Recent Developments Greek Exports: Weathering the Crisis?

2. Recent trends in the current account and the trade balance

1. Introduction

Almost a decade has passed since January 1st, 2001, when Greece joined the euro and put the times of monetary instability and foreign exchange shortages firmly behind it. Entry into the euro-zone diluted the significance of current account deficits and foreign indebtedness as potential policy constraints, whilst simultaneously depriving domestic policy-makers of the option of using monetary and exchange rate instruments to manipulate the country’s external balances¹. As country-specific foreign exchange risk was eliminated, countries such as Greece – who had been running current account deficits for several decades – gained access into a much wider capital market willing to finance these deficits on much more advantageous terms. Financing constraints loosened and the sense of urgency that usually accompanied announcements of gaping external deficits subsided. Across the EU, the growing economic and financial integration between euro-zone members rendered the measurement of conventional intra-European trade flows increasingly difficult, thus shifting the emphasis of official statistics to the EU trade balance in toto, rather than the trade-positions of individual member-states.

Nevertheless, these developments should not lead one to underestimate the importance of monitoring the current account to assess Greece’s macroeconomic outlook – more so, since the last years have witnessed a considerable widening of this deficit, which now stands almost €35 billion, or 14.4% of GDP². High current account deficits have been a perennial feature of Greece’s economic history, reflecting the low level of national savings and the domestic economy’s inability to respond to the composition and growth rate of domestic and international demand for consumer and investment goods. Post-EMU deficits have been spiralling upwards at unprecedented rates: in the last three years alone, the country’s trade deficit has widened by 24.8%, whilst the overall current account deficit increased by 47.8%. Whilst part of this development can be attributed to the fuel price hikes witnessed over many of the previous years, its principal cause can be traced back to the particular configuration of macroeconomic circumstances that prevailed shortly before, and ever after, Greece’s euro accession. In fact, it is only with the onset of the most recent economic crisis – arguably the deepest recession witnessed in the post-war world economy – that some of these long-terms trends have been reversed.

Greece’s commitment to join the euro generated widespread expectations of faster growth and lower capital costs, which were soon translated into steadily expanding investment and consumption expenditures. Private savings contracted, as expectations of higher future incomes were combined with added liquidity and a sharp drop in real borrowing costs: financial liberalisation, along with a protracted period of record-low interest rates (as domestic rates converged to the euro-zone average) led to an unprecedented expansion in bank credit. This in turn fuelled a sustained demand boom, not only in construction and real-estate (where a substantial portion of loans were channelled), but across the entire economy. Much of this demand-side stimulus came from gross fixed capital formation, where large-scale infrastructure projects and buoyant private investment accounted for almost a quarter of the country’s GDP. This was by far the most encouraging aspect of the boom, inasmuch as it was consistent with the picture of a rapidly growing economy converging to the EU average and drawing on foreign resources to build its capital base.

On other side of the coin, the underperformance of Greek external trade could also be interpreted in terms of a chronic ‘competitiveness deficit’ mirroring the constant misalignment of the country’s exchange rate and the lack of non-price competitiveness. Far from seeking to counteract the boom in credit-driven demand by reigning in public spending, past administrations continued to run budget deficits, thus behaving pro-cyclically and ending up widening the trade deficit. Following three years of mild fiscal consolidation, the government first succeeded in bringing its budget deficit under the 3% threshold stipulated by the Stability and Growth Pact in 2006. Despite commitments to further retrenchment, later budgets were significantly off-target, and deficits climbed back to 3.6% and 5.0% of GDP in 2007 and 2008 respectively. As a result, Greece has once again become subject to the provisions of the Maastricht Treaty’s Excessive Deficit Procedure (from which it had only just graduated in early 2007), and faces the unfolding economic crisis with its capacity for fiscal expansion significantly curtailed. By failing to put public finances in order during the boom years, recent administrations have not only exerted undue pressure on the current account deficit, but are now obliged to seek fiscal retrenchment, at the very same time when the economy seems to be sliding toward its first post recession in 15 years.

Diagram 1.1. Quarterly developments in key GDP components
(year-on-year real growth rates, seasonally adjusted)

Source: National Statistical Service of Greece (NSSG)

2008 was marked by the global financial crisis which hit in October, the first signs of which had become apparent many months earlier; the crisis and the subsequent meltdown of economic activity across the world has overshadowed all other economic developments. In Greece, evidence of a slowdown in economic activity started accumulating late 2007, but became much more apparent in the last quarters of 2008 (see diagram 1.1). Last year closed with a 5.3% drop in investment (compared to 9.6% increase in 2007), itself largely the product of substantial downswings in construction activity and investments in machinery/vehicles, a deceleration of consumption growth to 2.2% (from 3.0% the year before), and an overall slowdown in GDP growth to 2.9% (down from 4.0% in 2007). As the financial crisis spilled over to domestic capital markets, interest rates spiked and credit expansion was brought to a halt, taking its toll on private investment and consumption. By the time policy steps had been taken to ease credit conditions, demand for new credit had also subsided, as household and business expectations deteriorated rapidly. Investment was further curtailed by low profits and collapsing stock market prices, whilst consumption was adversely affected by low consumer confidence and unfavourable adjustments in labour markets (so far primarily cut-backs in overtime and/or working hours, rather than layoffs). Downward pressures thus intensified in the first half of 2009, with gross fixed capital formation shrinking by as much as 16.5% on a yearly basis in the second quarter, and consumption contracting by little less than a percentage point; in fact, the last two quarters have witnessed a contraction in the absolute level of private consumption expenditures for the first time since Greece’s accession to the euro zone. Current forecasts put this year’s GDP growth in negative territory for the first time since 1993, and predict zero growth for 2010.

Greece’s external balance was inevitably affected by these events, though the full impact of the ongoing crisis will manifest itself fully in the course of 2009 and 2010. The main effect of the crisis on the current account stems from the declines in domestic and international demand. The decline in investment and private consumption mark a definite departure from recent trends, and have led to a corresponding deceleration in import absorption rates. At the same time, Greek exports have also shown signs of weakening, as the country’s main export partners feel the effects of the ongoing recession. Overall, however, given the relative size of imports and exports in the Greek trade balance, the net effect on the current account deficit is expected to be positive. On the other hand, the decline in international demand and merchant trade flows will take its toll on the country’s service balance, whose surpluses rely on receipts from tourist and transport services . The global economic downturn has led to a substantial curtailment in world freight volumes and prices, whilst Greece’s tourist receipts have already suffered considerable setbacks from the recession. A further effect of the crisis on the current account will manifest itself through developments in energy markets, where Greece’s traditional dependency on foreign oil imports makes it particularly sensitive to changes in fuel prices. Oil prices dropped substantially in the second half on 2008, but on average they increased compared to their 2007 levels, accounting for most of the concomitant widening of the country’s trade deficit. The substantial drop in energy costs for 2009 however, suggest that the country’s fuel balance is going to improve significantly over the course of this year.

