some time. In short, Switzerland always was very expensive and is now even more expensive. If you don't believe it, go visit Switzerland...

And yet, Swiss exports have gone up despite the revaluation of the CHF and the economy is booming: the country is running literally indecent current account surpluses (about 12% of GDP!). So, price alone can't be the answer. Patriotic Swiss argue that the higher the exchange rate, the better for the country because a high exchange rate means that the country's products are in very high demand. A point worth thinking about!

I will cite just one sentence from the article which points to the answer for many challenges facing the Greek economy: "Spain has been very successful at moving up the value chain by turning more of their agricultural products into organic ones, thereby moving away from competing on price to competing on quality". How high in the value chain are Greek agricultural exports? Or other Greek export products?

In my opinion, Greek economic leadership should talk less about 'returning to the markets' and more about 'moving up the value chain'. The jobs, the wage/income taxes, the social contributions, the revenue for the state --- all of those things are along the value chain. If most of the value chain is outside the country, all these nice things are also outside the country.

I rest my case!

Saturday, January 11, 2014

IT and High Tech in Greece!

News about successful Greek companies in the IT and high tech areas are becoming more frequent. Here is the latest one:

7 Greek Start-Up's You Need to Know About

And below are the articles which I have posted about this subject in the past:

Rays of Hope in Greece?
Tourists, Olive Oil and --- Nuclear Research!

Dismal Export Performance of Greek Economy

I regularly post statistics on the development of Greece's current account with all the details on exports, imports and services. The latest one is here.

One of the points which I have continually made is that the Greek export performance, though quite positive since the crisis, must still be considered as dismal. To demonstrate: 2013 exports will be only marginally higher than in 2008, the record year. 2013 exports may yet come out lower than the year before. That simply is not impressive when considering that Greece has become so much cheaper ('more competitive') since then. Also, the Euro, though appreciating of late, is still substantially lower against the USD than a few years ago.

This is even more surprising when considering that, as I read, the Greek productive capacity is running way below capacity. One wonders why that unused productive capacity cannot be placed in foreign markets.

Obviously, there is more to the issue of productive capacity. Longer-term, the Greek ecconomy's challenge is to increase its productive capacity so that it can make more of the products which Greeks consume (thereby reducing imports) and/or for export. But that takes time.

I would suggest that marketing & distribution, or the inadequacy thereof, are major reasons for the dismal export performance. It's not good enough to make, for example, agricultural products and sell them to a distributor. To export olive oil in bulk to Italy is nothing other than giving away the margins on the rest of the value-adding chain. Where possible, the focus should be on making products shelf-ready.

Finally, the 'promotion' part of the whole thing is key. I understand that Greece has a rather large export promotion agency with offices all over Greece but their focus doesn't seem to be on increasing exports. By the same token, an export strategy requires 'sales offices' abroad. Typically, they are commercial delegations residing in foreign embassies. They don't require much staff but they do require the best sales people!

I can only guess that these factors play a role in Greece's dismal export performance. Perhaps there are others. However, if Greece has been and is - as has been stated quite often - on an aggressive export strategy, that strategy can't be a very good one because, otherwise, the results would have to be much better.

Friday, January 10, 2014

Phenomenal News! "The Euro-Crisis is Over!"

The EU Commission Chief informed the world the other day that the Euro-crisis was over. Many people wondered what he was smoking before he made that announcement. Below are two of the more passionate commentators.

Barroso triumphant, by Ambrose Evans Pritchard
Waiting for an economic collapse, by Michael Snyder

I say no more.

Germany: Guest-Visitors Instead of Guest-Workers?

The following situation-in-process should be watched by Greeks as it develops:

EU-citizens who move to Germany, without a job, are entitled to German child support provided they can show an official residence in Germany. The question is whether they are also entitled to Hartz-IV, the German welfare benefits system. According to German law, they are not entitled. It is unclear, however, whether German law is in compliance with EU law in this matter. Thus, a German court has now brought the matter before the EU Court of Justice. A ruling is pending. For some unknown reason, the EU Commission felt compelled to express its opinion on the matter before the Court's ruling. Its opinion is that EU citizens, even without a job, should be entitled to Hartz-IV.

