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The mystery of the missing Greek exports

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By Daniel Gros*

The saga continues.  Six years after the Greek government first lost market access and 4 years after the biggest sovereign default ever the Greek economy is still in the doldrums and the Greek government continues to squabble with its creditors about the details of its budget.
Why is Greece different?  All the other countries with ad an adjustment program have by now exited it and see light at the end of the tunnel.


What sets Greece apart is the continuing recession.  Without growth the government will always struggle to achieve even unambitious target, let alone large sustained primary surpluses.  Some argue of course that austerity is the problem: if the government were allowed to spend more income would increase and growth would return.  But this is realistic:  with all the debt it has Greece cannot base its growth on even larger borrowing.  Higher growth can be achieved on a sustainable basis only if the country exports more.
The real problem of Greece is thus not austerity, but the under-performance of Greek exports.


It was clear from the outset of the adjustment program that the economy could return to internal balance only if the huge fiscal adjustment would be offset by an increase in exports.  The challenge was known to be huge: the country had started the adjustment program with a deficit of close to 12 % of GDP.  A deep recession was thus unavoidable.  But the underlying assumption at the start had been that growth in exports would overcome the negative impact of austerity over time.  This is indeed what has happened in the other program countries in the euro area; and indeed in the dozens of adjustment programs the IMF has overseen over the decades.


Given that Greece could not devalue, it is natural that the Troika insisted on harsh wage cuts early on.  It was assumed that exports should boom as wages and costs declined by over 20 % relative to Germany (and most other competitors).   But this did not happen.  Greek exports have continued to be sluggish until today.  This is the real Greek mystery.  If one excludes petroleum products, which Greece does not produce, exports are today not much higher than they were in 2007/8.Non petroleum goods exports have been flat and service exports have slightly declined as a modest gain in tourism was not sufficient to offset a strong fall in shipping services. 


This weak overall performance is disappointing since, one could have expected that exports increase at least 20-30 %, given the huge gain in competitiveness.  Ireland, which is a much more flexible economy achieved even higher growth rates.  And this is the main reason why the country now has the highest growth in the euro area.  But even a country like Portugal, which has a similar income per capita as Greece, was able to increase exports by 30 % since its program started.


The increase in exports was equivalent to about 8 % of GDP in Portugal and could thus offset the direct impact from reducing the fiscal deficit, thus making the recession much shallower and shorter than in Greece.  Portugal is not out of the woods yet, but thanks to its export performance, the country no longer needs a program and the debt has stabilized at a high, but bearable level.  If the performance of Greek exports had been the same as that of Portugal the recession would also have been over, income would be 8-10 % higher; and, with all the expenditure restraint, the budget would actually be in surplus.


The comparison with Portugal is instructive because that country was stagnating even before the crisis, and was widely perceived to have inflexible labour markets.  Greece, by contrast, had grown rapidly during the boom years and one OECD report noted that its structure with mostly very small firms meant that the economy could be flexible even if official regulations were rigid.  A priori one could thus have expected that Greece adjusts better to the crisis than Portugal.


However, the experience since the 2010 has been exactly the opposite:  In Portugal entrepreneurs found new markets abroad when the domestic market collapsed when austerity was implemented.  During the boom years the biggest market for Portugal had been Spain, but this market also sagged at the same time as Portugal needed exports most.  But Portuguese exporters found new markets, for example Angola, which boomed with oil prices high until 2014.


Greek exporters had actually a better starting position because they had the Middle East at their doorsteps which was booming until recently (and is a much bigger market than Angola).  Moreover, wages declined much more in Greece than in Portugal.


The only partial explanation of why Greek firms did not sell more abroad might be that they did not have access to credit. But this lack of credit cannot fully explain the weakness of Greek exports because Portugal also experienced a credit squeeze, but Portuguese banks were able to increase credit to exporting firms because they cut credit to the domestic market.  This did apparently not happen in Greece.  The credit squeeze might also have been much stronger in Greece because the ‘Private Sector Involvement’ of 2012 fatally weakened the Greek banking system.  The one lesson of this episode is thus that a sovereign default is not a free lunch.  It has huge collateral costs by destroying the financial system.  However, the Greek banking system was generously recapitalized more than once.  It should have been able to provide the exporting sector, including tourism, with the minimum of working capital needed for a modest growth in exports.
What remains today is the mystery of the missing Greek exports. Unless this mystery is solved, and exports start growing, the crisis with its squabbles between the country and its creditors might well go on forever.


*Daniel Gros is a German economist. He is the Director of the Centre for European Policy Studies (CEPS), a European think tank


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