In light of the above, the current account and overall export performance remain crucial aspects of the country’s macroeconomic performance and outlook. In fact, the recent crisis put the precariousness of the country’s post-EMU external balances into much sharper focus: faced with plummeting receipts from tourism and transport services, virtually non-existent foreign direct investment inflows, as well as merchandise exports barely capable of covering a third of the country’s imports, Greece continues to rely on foreign lending and portfolio investment to finance its current account deficits. In doing so, it not only accumulates foreign liabilities that will sap future purchasing power and potentially delay economic recovery, but it also increasingly exposes itself to shocks arising from sudden capital flows and interest rate changes – at a time, in fact, when global financial markets remain far from calm. In this context, improved export performance would not only contribute to economic recovery, but also offer the basis for greater macroeconomic stability in the future.

¹A country’s balance of payments is a record of all trade and financial transactions between domestic and foreign residents. As such, it is by definition always balanced, and thus the concept of disequilibrium and adjustment arises from consideration of particular components, such as the trade balance, the current account etc. As a rule, those transactions between domestic and foreign residents that constitute income transfers are recorded in the current account, whilst financial transactions, i.e. capital movements, are recorded in the capital account. As of 2005, new methodological guidelines require that long-term transfer payments (primarily EU funds flowing in and out of the country) are recorded in a separate account, henceforth referred to as the capital transfers account. These three records, often with the help of the Central Bank, which manages the country’s foreign exchange reserves, cancel each other out and ensure the necessary balance in the country’s foreign transactions.

² Throughout this report, GDP figures used are drawn from the National Statistical Service of Greece and are based on the most recent revisions along Eurostat recommendations and guidelines; these revisions covered the entire 2001-7 period.

2. Recent trends in the current account and the trade balance

Post-war Greece has a long tradition of current account deficits, which are covered by equivalent capital account surpluses. Figuring most prominently amongst the individual components of the balance of payments, the trade deficit currently absorbs almost a fifth of the GDP, though it is partly offset by surpluses in the service and current transfers balance. These countervailing receipts are another long-standing feature of the Greek balance of payments, and stem chiefly from strong surpluses in shipping and tourism. Greek-owned shipping accounts for an estimated 15% of world deadweight tonnage; its total outstanding orders for 2009 amount to 55% of the current fleet size and correspond to roughly 16% of world orders³. It thus comes as no surprise that Greece’s service exports, when expressed in per capita terms, are 7.5 times above the world average, and account for more than 60% of the country’s total exports – a share that is by far the highest one in the OECD⁴. Nevertheless, not only have service exports and transfers (comprising primarily net inflows of EU funds) not been able to keep up with rising imports, but they also constitute a particularly volatile component of foreign balances, which is highly susceptible to external shocks. This was confirmed by the recent economic crisis and its stark implications for tourism and international freight transport (in terms of both prices and volumes). A steadily expanding share of Greece’s goods imports are thus financed through external borrowing, which accounts for the better part of the capital account surpluses recorded. As foreign direct investment (FDI) inflows remain amongst the lowest ones in the OECD, and are largely offset by corresponding outflows from Greek companies toward the Balkans, the current account deficit is primarily financed through the sale of domestic portfolio assets to non-residents (stocks, bonds, etc.). Inevitably, this has led to a marked deterioration in the country’s net international investment position, as the accumulated total of net foreign liabilities has risen from 43.4% of GDP at the beginning of this decade, to 93.8% in late 2007. The recent sharp drop to 75.7% in 2008 is not indicative of any broader structural shift, but stems from the recent stock market crash and its impact on the valuation of non-residents’ stock holdings.

As the steadily expanding debit items on the country’s income balance readily confirm, servicing this debt and paying out dividends to non-residents absorbs an increasing amount of domestic resources. The ongoing crisis has done little to mitigate the problem, not least by placing added strain on the country’s public sector finances and concomitant borrowing requirements. What is more, the rise in financial uncertainty has increased sovereign risk and rendered international investors reluctant to commit funds to countries whose public finances seem particularly precarious. This has been the chief cause underlying the recent spikes in yield spreads between Greek and German public sector bonds. With the majority of its foreign debt in the form of short-term government securities with maturities under two years, Greece is particularly sensitive to such changes in its debt service costs.

Diagram 2.1. Recent developments in the euro exchange rates (January 2007 – August 2009)

(a) Euro-dollar spot exchange rate

(b) Greek and Euro-zone effective exchange rates

Source: Global Financial Database (GFD) and Eurostat

Exchange rate movements remain key in determining trade flows, and recent years have witnessed substantial volatility in major international currencies. Similar to its course in previous years, the euro continued to rise against the dollar in 2007 and the first half of 2008 (see diagram 2.1(a)), as traditional concerns for America’s trade deficit were compounded with the effects of the sub-prime mortgage crisis and the concomitant shift in US monetary policy. However, as fears of financial instability spread to major eurozone economies and original hopes for a much milder European recession were dashed, investor confidence in the euro faltered and the dollar appreciated almost 20% within the span of a few months. This trend was reinforced by generous interest rate cuts by the European Central Bank (ECB)⁵, as well as large-scale liquidations of foreign assets holdings by US institutional investors forced to de-leverage and repatriate capital to cover domestic liabilities. This ‘flight to cash’ also reflected many investors’ desire to convert their holdings into a perceived ‘safe haven’ currency. Thus, by the end of the year, the euro had actually lost 5.1% of its value against the dollar, compared to December 2007. Despite cancelling out part of the decline in dollar-quoted oil prices, this depreciation was a welcome development for European exports, at a time when both domestic and foreign demand was faltering. Following a period of high volatility, however, as of the second quarter of 2009 the euro seems to have resumed it’s upward trend vis-a-vis the dollar, though still lagging far behind its peak value of May 2008. Recent developments in bilateral exchange rates have been fuelled by the first signs of recovery in the euro zone, and thus remain as precarious as those signs themselves; exchange rate volatility is thus likely to persist over the coming quarters.

The euro’s trade-weighted index against a basket of world currencies followed a similar – albeit milder – trend in 2008, alternating between two quarters of appreciation and a subsequent period of declining exchange rates, which offset most of the gains recorded earlier in the years. Diagram 2.1(b) shows that the euro’s nominal effective exchange rate (NEER), as weighed by euro-zone exports, appreciated by a modest 1.56% in 2008. The impact on the Greek rate was very similar – 1.65% for 2008 – with the Greek exchange rate displaying much lower volatility throughout the year. This can be traced back to the fact that a substantial portion of Greece’s exports is directed toward countries within the euro-zone (with which exchange rates remain invariant). Nevertheless, even such seemingly innocuous changes can take their toll on the competitiveness of the country’s exports, when compounded over several years. Unfortunately, this is exactly what has been happening with the euro since 2001, leading to a cumulative appreciation of Greece’s exchange rate vis-a-vis other currencies by 18.7%⁶. Thus far, 2009 has witnessed a mixture of high volatility and further appreciations in key bilateral exchange rates, which have pushed the euro’s nominal effective exchange rate closer to its 2008 peak. Given the ongoing contraction in world-trade, the negative growth rate projected for global output and the strength of the euro, euro-area exports in 2009 are forecast to suffer one of the worst setbacks on record.

