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.
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| 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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