Wednesday, 20 January 2010

Greek Tragedy

Michael Burke: Today's Financial Times carries an interesting piece from Martin Wolf on the severe difficulties being faced by Greece as it attempts to come to terms with its current econmic crisis.

The FT's veteran commentator places Greece's plight in the overall context of developments within the EU, and so has something to say about Ireland. Without minimising the problems of any country, he clearly shows that it is Greece which is an extreme case, not - as is often claimed here - Ireland.

"The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others."

He also warns that those pinning their hopes on export-led growth are in perliously crowded boat in choppy waters, as they now comprise (at least) 70% of the world's economy.

Finally, he has a very illuminating chart of unitl labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn't stated by Martin Wolf, that's based on the much stronger growth of German investment.


Proposition Joe said...

This sounds like yet another "look, ill-informed foreign guy disagrees with local experts!" lark, to join the paens to Blanchflower, Krugmann, Siglitz et al.

But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively.

Irish public debt was nowhere near 25% at the end of 2009. The NTMA put this ratio at 48% at the end of 2008. Does anyone believe our ratio halved during the past annus horribilis?

In fact, it was forecast by the DoF to go past 60% in 2009 and to approach 80% in 2009. Who knows if the DoF boffins even included the "off-sheet" NAMA debt in that calculation.

Rory O'Farrell said...

Interestingly Greece has the 2nd lowest fall in real GDP from peak (according to Eurostat). Some EU countries want to audit Greece's figures. Perhaps they should do the same for Ireland's off balance sheet NAMA.

@ Michael Burke
Perhaps I am being pedantic but you say 'Germany is an outlier, with unit labour costs way below that group'. I did some calculations myself and found that Germany had higher nominal unit labour costs than Greece, Italy, and Spain in 2008. Spain had higher real labour costs. The graph in the article doesn't show levels but changes since 2000.

Michael Burke said...

@ Proposition Joe

I frequently find myself in disagreement with Martin Wolf, but he rarely gets the data wrong. And he hasn't this time either.

The DoF data refers to gross government debt. The FT columnist referred to net debt. An easy mistake to make, I know, but an important one.

Thanks for the links, though. I was particularly struck in the '10 Key Facts on the Irish Economy' by point 9. "Ireland's Government debt to GDP was the fifth lowest in the Euro Area in 2008 and is forecast to remain below the EU-15 area average over the period to 2010". This is despite the fact the Irish slump began earlier and was deeper than anywhere else in the Euro Area.

Shame the DoF didn't broadcast this more widely in the pre-Budget debate

@ Rory

You are right. As above, we all make mistakes. It should have read Germany's costs falling sharply relative to that group.

Proposition Joe said...

@Michael Burke

Well in that case, my apologies to you and Mr. Wolf.

But I wonder what accounts for the massive difference between net and gross public debt in our case? Could it be cash reserves, in the form the large "float" pre-borrowed by the NTMA last year? Seeing as this was intended as a buffer against Irish bonds hitting a hard-stop, its existence hardly fills one with confidence about our fiscal situation compared to the EU-15.

Roger Cole said...

Greece spends a much higher percentage of its total take on it military industrial complex. If they cut it back to the same level as Ireland then that woud help. The problem is the EU wants more money to be spent on defence. Instead of withdrawing its troops from Afghanistan the EU states are sending more, and also the EU Commission is advocating they spend €milions more on airport security. At the moment the US annual spend on its military-industrial complex is €1 trillion while at the same time studies by Elizabeth Warren is showing that the US middle class is becoming impoverished by the neo-liberal economic and militarist policies being pursued for decades by the Clinton/Bush/Obama political elite. The absolutely inevitable massive economic crash (the so called double dip) coming to the US in the near future will make the trouble's in Ireland, Greece etc, look like a teddy bear's picnic. So its buy that gold or end the wars and my choice it to end the wars. I only sell ads, but then I have always thought people who sell ads have a much better idea of what's happening in the real world that most economists. If you really want to help why don't you sent up an Economists Against the war group.

Joseph said...

@Roger Cole - I always thought war was a 'solution' to the neo-liberals (tongue in cheek). I tend to agree with you about the double dip coming to America. It's starting to look 'out of' control over there. At least the new Greek government is making the right noises about getting back in control.

Michael Burke said...


It seems there is the money for guns, but not butter.

Michael Taft said...

Proposition Joe - the gap between the net and gross gap is almost evenly divided between Exchequer cash balances (€20 billion) and NPRF assets (valued at €21 billion of which €7 billion is the bank recap). The Exchequer cash balance has remained nominally the same as at the end of 2008. Last April the NTMA published a strategy of drawing this down starting in 2011 to reduce the cash balance from 12% of GDP to 4% by 2013 - the historical cushion that the NTMA maintained.

Of course, with this much cash on hand - and little question, despite a vigorous campaign claiming otherwise, that we have a strong capacity to borrow (the NTMA borrowed over 20% of GDP last year - incuding long-term bonds)- we could engage in a combination of front-loading some of that drawdown, combined with extra borrowing this year to commence an investment stimulus. This would boost output, create and maintain jobs, raise productivity, increase tax revenue while cutting unemployment expenditure, and do a far better job of fiscal stabilisation in the medium term; we'd be embedding investment, not deficits, into our economic base.

As Roger suggests - make jobs, not war, fiscal or otherwise.

Proposition Joe said...

Thanks for the clarification, Michael.

That €7 billion in bank recap reminds me of the proverbial keys dropped into a river of molten lava (let'em go, because, man, they're gone!)

It may be politically impossible to do so right now, but the stark economic reality is that the €7 billion will have to be written off sooner or later. Subtracting it from our public debt really is in the realm of smoke and daggers.

In fact, the entire NPRF shouldn't be counted as an asset at all, seeing as its really a downpayment on another massive off-sheet debt - the €108 billion (and growing) of public sector pension liabilities.