Diagram 2.2. The Current Account (€ mil. – provisional data)

Source: Bank of Greece

Diagram 2.2 plots the overall course of the various components of the current account over the last three years, while table 2.1 offers a more detailed picture of the constituent balances. All data are derived from the Bank of Greece and are provisional in nature. As shown by the diagram, the last three years have witnessed an upswing in the size of the country’s trade and current account deficits, which currently stand at 18.1% and 14.4% of the GDP respectively. The principal causes behind this trend are long term, structural ones such as the strong growth in domestic consumption and investment, the decline in private savings, and the country’s inability to respond to the composition and growth in domestic and international demand for goods. Nevertheless, year-to-year variations also reflect idiosyncratic shocks and short-term trends, and the next paragraphs look at developments in the last two years in greater detail.

Table 2.1. Current Account Balance (€ mil. – provisional data)

Source: Bank of Greece

The last two years have witnessed the continued expansion of Greece’s trade deficit, which closed at a staggering €44.0 billion in 2008, increasing by more than €2.5 billion. However, as the Greek economy began to slow down, the rate at which the trade deficit expanded decelerated in comparison to previous years (6.1% in 2008, down from 17.6% in 2007). Only to a small extent does the widening of the trade deficit in 2008 reflect increases in the non-fuel/non-shipping trade deficit. In fact, exports of goods (excluding fuel and shipping) increased by 15.2% in 2008, compared to a much more modest 4.7% in 2007. The additional exports were chiefly absorbed by the country’s trade partners in South-Eastern Europe and the Balkans, whose growth rates in 2008 were still relatively impervious to the global economic turmoil. On the other hand, the substantial contraction in Greek investment, along with the lower growth of domestic private consumption⁷ led to a marked deceleration in the rate of import expansion, which slowed down to 5.8% in 2008 – down from 12.0% a year before. Nevertheless, since Greece’s imports still total more than three times its exports, this modest percentage increase was sufficient to outstrip the rise in exports and lead to a widening of the non-fuel/non-shipping trade deficit by €422 million. Nevertheless, this 1.6% deficit expansion is still a far cry from the 15.7% increase witnessed in 2007.

Most of the increase in the overall trade deficit can be attributed to increased fuel outlays, themselves largely due to oil price developments⁸. Euro-denominated oil prices rallied upwards by as much as 40% in the first seven months of 2008, and then dropped sharply from August till December, leaving end-of-year prices more than 50% below their corresponding levels at the end of 2007 (see diagram 2.3(a)). Nevertheless, average fuel prices in 2008 were 23.4% above their 2007 mean, leading to substantial increases in the value of Greece’s fuel transactions. The country’s current account is particularly susceptible to such price movements, due to Greece’s dependence on imported oil as a principal source of energy: with fuel imports almost four times higher than exports, the 33.9% expansion in payments inevitably led to a widening of the fuel deficit by €2.9 billion, even though exports also rose by 40.1% over the same period.

Diagram 2.3. Recent developments in energy prices and shipping freight indices
(January 2007 – August 2009)

(a) Brent oil price (in euros per barrel)

(b) Shipping freight prices (BDI and BDTI indices)

Source: Global Financial Database (GFD) and Capital Link Shipping

For its part, the 2008 ship deficit shrunk by €807.6 million to about €4.7 billion, as new ship orders were curtailed or even cancelled. The slowdown in world trade has led to a substantial decline in demand for transport services reflected, inter alia, in plummeting shipping freight prices (see diagram 2.3(b)). It thus comes as no surprise that ship imports decelerated by 19.3% (compared to a 55.2% increase the year before); in fact, as past orders continue to be delivered and new purchases remain at a virtual standstill, the contraction in ship transactions is expected to accelerate in the course of 2009⁹.

Interestingly enough, however, the modest increase in Greece’s service balance surplus in 2008 was almost entirely due to expanded receipts from transport services. Despite the collapse in shipping freight prices in late 2008 (see diagram 2.3(b)), net receipts from transport services still grew by 7.7%, or €704 million. In part, this can be attributed to the higher freight prices that prevailed during the first two quarters of the year, as demand for raw material imports from developing economies (notably China) remained strong. Subsequently, however, freight prices dropped sharply in the third and fourth quarters of 2008, not least due to the lower demand for raw materials and oil from developing countries. The full impact of these developments was not felt in the 2008 data, not least since many of the contracts executed in 2008 still incorporated the (higher) prices prevalent at the time of negotiation. On an annual basis, net shipping receipts thus grew by 11.7% in 2008 – down from 24.2% in 2007, but still extremely robust¹⁰.

Greece’s overall service surplus thus expanded by about 3.7% in 2008, reaching almost €17.2 billion and compensating for roughly 39.0% of the deficit in the goods balance. More than half of that surplus was due to net tourist/travel receipts, amounting to about 3.7% of GDP. Tourist receipts grew by a modest 3.0% in 2008 (1.4% in net terms), whereas there was a slight decrease in the number of tourist arrivals, in what is often described as a general shift toward lower-budget tourism, packaged deals and briefer holiday spells. As in the case of merchant shipping, the impact of the global economic downturn on Greek tourist receipts is expected to be much stronger in 2009.

The other major credit item on the current account, the transfers balance, grew by €1.17 billion in 2008. Since this account is dominated by EU transfers and budgetary contributions, the aforementioned development is primarily due to the fact that the 2007 figures had included an unexpected additional contribution to the EU budget, mandated by the higher revised GDP figures for the period 2001-2007. As this was a one off expenditure, transfer payments for 2008 dropped back to trend levels, whilst receipts expanded by 7.3%, thus brining about an improvement in the overall balance by 73.4%.

Last but not least, the country’s income deficit, continued to grow under the burden of rising interest, dividend and profit payments to non-residents, largely brought about by the continued accumulation of foreign liabilities to finance the current account deficit. In 2008, income payments expanded by a further 21.3%, as Greece’s gross external debt reached 149% of its GDP. Note that 60% of that debt belongs to the public sector, whilst the remaining 40% mainly comes from financial institutions and private business.

Table 2.2. First Semester Current Account Balance
(€ mil. – provisional data)

Source: Bank of Greece

More recent data on developments in the first semester of 2009 are presented in table 2.2. A quick glance at this data shows the effects of the worsening economic situation in Greece and the rest of the world. The current account deficit shrunk to €13.8 billion, down by 18.4% compared to the first semester of 2008. This corresponds to a reduction of more than €3.1 billion, primarily reflecting a substantial contraction in the non-fuel/non-shipping trade deficit. This in turn was chiefly driven by a striking 25.4% decrease in Greek imports, whose value has returned to 2004 levels. Non-fuel and non-ship exports, for their part, have also been adversely affected by the downswing, registering a more modest drop by 14.2%. The fuel deficit has also improved, largely because of the steep 38.0% drop in imports, itself the product of lower oil prices and the slowdown in economic activity. As was expected, the decline in ship imports accelerated to -33.6% in the first semester, shrinking the ship deficit by a further €709.3 million. As a result, Greece’s overall trade balance improved by more than €7.4 billion in the first semester of 2008.