No one is likely to get rich through Hartz-IV. The monthly basic benefit is EUR 391 per person. However, that benefit is multiplied by household members and, of course, there is the additional child support. Furthermore, there is the possibility of one-off benefits, for example to establish a household, etc. There have been stories that some families received up to EUR 3.000 per month after exploiting all Hartz-4 features (I recommend to take this figure with a lot of doubt).

It is easy to imagine that a, say, Bulgarian family of 4 whose benefits total, say, EUR 1.500 per month are better off in Germany than in Bulgaria. Not to mention the fact that, once in Germany, they also have access to all German public services like education, etc. And they might even find a good job...

For a Greek family in dire straits, this could be more interesting than for anyone else because there are several cities in Germany with a significant Greek diaspora. That's why I recommend watching this situation-in-process.

Thursday, January 9, 2014

Euromoney - "Criticizing Germany For Its Surpluses is Nonsense!"

Surprisingly, Euromoney comes to the defense of Germany in the debate about surpluses in external accounts. Just one example: 

"The logic is that German external surpluses detract from growth elsewhere as other countries must have a matching deficit to balance the global books. The surplus is said to be because Germans are not consuming and importing enough of others’ goods and services. So the German surplus hits the recovery prospects elsewhere. But these claims are nonsense".

Personally, I am no great fan of either/or argumentations, be that in this debate or in others. There is almost always more than one option. I will below describe an option which has not been discussed much in the media.

There is no question that money will continue to be recycled from North to South; either voluntarily or not. The point of Germany-bashers is that Germany should increase domestic demand so that Germans buy more products (imports) from other countries such as Greece. Fine! Let's say that all Germans get a 10% increase in net earnings and spending power increases accordingly. Where is the assurance that they will buy a lot more from Greece? What would/should they buy from Greece?

If money cannot be recycled from North to South through the current account of the Balance of Payments, it must be recycled through the capital account. The largest item in the capital account is typically loans. However, there no longer is great appetite on the part of foreigners to make loans to Greece.

Readers of my blog will have guessed by now what I am getting at --- it is foreign investment. Foreign investment would also be a flow of money from North to South. Except, the money doesn't flow South so that the South can spend it on imports. Instead, it flows to the South to be invested and to stay there. AND: to increase the productive capacity of the South so that the South can make more of the products which it consumes (thereby reducing imports) and hopefully even make products for exports.

Not to mention the fact that foreign investment is also the most efffective form of know-how transfer!

The justification for this attack is that German external surpluses must detract from growth elsewhere as other countries must have a matching deficit to balance the global books. The surplus is said to be because Germans are not consuming and importing enough of others’ goods and services. So the German surplus hits the recovery prospects elsewhere. But these claims are nonsense.

Full article: http://www.euromoney.com/Article/3291907/CurrentIssue/90598/Against-the-tide-Dont-be-beastly-to-Germans.html?copyrightInfo=true
Visit http://www.euromoney.com/reprints for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.
The justification for this attack is that German external surpluses must detract from growth elsewhere as other countries must have a matching deficit to balance the global books. The surplus is said to be because Germans are not consuming and importing enough of others’ goods and services. So the German surplus hits the recovery prospects elsewhere. But these claims are nonsense.

Full article: http://www.euromoney.com/Article/3291907/CurrentIssue/90598/Against-the-tide-Dont-be-beastly-to-Germans.html?copyrightInfo=true
Visit http://www.euromoney.com/reprints for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.

Wednesday, January 8, 2014

Yes! Probe the Use of EU Funds!!!

I was delighted to read today that Greece may begin to conduct a nationwide investigation into the use of EU Funds. I refer to an article which I had written about this subject last year.

