Emerging Hope in Greece

December 13, 2011

 by Chidem Kurdas

The Greek economy continues to shrink. With the wider European debt crisis and slump hampering Greek recovery, the recession may persist through 2013.   Amid the grim news, however, there is a small sign that austerity measures are starting to work.

This evidence is not widely known or reported.  I heard about it from Nick Kounis, head of macro research at ABN Amro.

He pointed out, at a Capital Link Forum in New York last week, that Greek exports are growing, albeit from a low level. In the past couple of quarters Greek export growth rates outpaced German export growth. The reason, Mr. Kounis said, is that Greek wages declined while German wages increased. This improved Greek competitiveness.

If strong export growth continues, international trade will make up for the fall in domestic consumption as the industrial structure shifts to selling more to the rest of the world. By 2013 greater exports could bring back growth, Mr. Kounis says.

Of course if Greece still had its own currency, lower exchange rates for the drachma could have achieved the same result. That would have been less painful and certainly less politically disruptive. Given the fact that the country remains in the euro zone, wages and prices are the forces restoring competitiveness. Export growth indicates that the market process is working despite ongoing domestic turmoil and wider European crisis.

Meanwhile, the government’s spending and deficit continue to shrink, though the deficit reduction target has not been met. Another fundamental change is the reform of state-owned enterprises, from port operators and railroads to a gaming business. These have been in the red for years.

George Kyriakos, Special Secretary for Public Enterprises and Entities, says government enterprises were over-staffed and personnel costs were higher than revenues. The first step toward reducing costs was to appoint external auditors. Certain enterprises are being merged and some of the assets are to be privatized.

Having watched the US experience with mortgage financers Fannie Mae and Freddie Mac, I have come to realize that not all privatization is real. Fannie and Freddie in effect retained the backing of the federal government and came right back to the taxpayer for support once losses piled up. Clearly, successful privatization is not just a matter of selling a public asset but requires a change in how it is managed and a commitment on the part of the government to letting it be.

In the Greek case, the danger is that the pressure to add personnel – a source of political patronage – will continue to bloat costs. The process Mr. Kyriakos described has a chance of working. The assets to be sold include game and cell phone licenses but the big items are real estate and infrastructure such as water supply and energy operations, which could attract foreign capital.

Real estate can be developed for myriad purposes – the legal changes to allow this are still in the works – that make it reasonably independent from the government. So the sale of real estate may break it free from political influence, though it sounds like local governments are already angling to get a piece of the pie.

Legal hurdles remain but new laws allow more flexibility, for instance in labor contracts, according to Anthony Papadimitriou, a lawyer who spoke at the same conference.

6 Responses to “Emerging Hope in Greece”


  1. An informative post. We’ll see if politics allows economics to work. Greek wages would need to fall something like 20% to become competitive.

    I will add a caveat to Chidem’s argument on the beneficial effects of currency depreciation. He gives us the benefits without specifying the costs. Currency depreciation can avoid deflation at the expense of generating inflation. In the UK, the pound depreciated and now the Brits have inflation. The rising prices of food and fuel have hit particularly hard.

    Real incomes and asset values must decline in the transatlantic debt crisis we’re witnessing. There is no policy that can avoid that.

  2. chidemkurdas Says:

    Jerry O’Driscoll–
    Re inflation due to currency depreciation: that is an important caveat. The deflationary process in Greece seems to be particularly unpleasant. But either way, of course, you’re talking about declining real incomes.


  3. […] Click for ThinkMarkets post on trade and policy developments. […]

  4. chidemkurdas Says:

    Here is another perspective. This is a comment from George Tzanetatos, futures trader and manager of Tzanetatos Capital, Chicago.

    The global economy is retooling towards major conflict. Greece is an integral part of the geopolitical puzzle and the fight for domination has only began.

  5. Andrew Allison Says:

    The only meaningful words in this piece of wishful thinking are: “the deficit reduction target has not been met”

  6. chidemkurdas Says:

    I realize this sounds like wishful thinking, especially as the wider crisis situation in Europe persists. But Greece was the first to go down and to start instituting reforms. It stands to reason that the effects of the reforms should show up earlier than in other parts of Europe.


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