Give Hercules some time – a spectacular improvement of the Greek trade balance
from Merijn Knibbe
According to Kash Mansoori deficits on the current account were more important sources of the present crisis in Greece and Spain than government deficits. According to Aaron Tornell and Frank Westermann Greece is not making any progress with improving the indeed ‘whopping’ deficit on its current account. Mansoori is right. And Tornell and Westermann are wrong (as they base themselves on 2009 and 2010). In the first six months of 2011 the trade balance (part of the current account) of Greece has improved dramatically (see graph). This improvement was by far the largest of the entire EU, even in absolute terms. As Greece already had a surplus on the services balance (tourism…) which probably also improved in 2011 this means that the deficit has diminished in a spectacular fashion.
Warning: (hat tip to Jesse Frederik) the improvement came about as the consequence of a rise in exports of 37% and a decline in imports of 20%. As Greece is in a situation of internal devaluation and not of external devaluation this decline in imports does not (repeat: does not) indicate that the Greek have started to buy domestic food or other products instead of imported products as domestic products became cheaper (the textbook external devaluation scenario). Despite the present 3,7% year on year decline in Greek wages, inflation was still about 5% in the first months of the year – i.e. the domestic price level increased vis a vis the German or Dutch or Austrian or Italian one. Price levels need quite some time to adapt, in a case of internal devaluation. The decrease of imports might well have come about as a consequence of the ‘income effect’: Greek people who can’t afford to pay for life saving imported medicines (or Mercedeses) anymore.
Let’s not fool ourselves: even after the improvement the deficit is still very large (the graph only shows the improvement, not the actual deficit/surplus). But the change does indicate that Tornell and Westermann are wrong to plead for even more harshness. Give Hercules some time (to get out of the Euro).