This improvement, however, was not translated into an equivalent drop in the current account deficit, as more than half of it was cancelled out by decreases in the services and current transfers surpluses. Greece’s service balance surplus fell by more than €2.0 billion euros in the first semester of 2008, as net receipts from transport services and tourism contracted. Gross transport receipts fell by 28.4%, the effect being largely due to low demand for merchant shipping services and stagnant freight prices. With global trade volumes exhibiting record losses, demand for transport services has remained low. What is more, adverse developments on the demand side have coincided with the delivery of several new vessels that had been ordered during the previous years of economic prosperity and booming freight prices. Despite occasional cancellations and the withdrawal of older vessels, 2009 is expected to witness a further expansion in merchant shipping fleets, as some 300 tankers are added to the existing stock, whilst overall dry tonnage is projected to grow by as much as 9.0%. For their part, non-residents’ travel expenditures in Greece, as well as spending by Greek citizens abroad, fell by 14.7% and 5.4% respectively, leading to an overall contraction in net receipts by €463 million. Whilst the drop in tourist receipts was smaller than what had been originally feared, it remains clear that Greek tourism suffered a substantial blow in 2009.

Last but not least, the income balance remained largely unchanged. Interest and dividend receipts contracted sharply by 15.3%, probably as a result of adverse developments in international stock and capital markets. For their part, interest and dividend payments fell by a much more modest 5.3%, reflecting such conflicting influences as the fall in domestic profit/dividend rates and the rise in public sector debt and debt servicing costs. The latter have been fuelled by heightened concerns for Greece’s precarious fiscal position, leading to refinancing difficulties and rising spreads between Greek and German bond yields. Given current expectations concerning the size of the 2009 budget deficit, the cost of servicing the country’s mounting foreign debt is most likely to increase substantially over the next year, inevitably acting as a partial drag on economic recovery.

³ See Bank of Greece (2009), Report of the Governor of the Bank of Greece, Athens, pp. 148-152.

⁴ The next country on the list is the UK, with some 35% of its exports due to services. Cf. Sygkelakis (2003), World service trade and Greece’s position, Panhellenic Exporters Association, Export Research Centre (ΚΕΕΜ), December. The author also expresses concerns about the country’s growing dependence on traditional forms of service trade and the subsequent delay in the promotion of high-tech service exports.

⁵ Starting October 2008, successive ECB governor meetings have slashed key interest rates by a total of 300 basis points. The ECB’s approach has been somewhat different from that adopted by the Federal Reserve in the face of the financial crisis. Compared to the Fed’s extremely loose monetary policy, the ECB preferred to keep interest rates somewhat higher and intervened selectively to bolster liquidity in the banking system – notably by offering banks unlimited fixed-rate refinancing operations, thus allowing eurozone overnight lending rates to return to levels comparable to those prevailing in the US and UK (see Economist, Jul 2nd 2009, “Hard talk, soft policy”).

⁶ Once more, the corresponding figure for the euro-zone as a whole is much higher (29.7%). Data drawn from the European Commission’s Price and Cost Competitiveness database and are based on trade flows between EU countries and 41 industrialised economies. Note that as late as September 2009, the European Commission had not released data on the first quarter(s) of 2009, thus limiting our ability to assess the trade-weighted magnitude of the more recent euro appreciation.

⁷ In 2008, private consumption (which remains the most important component of Greece’s recent GDP growth) grew by 2.2%, slowing down from 3% a year before. For its part, investment contracted sharply, dropping by 29.1% in housing construction and 9.6% in capital equipment.

⁸ Greek fuel demand is virtually price inelastic, which implies that changes in fuel prices are translated into equi-proportional increases in fuel imports. A recent study has suggested that the full impact on the trade balance is lower, since about 20% of the value of fuel imports are re-exported as fuel by-products – see Export Research Centre (2006), ‘Greece’s trade in oil’, Comments, issue 32, Panhellenic Exporters Association, November.

⁹ Note that contraction in world trade has also taken its toll on other kinds of transport services. According to the International Air Transport Association (IATA), global air cargo traffic was down 23.0% in December 2008 compared with a year earlier, led by a strong decline of 26% per cent in the Asia-Pacific region (cf. the 14.0% decline recorded after the terrorist attacks of September 2001, when most of the world’s aircraft were temporarily grounded).

¹⁰ See Bank of Greece (2009), Report of the Governor of the Bank of Greece, Athens, pp. 148-152.

3. Greek export performance

Despite six consecutive years of growth, Greek exports continue to lag substantially behind imports. Developments after the 2001 euro accession are presented in diagram 3.1, which tracks goods exports (total and non-oil) both in absolute and in relative terms. After a sizable contraction in 2002 (6.6% total and 4.1% for non-oil exports) exports have been growing steadily over the last few years and currently stand at 7.1% of GDP. Unfortunately, according to data drawn from the National Statistical Service of Greece (NSSG), the last two years have witnessed export growth rates below the corresponding import figures, leading to renewed declines in the export/import ratio, which currently stands at an all time low of 28.6%. The recent couple of years register a sharp deceleration in the export growth rates, a phenomenon that is easy to attribute to the global economic downturn and the concomitant deceleration in merchandise trade growth – particularly amongst some of the country’s major trading partners (see below). Volumes of global merchandise export growth fell from 8.5% in 2006 to 6.0% in 2007 and a mediocre 2.0% in 2008; the drop was even larger in the EU-27, where exports came to a virtual standstill in 2008, whilst imports shrunk by 1.0%¹¹. The fourth quarter of 2008 witnessed an unprecedented drop in world trade, which led to the sharpest contraction ever recorded in euro-are exports since 1970, by -6.7%. The shock to exports was unexpected and led to involuntary inventory accumulation and a curtailment of production plans. Subsequent sharp declines in industrial production – from which Greece has hardly been exempt – were largely in response to these developments.

Diagram 3.1. Greek export performance (€ mil.)

Source: National Statistical Service of Greece

Given the continued decline in economic activity and trade, developments for 2009 are expected to be far worse; first quarter data from OECD countries already point to export drops in excess of 6.0% with no sign of a recovery in the immediate future. These findings are largely consistent with the preliminary data available for Greece, which suggest that both imports and exports will contract sharply in the course of the current year. Monthly and quarterly business confidence surveys, which include questions on the current stock of export orders, as well as expectations about future exports, offer a particularly informative source of both up-to-date and forward-looking data on manufacturing goods exports in the EU and individual member-states. Diagram 3.2 plots assessments of current export orders and expectations against time for both the EU27 and Greece, and testifies to the unprecedented scale of the most recent trade slump. Between August 2008 and August 2009, EU27 manufacturing enterprises’ assessment of export orders dropped by a staggering 3.8 standard deviations and currently stands 3.3 standard deviations below its long-term mean. A similar drop was recorded in Greece, where the most recent assessments lie 3.9 standard deviations below their inter-temporal mean. Expectations registered similar drops, their overall magnitude being significantly larger in Greece, where the relevant indicator currently stands more than 3.7 standard deviations below its historical mean, having lost 2.9 standard deviations between the second quarters of 2008 and 2009. Whilst the declines appear to have halted, the level of both order and expectations indicators remains at historical lows, leaving little hope for an export recovery in the immediate future.