In the same article, I suggested another area where it would be very easy for Greece to uncover financial and tax malpractice --- anonymous offshore companies.

If Greece really makes a serious and credible effort to attack the issues of use of EU funds and anonymous offshore companies, that would be two steps in the right direction and a giant leap for executive credibility!

Monday, January 6, 2014

Greece: Tourists, Olive Oil and - Get This! - Nuclear Research!

This Google-translated article from the FAZ totally astounded me! It states that Greece, through its research center 'Demokritos', belongs to the leaders in nuclear research within the EU. The key tags are: nuclear physics, nuclear technology, radiation protection, material science, microelectronics, nanotechnology, pharmaceutical and other fields.

Well, it took me a while to take in the news that this would be happening in the land of tourists and olive oil. On the other hand, I have always intuitively argued that Greece is a country of tremendous potential --- only that this potential is not fully put to use.

The article quotes Prof. Alexander Kritikos, researching in Germany but of Greek origin, who makes some very interesting comments. Comments which I have also made in this post.

"Balancing the budget and implementing reforms, however difficult that is, will alone not solve Greece's problems" - tourism and shipping will not suffice to provide Greeks with a decent living standard. There will have to be more value creation built up in the country (or brought into it via foreign investment).

"There are many hidden resources in Greece; they are just not properly used and/or developed".

"One doesn't have to begin with new incentives. Only eliminating current hurdles would be a good start".

Prof. Kritikos concluded with a remark which at first sounded funny but which, upon further thinking, is probably the saddest thing one can say about Greece: "Greece is the only country in the Eurozone which exports more scientists than it imports". That is probably an exaggeration but I guess he is trying to make a point.

A surplus in the scientists balance is the worst thing which can happen to Greece longer-term. On the other hand, if Greece could accomplish a deficit in the scientists balance (i. e. import more scientists than are exported), a gigantic surplus in the trade balance would surely be the consequence over time.

Sunday, January 5, 2014

Karelia Tobaccos - A Greek Company?

Typical stereotypes of Greek entrepreneurs are that they are corrupt, that they cheat, that they treat their employees poorly and that, in general, they don't know how to run a business other than for short-term gain.

I just saw this article which reports on Karelia's annual year-end 'feast' and I subsequently looked up the company's website. All I can say is that I am most impressed!

One of the greatest strengths of the Austrian and German economies is their respective 'Mittelstand', small and medium size companies but also companies with sales of several BEUR. What they have in common is: family ownership; family supervision and, oftentimes, family management; focus on sustanstained long-term success and a contempt for short-term financial gain; loyality from employees to owners AND from owners to employees; and many more!

When I browsed Karelia's website, I got the impression that the values expressed there were very similar to the values expressed by successful Mittelstand-companies. Those are the kinds of companies which Greece should promote and which Greece should get to invest in Greece!

PS: in the last 15 years of my career, I have gotten to know probably close to 1.000 Austrian and South German Mittelstand-owners and managements. Many of them were socalled 'hidden champions', i. e. companies with very little publicity but world market leaders in their own line of business. There were many real champions and it is hard to pick the best one. If I had to pick one company as the best, it would be Trumpf AG, a global player owned by the Leibinger-family with outstanding corporate values and excellent management with a long-term orientation.

Should the Grexit Discussion Return?

About a year ago, I wrote about a friend of mine who had predicted the Grexit for January 11, 2013 at 22 hours. Not only did he turn out wrong but the whole Grexit debate seems to have died during 2013.

Ex-Prime Minister Costas Simitis seems to want to bring the Grexit debate back on the table. It will be interesting to observe whether or not he succeeds with that.

I would like to offer one aspect of a possible Grexit debate which could serve a most useful purpuse. If a Grexit debate were not limited to the case of Greece but if, instead, it lead to an overall discussion among EU leadership about the structure of the common currency union, based on facts and analyses and not on prejudices and emotions, well, if that were to happen, then a renewed Grexit debate would serve a meaningful purpuse. 

