The Greek economy is struggling under her austerity programme whilst her government and “rescuers” argue

On Friday came the news that the crown in Tahir square in Cairo was waiting for a the man who had ruled Egypt for 30 odd years finally bowed to the pressure and quit. However it appears that a military autocrat has been replaced by a different military autocrat which makes me wonder how much progress there really has been. The new government has suspended the constitution and closed parliament without any set date for new elections. Disputes at the banks mean that they will not now open until Wednesday and the Stock Exchange will stay shut until then too. Financial markets around the world have taken the news well as for example the Eurofirst 300 which measures share values around Europe rallying both late Friday and this morning. But they were perfectly happy to accept the Mubarak regime also as it provided stability.

Japan’s economy contracts in the fourth quarter of 2010

According to the Japanese Cabinet Office her Gross Domestic Product fell by 1.1% on an annualised basis in the last quarter of 2010. The reasons for the fall were the ending of the Japanese stimulus programme which encouraged car buying and a fall in exports presumably driven by the high exchange rate of the Japanese Yen. This news was not received with the wailing and gnashing of teeth that accompanied the recorded fall in UK GDP because the Japanese has expected a larger fall and because they have signs of growth picking up and are expecting much better figures as 2011 develops.

One feature of the figures was that the measure of inflation from GDP figures which is called the GDP implied deflator fell by 1.6%. Welcome to the world of Japanese disinflation that I have reported on often. Now whilst this was an improvement, as in a lower rate of disinflation from the previous fall of 2.1% it has an interesting corollary. Japanese nominal GDP fell by 2.5% if you add the price fall to the real drop.

Does the fall in Japanese nominal GDP matter?

Yes it does. Not probably today or the immediate future but remember that in gross terms the Japanese state is heavily indebted with a national debt to economic output ratio heading towards 250%. Usually it is considered that rising nominal GDP helps deal with debt issues for a sovereign state as for example some taxes depend on what is spent in nominal and not real terms, and inflation helps by reducing the real value of the debt. Well Japan has exactly the reverse and with an ageing population as we project forward the future looks difficult to say the least. So a rising real debt level is likely to meet an economy with a reduced ability to cope with it.

Also today some news services are giving publicity to the statement from the Japanese Cabinet Office that China has now overtaken Japan as the world’s second largest economy. They have published this without thinking. The news that China has overtaken Japan is in fact regularly reported and there is an element of deja vu here! The reason for the problem is that these numbers are in US dollars so that the exchange rate of the two countries matters. If we look at the Chinese Yuan we see that it is considered to be undervalued versus the dollar to promote Chinese exports and the Japanese Yen partly due to the unwinding of the “carry trade” situation is overvalued. The combination of these two influences means that Japan’s economy is overstated versus China in US dollar terms. Accordingly China passed her some time ago if you apply such logic.

Just to give you an idea of the enigma that is Japan you might think that she would have a government bond market being punished like Greece, Ireland or Portugal. Er,no her ten-year government bond yield is in fact 1.31%. So the recent trend is up as it has been in so many places but from an extraordinarily low base. Welcome to the enigma wrapped in a puzzle that is Japan!

Dissent about the Greek bail out programme between Greece and the troika

On Friday there was something of a development in the relationship between the so-called troika who are supervising the loan package given to Greece. The troika is made up of the European Commission,the European Central Bank and the International Monetary Fund. In general we usually get a statement like this.

Most key policies are being implemented; delays should not take anything away from this achievement,” said Poul Thomsen, from the International Monetary Fund. “The acceleration of structural reforms is needed to keep economic policy on track.”

But this time something of a kicker was added as according to the Greek newspaper Kathimerini we also got.

Greece will pick up privatization its efforts in coming years in a bid to pay down its debt faster, selling a massive 50-billion-euros worth of state assets by 2015, its international lenders said on Friday, adding that the next tranche of aid has been approved………..The money will come from the sale of listed and non-listed state enterprise, the utilization of their assets and the development of real estate.

So by the backdoor we got an admittal from the troika that they know that on the current path Greece is heading for insolvency! This figure for privatisations was much larger than before and is clearly an attempt to get the numbers to balance. Actually it still is not enough. And as the quote from Kathimerini below shows the Greek government does not appear to agree.