Diagram 3.2 Current and expected export orders from manufacturing survey
[Seasonally adjusted data on Greece and the EU27; January 1990 to August 2009]

Source: ECFIN Business Surveys

On a side note, the reader may already have noted the differences between the export figures mentioned above, and the ones used in section 2. The data used in this section are drawn from the National Statistical Service of Greece (NSSG) and are not entirely compatible with the Bank of Greece figures. This discrepancy is principally caused by differences in data collection methods. The Bank of Greece collects data from financial institutions and some major industrial units with substantial external transactions (e.g. refineries). Most of its data thus concerns the disbursement of funds to pay for exports/imports, not the actual delivery of the merchandise; if goods are purchased on credit, or if they are exchanged for other commodities directly, then they are not recorded by the Bank of Greece. For its part, the NSSG collects data on both the value and the quantity of goods traded from two sources: (a) in the case of intra-EU trade, by processing the INTRASTAT forms completed when VAT is paid at the competent local tax authorities, and (b) in the case of extra-EU trade, by processing the special forms filled out when merchandise is cleared through customs offices. Tax evasion issues aside, this is a very time-consuming process, since a large portion of the forms contain errors that lead to their initial rejection. They are then re-submitted and only gradually added to the total as the data is revised, thus causing a discrepancy between provisional and final NSSG trade figures. The generalisation of on-line INTRASTAT form submission in 2003 has substantially reduced the number of errors and has increased the initial data coverage from 70% to an estimated 85%¹². Nevertheless, deviations still emerge between the two data sources, especially in the more recent observation periods. Moreover, the coverage of the two sources is different, since some transactions classified as exports by the Bank of Greece (e.g. ship repairs and supplies, ‘triangular’ transactions etc.) are not included in NSSG data¹³.

Having said that, we should point out that in the case of exports, the mean discrepancy between Bank of Greece and NSSG data over the 2003-2008 period is a mere 0.58% (arithmetic mean of annual percentage deviations). On the other hand, there is good reason to expect NSSG data reliability to decline as we examine more recent time periods. Despite their provisional nature for most recent years, NSSG data offer greater potential for further analysis and are conceptually closer to our notion of export firm activities. In what follows we shall use them to examine the principal markets for Greek exports, both in terms of countries and in terms of major product categories.

Geographical export distribution

The long-run trend in Greek exports over the last 15 years, i.e. after the collapse of the Soviet Union and the liberalisation of Eastern European markets, has been one of increasing penetration in Central and Eastern Europe (CEE), especially the Balkans. This is reflected in the intertemporal rise of their share of Greek export activity, with CEE countries now absorbing roughly a quarter of the country’s exports, as opposed to 14.5% in 1995¹⁴. As one would expect, this trend has been matched by a corresponding decline in the EU-15 share from 60.6% in 1995 to 42.0% in 2001. In fact, the gradual realignment from EU-15 to Eastern-European and Balkan trade partners does not merely reflect the success of Greek export policy in the region; it also reflects the ‘crowding out’ of traditional Greek exports from EU-15 markets, as cheaper imports from new member states become available. The main Balkan countries where Greek products have penetrated local markets are Bulgaria, Romania (both of which are now part of the EU-27), FYR of Macedonia, and Albania, whilst the largest intra-EU-15 export markets for Greek products are those of Germany, Italy, and the United Kingdom. What is more, the post-1995 customs union between the EU and Turkey has contributed to a gradual increase in Greco-Turkish commercial relations; Turkey currently absorbs roughly 3.6% of Greek annual exports and is the 9th largest importer of Greek products.

Focusing our attention on developments over the last five years, as these are captured by the figures contained in table 3.1, we observe seemingly stable shares of exports across country groups. This masks an increase in the export share of new EU members, notably Cyprus, Bulgaria, and Romania, and a corresponding decrease of the export share of Greece’s traditional trade partners amongst the EU-15. Such new member states currently absorb 22.7% of Greece’s exports, up from 16.9% in 2004; at the same time, the export share of the EU-15 has shrunk by 6.1 percentage points. In fact, the acceleration of export growth in 2008 can largely be traced back to increased import absorption from countries such as Romania and Bulgaria, which joined the EU in 2008. Other countries contributing to the increase in Greek exports in 2008 are Russia, FYROM, the Netherlands. On the other hand, 2008 witnessed a reduction in EU-15 imports from Greece (by 4.0%), particularly in such key markets as Spain, the UK, Germany, and France. Greek exports to Albania also decreased, by 16.5%. On the contrary, the share of exports to North America increased to 5.7% of total exports, with exports to the USA rising by 27.9%, probably as a result of the euro’s depreciation against the dollar in the second half of 2008.

Table 3.1. Geographical export distribution

¹ Albania, Croatia, Bosnia-Herzegovina, Serbia - Kosovo, Montenegro, FYROM and Turkey.
² Ukraine, Belarus, Moldova, Russia, Georgia, Armenia, Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, Tajikistan, Kyrgyzstan.
³ USA, Canada, Mexico.
⁴ Morocco, Algeria, Tunisia, Libya, Egypt, Lebanon, Syria, Iraq, Iran, Israel, Jordan, Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, Oman and Yemen.
⁵ Thailand, Indonesia, Singapore, Philippines, South Korea, Taiwan, Hong Kong, Japan, India, China.

Sources: National Statistical Service of Greece, Panhellenic Exporters Association, Export Research Centre (KEEM)

Diagram 3.3 Top 15 export markets in 2008

Source: National Statistical Service of Greece, Panhellenic Exporters Association, Export Research Centre (KEEM)

The most recent geographical export distribution is depicted in diagram 3.3, where emphasis is placed on the largest 15 importers of Greek commodities. These countries account for 71.6% of total exports, a figure suggesting that Greece’s external trade might benefit from an increase in its geographical diversification. A shift in export orientation toward new markets – possibly one directed toward such rapidly growing, major economies as Russia, India or China (where Greek exports remain minimal) – would be particularly forthcoming, not only as it would raise the country’s potential export growth, but also because it would reduce its susceptibility to regional or country-specific shocks. Returning to diagram 3.3 we observe how Italy, Germany, Bulgaria and Cyprus are Greece’s largest export partners in 2008; between themselves, these four markets absorb more than one third of the country’s exports. Developments at the top 15 have been minimal in recent years, with the same countries occupying the top positions in the list since 2005.

Diagram 3.4 Exports to EU accession countries (1990-2008; base year 2000)

Source: National Statistical Service of Greece, Panhellenic Exporters Association, Export Research Centre (KEEM)

Before turning our attention to the product composition of Greek trade, it’s worth pausing for a moment to examine the long-term evolution of exports directed towards the 12 new EU member-states (which now include Romania and Bulgaria). Accession countries may have been ‘crowding Greek exports out’ of traditional EU-15 markets¹⁵, but their strong growth rates and geographical proximity has also contributed to increased export absorption from Greece. Diagram 3.4 compares the value indices of total exports and exports absorbed by the 12 accession countries between 1990 and 2008. For the majority of years covered, the chart indicates that exports to accession countries have been growing faster than overall exports. Thus by 2008, exports to the 12 new member-states have increased almost 11 times from their 1990 value, while overall exports have not even doubled¹⁶. The share of EU accession countries in total Greek exports has thus been increasing, currently standing at 22.7% as opposed to a meagre 3.9% in 1990. 2008 data attribute a total of €3,940.5 million to accession countries, of which 28.0% is directed toward Cyprus, 31.4% toward Bulgaria and 19.6% toward Romania. Bulgaria and Romania have demonstrated some of the fastest import growth rates in the last few years, a development undoubtedly stimulated by their entry into the EU, investment inflows and lower interest rates. A recent paper on the trade effects of EU enlargement finds evidence of trade diversion away from accession countries’ traditional trade partners and toward the EU-15 and predicts that these countries will face import increases in excess of their exports to the EU-15¹⁷. This trend is expected to be particularly strong in countries such as Bulgaria, Latvia, Lithuania and Slovakia, which have been exhibiting serious competitiveness gaps.

