Wednesday, November 2, 2011

One of the Craziest Myths about the Greek Economy

Economists across the spectrum often point to the fact that Greece has a trade deficit against stronger EU states. The further suggestion is that this is one of the major problems with the economy of Greece.

Business Insider's Joe Weisenthal does a good job of promoting this myth in a post where he writes:

A really depressing aspect of watching the Eurozone crisis unfold is that for all the effort they're putting in, they're not getting at any solution.

The way European leaders see it, it basically goes like this: Greece borrowed way too much money, and if only it had been responsible it would be fine. Italy might have borrowed too much, but maybe it's not too late to save it. And so if Greece can get a haircut, and Italy can reform, then everything is fine.

Unfortunately, this isn't just simplistic, it's wrong.

Europe doesn't just have a debt problem, it has -- as Nouriel Roubini reiterates out in a new paper -- a flow problem. The weaker periphery states run persistent trade deficits with the stronger core countries (Germany, basically). And since the periphery doesn't have the currency devaluation tool, it plugs the GDP gap (remember, a trade deficit subtracts from GDP) using government spending.

Aside from the fact that there is inherently nothing wrong with a trade deficit, why on earth does a country need a "currency devaluation tool" to reverse a deficit? All you need to do is lower prices, wages and rents to sell anything you want, anywhere. It is a complete myth that you need a currency that you can devalue. A currency devaluation does nothing but surreptitiously lower wages and rents via price inflation. The most likely reason Greece has a trade deficit is because onerous Greek business regulations make it difficult for Greek firms to compete in other sectors of the EU, in combination with high minimum wage laws, a welfare support system that results in disincentives to work at low wages and a Greek government borrowing in other parts of the EU to support the welfare support system. So instead of proposing a return to a Greek currency, only for the purpose of destroying it, all that's needed is an economic environment that encourages work and ends the Greek government welfare support system, which is collapsing right in front of our eyes. A move toward a laissez faire system, without a welfare support system, would cause a boom in the Greek economy and would work under the euro or if the Greeks returned to the drachma. None of the crazed inflationist proposals by the economists influencing Weisenthal are necessary, nor desirable.


  1. Ah, if only we could get the meaningless GDP statistic up, all would be well.

    ...which illustrates the dangers of these MMT practitioners. The "innocuous" analysis always ends with absurd and nihilistic recommendations.

  2. If we were importing good that would grow our economy, a trade deficit could be a good thing. In our case, it is not.

  3. This is great. I was having a discussion with one of my coworkers who is from Italy a few hours ago. He made this claim that if Greece left the EU and devalued their currency they could get out of this problem. By the way, this guy has a PHD in economics! So I laughed saying that this "solution" would only cause further damage. When he asked what I thought they should do I told him they should default on their debt, reduce spending and taxes dramatically, get rid of minimum wage laws and unemployment insurance, get rid of government regulations, and allow free market competing currencies or at least a gold standard. Surprisingly, he agreed but said they would never do this. I told him that's why they are going to see how deep the hole really is.

    Your post works perfectly with our earlier discussion. I'm going to show it to him a little later to add a little fire power to my point. Keep up the good work. It is a very useful tool in waking up the masses.

  4. I agree that devaluing ones currency doesn't solve anything, but in fact makes things worse. But I think trade deficits are inherently bad. I would say that the main problem of the PIIGS, uk and America are indeed their trade deficits. The problem with running a trade deficit is that more money leaves the economy than enters and the only way for GDP not to go down is to borrow the difference. This can go on for a while but is ultimately completely unsustainable. So I disagree with Wenzel on that point.