“The behavior of the representatives of the European Commission, the International Monetary Fund and the European Central Bank during Friday’s news conference was unacceptable,” said government spokesman Giorgos Petalotis in a statement. “We asked for their help and in return we have kept to the letter in all the pledges we made…….”However, we did not ask anyone to intervene in our country’s domestic affairs. Everyone has to be aware of their role and this is something that we will make clear to our partners.”………….”We are in need but we also have limits,”

As you can see the Greek government did not agree to this plan. The Greek Prime Minister also rang the head of the IMF Dominique Strauss-Khan to complain further. He got an apology and the troika appears to be reining back from its original position. The problem is of course that if you put out a statement that a further 43 billion Euros is required by 2015 (as 7 billion was already planned) you cannot wipe that out with a stroke of an apology’s pen. It may well satisfy the Greek government but their grasp of economic reality is compromised by their often stated claim that Greece can return to borrowing on government bond markets in 2011.

The Greek economy: How is it doing?

When the loan package for Greece was being debated I wrote an article which looked at the way an IMF inspired austerity package had been applied to Latvia. This was published on this blog on the 12th March 2010. The detail of my thoughts is there but in a nutshell an austerity programme of that sort can lead to a spiral downwards. Fiscal contraction led to economic contraction which led to a deterioration in the fiscal numbers and so on. In essence as well as an austerity plan you need a plan for growth to try to avoid such a situation.

I hoped that Greece would avoid this fate but have expressed my fears on other occasions pointing out that 2011 was also likely to be a year of negative economic growth for Greece. As we stand the latest figures from El-Stat show that on a year on year basis Greek economic output or GDP fell by 4.6% in the third quarter of 2010. The Labour Force Survey told us this on Thursday.

Unemployment rate in November 2010 was 13.9% compared to 10.6% in November 2009 and 13.5% in October 2010. The number of employed amounted to 4,307,054 persons while the number of unemployed amounted to 692,577 and the number of inactive to 4,320,927.

So we can see that unemployment is still rising. This in itself will lead to falling employment tax receipts and rising public spending on unemployment benefits as well as leading to suffering amongst those unfortunate enough to lose their jobs. An even more chilling number is the fact that the unemployment rate for 15 to 24 year olds is now 35.6%. Retail sales are also declining with the latest figures for November showing a fall if we exclude petrol sales of 13.6%. This position in terms of retail sales has been true for some time now and represents quite a decline. The numbers use 2005 as a base year and on a scale where 2005 represents 100 the index is now at 82.1.

At the beginning of this month we got an update from the purchasing managers survey for Greek manufacturing which opened as follows.

The Greek manufacturing industry started the new year on an even shakier footing than it ended 2010. The headline Purchasing Managers’ Index sank to a seven-month low of 42.8 (down from 43.1 in December) as contractions in output, employment and input stocks all accelerated.

These numbers use 50 as a baseline so any number below 50 represents a contraction.Just to add to the problems we also got news of a very familiar problem.

Input costs rose steeply since December, and at the most pronounced rate for thirty months.

The input cost rise hits on another problem the fact that Greek consumer price inflation is 5.2%, partly due to the rise in consumption taxes.


As you can see from the figures stated above there are real problems facing Greece under the loan package. If we put ourselves briefly in the shoes of the “troika” it is plain they can see this by the way they suddenly added some 43 billion Euros of privatisations to their numbers. Perhaps they were trying to “bounce” the Greek government to follow such a strategy. If this is so then it speaks volumes for their relationship or rather lack of it!

An increase in privatisations would help Greece for now and might break the cycle of a deteriorating situation requiring ever more austerity. It is a good idea. However it needs to be combined with genuine structural reform of the Greek economy and her government. For example widening the tax base and collecting taxes. However vested interest are strong as these news items show.

There will be no public transport in Athens on Tuesday as unions have decided to hold a 24-hour strike to coincide with Parliament voting on a bill reforming their sector…………..

Lawyers are to remain on strike until Monday, February 21, their unions decided over the weekend despite objections from the Athens and Piraeus associations.Lawyers have decided that on Wednesday they will stage sit-in protests at all of the country’s courts.They are protesting the government’s move to liberalize their profession, which will involve limits to newcomers entering the sector being relaxed and minimum fees being abolished.

Mind you I guess some readers will be thinking that a strike by lawyers may not be all bad!

A Curious Development, a sign of the times?

A UK supermarket has offered a buy one get one free deal for Valentines cards…………………………………?