Distribution of exports by product category

The current distribution of Greek exports by (single-digit) product category is plotted on diagram 3.5. A considerable portion of the country’s exports traditionally consists of agricultural products, including beverage and tobacco exports (which could also be taken to belong to the manufacturing sector). Thus the Export Research Centre (KEEM) of the Panhellenic Exporters Association noted in December 2002 that Greece was the EU-15 country with the greatest dependence upon agricultural product exports¹⁸. Despite a moderate decline over the last decade, the country’s agricultural export share remains much larger than that of most advanced economies. Some two thirds of these exports are absorbed by EU-15 countries (with which Greece actually has a deficit in the agricultural product balance), whilst there has also been a sizeable increase of agricultural trade directed toward CEE countries. The largest portion of exports in 2008 (61.0%) consisted of manufacturing products, which are said to have grown by 2.9% last year¹⁹. Manufacturing product shares had been increasing almost steadily throughout the entire 1990s, and the Export Research Centre has estimated this increase at 34%, a figure that is unfortunately dwarfed by the corresponding global rate of increase of 94%²⁰. Manufacturing exports towards the EU-15 remain quite low, but a substantial portion of trade has been directed towards Balkan and Easter European countries. Hence one could argue that, broadly speaking, the product distribution of Greek exports has trailed the geographical re-orientation of the country’s trade. For the most part of the 1990s, exports were increasing at low rates, since agricultural product exports were receding and manufactures were on the rise²¹. Inasmuch as this can be interpreted as a shift to more diversified product categories and greater price and revenue stability, this development has been a positive one.

Table 3.2 offers a more detailed picture of developments in individual product categories over the period 2004-2008. The absolute magnitudes, on which the calculated export shares are based, suggest that the export growth recorded in 2008 was mostly due to increases in agricultural product exports, particularly such categories as beverages and tobacco (+15.1%), and food and livestock (+7.0%). Increases in manufacturing product exports, in such categories as machinery and transport equipment (+9.5%), and Industrial products classified by raw material (+5.1%) also contributed to the rise in exports. On the other hand, fuel and miscellaneous exports registered sizeable contractions by 9.5% and 22.6% respectively, while there were also negative developments in exports of animal and plant fats/oils (-6.4%), and chemical and related products (-3.1%). Exports of raw materials decreased only slightly, by 0.5%.

Diagram 3.5 Distribution of exports by product category (2008)

Source: National Statistical Service of Greece, Panhellenic Exporters Association, Export Research Centre (KEEM)

The country’s manufacturing exports principally comprise non-durable consumer goods and semi-processed products, with consumer durables and capital goods occupying a small but expanding share. The overall increase in manufacturing exports through time conceals various internal changes in relative shares. The most characteristic example is the protracted stagnation in clothing and footwear exports (where a large portion of the industry has migrated abroad) as opposed to the particularly dynamic categories of chemical products and machinery and transport equipment. The latter category also includes telecoms equipment and office machinery and computers, both of which have exhibited remarkable growth in recent years. Unfortunately, large growth rates are not hard to attain in the early stages of export growth, whilst some figures are misleading. Thus for instance, part of the impressive performance in the chemical industry is due to the widespread practice of ‘parallel’ pharmaceutical exports from Greece, and many of the vehicle exports refer to the export of used (or sometimes even new) passenger cars to Balkan countries; whilst counting as exports, these activities reflect modest if negligible amounts of domestic valued added.

Having said that, calculations by the Export Research Centre suggest that even after adjusting for parallel exports, the overall manufacturing export growth rate in some product categories remains quite impressive²². Furthermore, a more recent study by the same agency revealed that whereas Greece’s export share in agricultural and labour-intensive manufacturing commodities (e.g. textiles and clothing) has been shrinking, the corresponding share of technology- and skilled-labour-intensive manufacturing exports has been growing rapidly over the past decades²³. Exports of technology-intensive manufactures (including chemicals and pharmaceuticals, electronic equipment etc.) have risen at three times the average speed, accounting for 22.3% of exports in 2005, up from just 5.8% in 1988. Skilled-labour-intensive manufactures (cosmetics, telecoms, vehicles etc.) have followed a similar, though less impressive course. The study’s results were endorsed by the 2007 Bank of Greece Governor’s Report, wherein it was also observed, however, that the share of technology-intensive products remains low in comparison with EU-averages²⁴. In similar vein, in a study conducted on behalf of the Ministry for Development, ICAP examined the technological intensity of OECD manufacturing exports over the last decade, only to find the Greek high- and medium-high export share being consistently the lowest one in the OECD, with 71.0% of the country’s exports belonging to the low and medium-tech classification²⁵. At the same time, the study confirmed that Greece’s high-tech share had exhibited one of the fastest growth rates (8.5% per annum between 1994 and 2003) in the OECD, but attributed the impressive percentage changes to the small initial base values.

Table 3.2. Distribution of exports by product category

Sources: National Statistical Service of Greece, Panhellenic Exporters Association, Export Research Centre (KEEM)

It is thus probably safe to conclude that Greece’s export profile still has a long way to go before it can rival that of other OECD countries in technological intensity. One could of course question the extent to which particular products necessarily bestow sector-specific advantages to the exporting countries, especially technology-related advantages. Surveying a sample of Greek enterprises exporting to Central and Eastern European (CEE) countries, one researcher found that export success stories were usually associated with large-scale companies of substantial experience in international markets. Interestingly enough, the same research did not suggest that the product category played a significant role in distinguishing between successful and unsuccessful export endeavours²⁶. It appears that a solemn commitment to a long-term export strategy, is a much safer avenue towards a sustainable presence in international markets. More than the technological intensity of the product involved, the exporting company’s own strategy as well as the growth potential of the market seem to matter when determining the success of export ventures.