Greece is no longer a financial urgency for foreign creditors: with a positive current account balance around the corner, Greece no longer needs net new money from abroad to survive. And since the bulk of Greece's debt is held by official institutions, a closed-shop mentality can succeed and events which might otherwise be uncontrollable can be contained. In short, a Grexit may hold a lot of scare for Greeks but certainly not for the rest of the Eurozone.

But can France continue to lose competitiveness and increase unemployment? Will the French accept forever that many of their products now come from Germany as do the loans which they need to pay for them? Will the Grande Nation accept this second-class standard forever? And if not, what can they do about it?

France still has a huge industrial capacity. Industrial capacities tend to react quickly to a devaluation of a national currency. France, after all, has experienced that for decades prior to the Euro.

My point is that a Grexit would be no threat to the Eurozone. The threat of a Frexit could quickly lead to disaster. So perhaps, before disaster strikes, Greece could initiate a Grexit debate so that a general debate about the Eurozone starts taking place so that things can be corrected/improved before something hits the fan.

Friday, January 3, 2014

Hurrah! The Euro-Crisis Is Over!

I am amazed about all the bullish news coming out of all corners of the media. The US is headed for a massive growth period and the dollar will go through the sky. The Eurozone is picking up growth and some countries are recording record employment levels. The survival of the Euro is no longer an issue because everything has been stabilized.

Greece, too, is on its way to an economic nirwana. The primary budget is in surplus; the current account is headed that way; the banks have been successfully recapitalized and are now in good shape; the Republic will return to the markets soon.

Makes me wonder what people have been worrying about in the recent past.

In a parody-interview about the sub-prime crisis, an investment banker was asked how such intelligent people like investment bankers could have made such terrible mistakes. His answer was: "We didn't make any mistakes. The mistake was made by those who started asking what those papers were really worth. Had they not asked that, we would have happily continued doing our thing".

So, here is the solution. Let's not ask what all those sovereign bonds are really worth and whether they can ever be paid. Let's not ask how a country like Greece will ever reach normal employment levels again. Those are silly questions which only disturb the positive view.

Things will be wonderful in 2014. It has been decreed that way, so let's not disturb that view. Instead, let's go out and invest all our money in stocks and bonds. They will all increase in value during 2014.

Nothing can go wrong, go wrong, go wrong...

Wednesday, January 1, 2014

Prof. Krugman Turning into an Optimist about the Eurozone?

A surprising dose of optimism about the Eurozone comes from an unlikely corner on this first day of 2014 --- from Prof. Paul Krugman! Well, it's not that he has become an optimist. He still describes himself a Europessimist but a Europessimist who now admits "that it’s now possible to see how this could work. The cost — economic, human, and political — will be huge".

Prof. Krugman attributes his reduced pessimism to two things: (a) the 'Draghi-effect', i. e. the commitment of the ECB to act as a sovereign lender of last resort; and (b) the 'amazing determination' of European nations to stay on the Euro at almost any cost.

Still, Prof. Krugman warns that "we have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off in falling debt burdens".

I wish Prof. Krugman would have gone a bit deeper into the question as to why there isn't more of an export boom in a country like Greece which has recorded a rather substantial internal devaluation. I also wish he would have touched a bit more on the need of North-South direct investments to strengthen economic activitiy in the South.

In short, I wish Prof. Krugman would have gone a bit deeper into questions of the real economies of the South: What are their respective productive capabilities? Where would they have export potential? Where should investments be made to increase productive capabilities and export potential?

I guess Prof. Krugman is a busy man and doesn't have time for that. But someone definitely ought to take the time to address these questions. It's fine and dandy to focus on monetary policies and political determination but if a national economy doesn't have much of a productive capability, it won't employ all of its people and it certainly won't export enough to pay for the desired imports.