6 thoughts on “The Greek economy is struggling under her austerity programme whilst her government and “rescuers” argue

  1. While reading your article I couldn’t help but remember that it was overspending that got Greece into this predicament, and that politicians seem to have a baleful affect on economies sooner or later. It doesn’t seem to matter if they are trying to arouse a feel good factor for election purposes or trying to rejuvenate economies under pressure. Maybe it is time for the UK to be really innovative by introducing some system that would remove or dilute considerably the harmful political effect from the nation’s business. I know you have been suggesting for sometime that there should be some sort of electoral process for people who would actually run the economy, though I still can’t see how I am sure there are plenty of bright people who could design such a system.
    Another worrying thing is that more and more politicians seem to making big money when they retire from politics. Is this not ultimately dangerous to a nation in that decisions will be made not in the interests of citizens but of investors – which seems to be happening all over, not only Greece and Ireland.
    So the Greeks are expected to have a fire sale to private people of things now nominally held by the government for the Greek people. Will this happen all over then? The people save banks etc and then have to sell off the silver while the banks prosper, probably by organizing the sale.
    There can be no moral hazard where morality doesn’t exist.

  2. Shaun,
    Your usual high standards, thanks.
    I am very interested to hear your thoughts on the upcoming appointment of the replacement to J.C Trichet as head of the ECB. Mr Weber has declined the position, highlighting his disagreement over the activities of the ECB with specific reference to the ECB’s policy of buying the bonds of Greece and Portugal etc.
    This appointment is highly political and with Germany becoming the underwriter to much of debt of the Club Med countries, will Mrs Merkel find it very difficult to accept the Italian, Mario Draghi, who is presently the favorite for the job?

    • Hi Diemen
      It has been an interesting week or so for the more hawkish central bankers. We had Kevin Warsh resign from the Fed and Alex Weber the head of the Bundesbank is on his way too. For those who do not follow such matters Herr. Weber was the ante-post favourite to become the next President of the ECB. However he was not a fan of the Securities Markets Programme as pointed out in the question. Indeed so hawkish were some of his comments he acquired the nickname Darth Weber in some quarters.

      My thoughts on Herr. Weber are that I wondered if he would go when the SMP began on the tenth of May 2010 and think that he should have done so…

      Moving onto what will happen next I understand that another German economistpolitican has turned down the role of head of the Bundesbank. It would seem they can spot the car crash coming and do not want to be trapped between a German population that is becoming more and more aware of the credit extended in its name and a Euro political leadership who’s only current strategy appears to be to keep using that credit. However it goes it does not now seem likely that a German will be in charge of the ECB just when it is in effect spending their money…..

      I think the politicians will be crowing over this state of affairs as it seems that they have to some extent “captured” the ECB. But as time goes by whoever gets the job of being head of the ECB will face more and more problems. So Draghi would be short-term good for the Eurocrats but I think medium term poor and being a politician Merkel will enjoy the short-term and be surprised by the medium-term. In the initial stages in the horse-trading that goes on she may be able to put other Germans in top jobs in compensation.

      Tucked away in here is one of my themes, central bank independence or rather the lack of.

  3. Hello Shaun,

    Looks like we are approaching the beginning of the end for Greece, where it has become perfectly clear that the country is absolutely insolvent. The brief ‘strike update’ you are quoting says little to those outside Greece about the Herculian tasks us Greeks have to accomplish so as to ‘achieve’ elementary to the whole western civilization everyday things such as going to work by public transport or seeing a doctor when ill!!! I think from now on focus moves from the economic to the political and social front. There is so huge endemic corruption in this society that as the spoilt social classes (public sector, syndicates, closed professions, leftists etc) are feeling the repercussions of the recession it looks like the political system is switching from the ‘dictatorship of the mob’ to the ‘civil war of the privileged’. Concerning the economy i can clearly see a generous debt haircut with consequent banking sector turbulence and intensification of recession. I cant predict any way out of all this for the near future even if things work out well (pretty unlikely) because such a radical reform would be amazing even for North European standards, let alone for a semi-asleep autistic Balkan economy. Regarding social and political developments seems impossible to make any estimation at all.

  4. For each ALBANIAN who changes HIS NAME and HIS NATIONALITY from ALBANIAN to GREEK, the Greek Government pays a pension of 400 Euro for life.
    The total is 2 Billion Euros per year and is increasing.
    There is where Germany Grant GOES …Shame on GREECE, shame on GERMANY.

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