Diagram 3.6 Constant market share analysis of Greek exports (2000-05)

Source: Comtrade database and IMF calculations – IMF (2007: 19)

Another strand of research looks at the evolution of Greece’s export share in world trade, thus seeking to identify the main drivers behind fluctuations in export flows. In an unpublished report²⁷, the Federation of Greek Industries (SEV) looks at the evolution of the country’s exports as a percentage of world trade, only to find that Greece’s share in international markets has remained almost invariant over the last 15 years. Thus, despite its proximity to the import-hungry CEE countries and the rapid export growth of the last few years, Greece’s has not increased its overall presence in international markets²⁸. This conclusion is largely consistent with the findings of the constant market shares (CMS) analysis undertaken by the International Monetary Fund in its 2007 country report²⁹. CMS analysis seeks to decompose trade flows into three effects: world trade effects, i.e. the portion of exports accountable by the overall growth in world trade; market distribution effects, i.e. the effects due to the country’s geographical specialisation in particular markets and commodity composition effects, i.e. effects due to the country’s specialisation in particular industries. Any residuals from these three effects are attributed to changes in overall competitiveness. Focusing on the 2000-05 period, the IMF finds that between 80-90% of the country’s export growth is due to the world trade effect, i.e. that Greece’s exports are mostly responding to changes in the overall volume of international trade (see diagram 3.6). The country’s geographical position and its access to rapidly expanding Balkan markets also leads to a positive market distribution effect, which accounts for about 35-40% of export growth. On the negative side, however, the country’s product specialisation has had a negative impact on exports, leading to a 15% drop in exports. The remaining (negative) residual is attributed to losses in the country’s competitiveness. The IMF report thus confirms that the country’s export performance has been primarily demand-driven, the recent upswings related more to the recovery of the world economy than to any gains in competitiveness – in fact, competitiveness seems to be the country’s Achilles’ heel, and it is to this issue that the last section is devoted.

¹¹See the World Trade Organisation’s World Trade Report 2009, Trade Policy Commitments and Contingency Measures, Geneva, pp. 5-18.

¹²See Bank of Greece (2004), Report of the Governor of the Bank of Greece for 2003, Athens, p.270.

¹³See Bank of Greece (2002), Report of the Governor of the Bank of Greece for 2001, Athens, box IX.1, pp. 238-239.

¹⁴ Maroulis, D.K. and Provopoulos, G.A. (2003), ‘The Balance of Payments in the Drachma and Europe Environment’, Economic Issues, Foundation for Economic and Industrial Research (IOBE), volume 11, September, p.45

¹⁵ See Bank of Greece (2006), Report of the Governor of the Bank of Greece for 2005, Athens, p.326/7.

¹⁶ Bear in mind that since values are expressed in current prices, variations over such a long period of time are obviously also influenced by price inflation. On the other hand, there is no reason to expect that the reliability of export share figures is undermined by this effect.

¹⁷ See Papazoglou C., Pentecost E.J. and Marquez H. (2006), ‘A Gravity Model Forecast of the Potential Trade Effects of EU Enlargement: Lessons from 2004 and Path-dependency in Integration’, World Economy, Vol. 29(8), pp. 1077-1089

¹⁸ Export Research Centre (2002), ‘Agricultural export dependence one of the highest in the world’, Comments, issue 11, Panhellenic Exporters Association, December.

¹⁹ As this is based on provisional data, it is most likely to underestimate the actual growth rate. Either way, the growth rate was above average, so the manufacturing share actually increased in comparison to 2007.

²⁰ Export Research Centre (2003), ‘Manufacturing product exports – unfavourable international comparisons’, Comments, issue 14, Panhellenic Exporters Association, April

²¹ Maroulis, D.K. and Provopoulos, G.A. (2003), ‘The Balance of Payments in the Drachma and Europe Environment’, Economic Issues, Foundation for Economic and Industrial Research (IOBE), volume 11, September, p.46

²² Export Research Centre (2003), ‘The successful export record in new technology fields: chemical products’, Comments, issue 13, Panhellenic Exporters Association, February

²³ Chalikias, I. (2007), Changes in the Composition of Greek Exports between 1988 and 2005, Export Research Centre, Panhellenic Exporters Association, February

²⁴ See Bank of Greece (2007), Report of the Governor of the Bank of Greece for 2006, Athens, p.276.

²⁵ See National Council for Competitiveness and Development (2007), Annual Competitiveness Report 2007, Athens, pp. 233ff. The technological classification used by ICAP differs from that of Chalikias (2007) and is the one introduced by the OECD in 1986 (OECD Science and Technology Indicators, R&D, Innovation and Competitiveness, No. 2, Paris) and revised in 1997. It remains the most widely used industrial classification by technological intensity.

²⁶ Karagianni, S. (2004), ‘Basic Characteristics of the Greek Export Enterprises That Penetrate in the Central and Eastern European Countries (CEECS): An Empirical Investigation’, Journal of Applied Business Research, 20(1), Winter, pp. 99-108.

²⁷ SEV (2007), ‘Greek Exports 1990-2005: Wins and Losses’, unpublished report.

²⁸ The same doesn’t apply to Greece’s export share in services, where the country’s receipts have grown much faster than world averages (SEV 2007).

²⁹ IMF (2007), Greece: Selected Issues, IMF country report 07/27.

4. Competitiveness

Discussions about competitiveness have attracted increasing attention over recent years in Greece, fuelled in part by the ambiguity of the term ‘competitiveness’ itself, which lends itself to various coexisting interpretations as well as ways of measuring and comparing it across sectors and geographical regions. It goes without saying that competitiveness is a multi-faceted concept affected by a wide range of factors, such as the macroeconomic and institutional environment, product and process innovation, the size and composition of investments, the quality of human resources (itself conditioned by education, social capital etc.) and infrastructure, developments in factor costs (influenced by the economy’s structural features, both in labour and capital markets) and factor productivity. The conventional, albeit narrow, definition of competitiveness however, merely refers to relative prices or costs, defined over some relevant group of commodities (tradeable goods) or inputs (manufacturing wages). The conventional approach thus revolves around a country’s real effective exchange rate, its trade-weighted exchange rate, deflated by the appropriate price or cost index, and it is to this aspect of Greece’s competitiveness that we turn first.

Cost and price competitiveness

In April 1998, on the eve of Greece’s admission into the exchange rate mechanism (ERM), the antechamber to full monetary union, the Greek drachma was allowed to devalue by 12%. It was thus hoped that Greece would join the euro at, or near, its ‘equilibrium’ exchange rate and gradually experience a drop in its trade deficit. The success of this strategy was predicated on the country’s ability to first defend this one-off competitiveness gain, and to gradually gain ground through some combination of strong labour productivity growth and wage/price moderation. Unfortunately, whilst labour productivity growth has indeed been higher than the euro-zone average since 1998, productivity gains have not being translated into lower relative prices, not least because the credit-fuelled domestic demand boom has allowed both wages and prices to rise at rates higher than the corresponding EU-averages. This has led to the continuous erosion of the country’s price competitiveness, leading some researchers to argue that Greece’s real exchange rate is currently overvalued by more than 20%³⁰.

