What Makes Greece Special? (And why the logic applies to India too)..

Daniel Gros shreds the myth around so called Greece recovery. Interestingly, the same lessons apply to India too..

He says despite the easing of crisis in Europe and Greece, the exports of Greece have declined:

The euro crisis seems to be largely over. Risk premiums continue to fall across the board, and two countries – Ireland and Portugal – have already exited their adjustment programs. They can now finance themselves in the market, and their economies seem to have started growing again.

By contrast, Greece is still having problems fulfilling the goals of its adjustment program and is engaged in seemingly endless negotiations over yet another multilateral financing package. The problem can be summed up in one word: exports (or, rather, lack of export growth).

The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus (the fiscal balance minus debt service) in 2013. For the first time in decades, the Greek government has been able to pay for its expenditure with its own revenues.

This is indeed a milestone. But another, much more important news item has received much less attention: Greece exported less in 2013 than in 2012.

He says CAD has become a surplus after being in double digits for number of years. Which is a surprise. However this has not come via rise in exports but compression in imports:

This lackluster performance, which followed years of decline in market shares, is difficult to explain, given that all other countries on the eurozone periphery recorded solid export growth. For example, Portuguese exports increased by about 5-6% per year over the last years, despite challenging external conditions (Spain is its biggest market) and a credit crunch, which made it difficult for exporters to obtain financing.

Neither weak foreign demand nor a lack of financing, therefore, can be the reason for Greece’s poor export performance. Low competitiveness, too, is not an explanation, as real (inflation-adjusted) wage costs have declined by more in Greece in recent years than in any other eurozone country, with the exception of Ireland.

….Greece now has a balanced current account – quite an achievement after double-digit deficits (as a percentage of GDP) a few years ago. But, in contrast to other economies on the eurozone periphery, this improvement was achieved entirely through import compression.

This implies that there cannot be any hope for a sustained recovery unless exports start growing. It is often argued that with less austerity, domestic demand would be stronger. That might be true, but stronger domestic demand would lead to higher imports, which would need to be paid for with higher export revenues, because the country cannot afford to accumulate more foreign debt. No exports, no growth: Greece’s debt sustainability ultimately depends on this key parameter.

What went wrong in Greece was not the fiscal adjustment. On the contrary, austerity was perhaps too successful (and painful). But it was the wrong target. The really important target for any country starting an adjustment program with a double-digit current-account deficit must be export growth. Missing this target is what has set Greece apart.


India’s CAD has also disappeared in quick time too. There has been a lot of talk on so called reforms and restructuring. Moreover, given the depreciation in INR (an option not  available to Greece) exports should have been the reason for shrinking of CAD. This is not the case here too. Exports have increased by $ 18.9 bn in Apr-Dec 2013 and imports have declined by$-20.1 bn. So imports have shrunk more than the rise in exports.. This has compressed the CAD from $70 bn to $31 bn…

Now in Greece’s case exports have actually declined but this is not the case here. But given the depreciation etc. exports should have picked up more in India’s case. So in a way Greece things apply here too..

CAD could have been far higher if the gold imports were not hammered making things more reasonable…one actually does not know the true level of CAD just like the fiscal deficit which always has doses of financial engineering…

India’s policymakers deserve to be awarded for first manufacturing a crisis out of nowhere and then hiding the crisis using all possible ways…

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