Friday, 31 August 2012

Greek current account deterioration in the 00s: a few factors left unsaid

Lots of commentators claim that the deterioration in the Greek current account can be blamed on the country adopting the Euro. Well, if you just look at aggregate figures it may seem that way.

source: Eurostat

If one bothers to drill down a bit more then a slightly different picture may start to emerge. Let’s take a closer look then.

One factor that contributed to the widening of Greece’s current account deficit was the drying out of current transfers from European Union after Greece’s accession in the EMU.

source: Eurostat

Next I would like to take a more detailed look at the merchandise trade balance (according to the SITC classification).

The relevant balances for Food,Drinks&Tobacco and Chemicals were essentially flat over the 1995-2011 period.

source: Eurostat, own calculations

Now let’s take a more detailed look the individual balances that contributed to the deterioration of the current account.

source: Eurostat, own calculations

Out of all the sub-accounts of the merchandise trade balance the one having the biggest net contribution to the widening of the current account deficit is the Mineral Fuels balance. I think it is obvious that the deterioration of this balance have nothing to do with the deteriorating competitiveness of the Greek economy per se, but its wide deficit is due to structural factors and buoyant demand over the 00s.

The Machinery&Transport Equipment balance deficit widened significantly during the run-up to Greece’s accession in the EMU and then narrowed exhibiting widening spurts which contributed in the periodical deteroration of the overall deficit (like for example in the 2005-2008 period when Greece recorded the widest current account deficit in the years that my data run). This occurrence underlines one single fact, that the household consumption bubble that Greece experienced in the 00s was the driving force behind the current account’s trajectory. This was a demand-pull phenomenon. Investment in machinery and investment in transport equipment were both quite robust in the 00s so the fact that the balance improved simply means that GDP expanded more than said imports and that the driving force was due to other factors (i.e. demand-driven).

I think that the next chart is interesting in this respect. 

source: Eurostat, own calculations

Our next stop is the Other Manufactured Goods balance, which deteriorated as well. I would like to highlight a couple of points. First, notice that the deterioration commenced before Euro membership was a reality but nonetheless continued during the 00s. Second, during the 2005-2008 period when this particular balance recorded its highest deficit these past 15 years, the Greek private consumption bubble reached its apogee, something which in my humble opinion means that at least part of this deterioration was again a demand-pull phenomenon. Undoubtedly, part of the widening of this balance can be attributed to falling competitiveness. But what part of it is due to the Euro’s strength and what part of it should be blamed on the accession of the Central-eastern European (CEE) countries and the explosive growth of their exports? I can’t apply econometrics to give you a precise answer, but I can attempt to shed some light with the next few charts. We shouldn’t forget that (at least in the start, since now CEE countries have upgraded their export baskets while Greece has not) Greece’s basket of merchandise exports was quite similar with that of certain CEE countries.

 The next chart can serve as further evidence of the validity of the claim that households’ final consumption was the main catalyst behind the said balance’s deterioration.

source: Eurostat

Of course, correlation is not causation but this a rather close fit, don’t you think..? If you believe that this would usually be the case, then take a look at the same chart for Germany, that did not experience a households’ final consumption bubble. Not such a good fit, is it?

source: Eurostat, own calculations
Now a simple observation. If the widening of the merchandise trade deficit could be blamed on Greece’s loss of competitiveness then Greece must have recorded significant losses in its market share as far as goods exports are concerned. This is not the case here.

source: Eurostat
A further takeaway from the chart above is that the slowing down of growth in Greece’s export market share coincided with the acceleration of growth in the respective shares of Bulgaria and Romania. Again, correlation is not causation but…

Finally. let’s take a look at the services balance. Here too the claim was that Greek services exports suffered due to Euro’s strength. Well, I have a chart here that might tell a slightly different story.

source: Eurostat, own calculations

As the EUR strengthened relative to the USD, the balance improved and later in the decade, as the EUR weakened after 2009 it improved as well. Can someone seriously believe that currency fluctuations are the only factor at play here? International trade is such a multifaceted affair that very careful and painstakingly-detailed analysis is required to get a whiff of the factors leading to such changes. Besides, looking at balances does not always tell the whole story since changes could be driven by the import-side or the export-side.

Once again the post is very long, so I'd better wrap this up. I think that changes in the Greek current account cannot be attributed to the Euro’s strength/weakness. The widening of the deficit in the 00s is, always in my humble opinion, mostly a demand-driven affair. If one wants to dig further, deeper structural problems of the Greek economy will start to emerge (e.g. the composition and stationarity of the country's export basket or the miniscule external sector/lack of international orientation of the majority of businesses, etc.). Naturally, some part of it can be attributed to loss of competitiveness but what part of it is due to the emergence of new exporters and what due to currency-induced, reduced price-competitiveness? This is my point exactly, claims that loss of competitiveness can be blamed on currency strength alone border to the simplistic…

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