Diagram 4.1. Price and cost competitiveness vis-a-vis industrialised countries (1994–2008; quarterly data)

(a) Real effective exchange rates (1998 Q2 = 100)

(b) % changes in relative costs/prices

Source: European Commission (2008), Price and Cost Competitiveness data tables, DG for Economic and Financial Affairs

Diagram 4.1 draws on data from the European Commission’s Price and Cost Competitiveness series, which produces real effective exchange rate estimates based on five different sets of relative price and cost indicators: harmonised inflation, unit labour costs, unit wage cost in manufacturing, GDP deflator prices and the prices of export goods and services. The index presented in our diagram is based on the unweighted mean of all five indicators, and thus captures both aspects of cost and price competitiveness, whilst data are presented for Greece and the EU-27. Both exchange rates and relative prices/costs are calculated vis-a-vis a broad group of 36 industrialised countries³¹. Panel (a) plots the evolution of Greece’s and the EU-27 real effective exchange rates on a quarterly basis since 1994. The index is normalised at 100 for the second quarter of 1998, i.e. when the drachma devalued and entered the exchange rate mechanism (ERM). As is shown by the dotted black line, the effects of the devaluation on the real exchange rate were completely eroded within a year as relative prices/costs rose and the drachma appreciated. The long-term downward trend in real exchange rates for both Greece and the EU-27 in the late 1990s came from the substantial depreciation of the euro (especially against the dollar). The reverse process has been at work as of 2001, with the euro appreciation taking its toll on European competitiveness, at least until the third and fourth quarters of 2008, when the sharp downturn in euro’s nominal effective exchange rate was translated into a 11.6% real depreciation vis-a-vis the EU’s trade partners. Greece’s smaller sensitivity to dollar variations (due to its trade with the US being more limited in comparison to the EU as a whole) accounts for the smaller variance of Greece’s real exchange rate in diagram 4.1(a), as well as the fact that its real exchange rate depreciated by a modest 1.0% in the last two quarters of 2008. In any case, by the end of 2008, the Greek real exchange rate stood 9.2% higher compared to its mean 1998 value, signalling a cumulative loss of competitiveness; the corresponding figure for the EU-27 was 11.1%.

Whereas the data in panel (a) draws on real exchange rates, i.e. combines both exchange rate and relative price/cost movements, panel (b) focuses on relative prices/costs alone. This aims at decomposing the overall evolution of competitiveness into its constituent parts, particularly at distinguishing between effects that are due to exchange rate variations and effects that are due to price/cost changes. The latter is particularly interesting, not least since Greece’s membership in the euro-zone means that a substantial portion of its exports (43.4% in 2008) is directed towards trade partners with whom exchange rates are fixed, and competitiveness is thus solely determined on the basis of relative costs/prices. Diagram 4.1(b) captures the price/cost-dimension of Greece’s competitiveness problem: percentage changes in average relative costs/prices based on all five alternative indicators offered by the European Commission’s data-base for Greece and the EU-27 are plotted against each-other on a quarterly basis and the Hodrick-Prescott filter is used to derive the structural trend. The diagram reveals Greek relative price/cost changes to be systematically higher than the EU-27 average. Of the 59 quarterly changes underlying the chart, Greece’s relative price/cost change has been below the EU-27 average in only 16 cases. What is more, the cumulative effect of these changes has been to lower Greek relative prices/costs vis-a-vis the 36 industrialised countries by a modest 3.6% since the 1998 devaluation; at the same time, the EU-27 as a whole, reduced its relative prices/costs by 13.9%.

Diagram 4.2 Changes in real effective exchange rates in 2008 (36 industrialised countries)

Source: European Commission (2008), Price and Cost Competitiveness data tables, DG for Economic and Financial Affairs

Developments in each country over the last year are presented in diagram 4.2. Greece’s increases in prices/costs for 2008 were higher than those of other countries, leading to a rise in relative prices by 2.3% and relative costs by 2.8% vis-a-vis the industrialised 36. This placed it once again amongst the ‘competitiveness losers’, and ranked it in 21st place – well below the EU27 average and 9 places behind last year’s performance. It is hardly surprising that the lowest places in this ranking come from rapidly developing countries such as Latvia, the Czech Republic, Bulgaria, Poland, Estonia etc., where strong growth is combined with price and cost inflation, whereas developed countries dominate at the top of the ranks. Having said that, let us bear in mind that real effective exchange rates are also influenced by exchange rate variations and cyclical trends in prices/costs. Thus, for instance, depreciations in the pound sterling and the dollar, combined with domestic deflation and cost/wage moderation go a long way toward explaining the substantial competitiveness gains of the US and UK for 2008. A somewhat similar story lies behind the real depreciation seen in Australia and New Zealand, whose currencies depreciated sharply in foreign exchange markets as lucrative ‘carry trade’ transactions were disrupted by the financial crisis. Last but not least, Japan – which had been the greatest competitiveness winner for 2007 – ranked 29th in 2008, as the yen’s perceived role as a ‘safe haven’ attracted investors and led to its substantial appreciation vis-a-vis other currencies.

The above information confirms that Greece’s rapid productivity gains in the last decade have not been translated into lower prices or costs, but have been absorbed in higher wage and non-wage labour costs, if not higher profits as well. This has led to a protracted erosion of the country’s price and cost competitiveness which certainly contributes to the widening of the trade deficit. If this trend is to be reversed in the future – as it inevitably must sooner or later to restore equilibrium in balance of payments – labour productivity must continue to rise steadily, and productivity gains must be allowed to translated into lower unit prices.

Non-price competitiveness

Greece’s negative track record in recent price and cost changes is hardly compensated by the non-price competitiveness of its goods exports. Acknowledging the multi-faceted nature of competitiveness, a series of national and international agencies have been offering comparative data based on a multitude of criteria. The annual publications of the Global Competitiveness Report compiled by the World Economic Forum, as well as the World Competitiveness Yearbook published by the IMD, receive a lot of publicity in recent years. The first report ranked Greece in 67th place (amongst 134 countries) for 2008-9 in terms of its Global Competitiveness Index. This ranking was marginally lower than the one occupied by the country the year before, whilst IMD’s World Competitiveness Yearbook for 2009 placed Greece in the disappointing 52nd place (out of a total of 57 countries), dropping it by as many as 10 places compared to 2008. Despite the usefulness of the information contained in these multi-dimensional surveys, the methodology applied by them is subject to a series of limitations that stem from the choice of sample countries, the reliability and comparability of data, the weighing of individual components etc.

A similar methodology, although not based on the use of questionnaires, is applied by the National Council for Competitiveness and Development (NCCD) in preparation of its Annual Competitiveness Reports. The most recent report, drafted by ICAP, draws on 220 different indicators, covering economic environment, social cohesion, environmental protection, labour markets, infrastructure, entrepreneurship, productivity etc. and compares data for 29 different countries. Although improvements in Greece’s scores were registered in 49.6% of the monitored indicators, the report also found the country’s rank to be consistently low. Focusing on the EU-27 in 2007, the report shows how Greece ranks in the bottom quartile of the distribution in no fewer than 37.7% of the indicators, whereas it features in the top 6 places in just over 9.3% of the indicators.

The above information only adds to the overall impression concerning Greece’s competitiveness deficit, more so if one takes into consideration the importance of entrepreneurship, innovation and technological progress (the production of new and qualitatively superior products) in forging a competitive export sector. In this context, the reduction of relative unit labour costs in manufacturing and elsewhere may be less important than improving product quality and design, or promoting investment. What is more, the essential desideratum may be the reduction of technological, administrative etc. (not labour) costs.

³⁰ IMF (2007), Greece: Selected Issues, IMF country report 07/27, p.11ff. The IMF’s estimates vary between 12.5% and 24.0%, depending on the method used; the figures referred to the nominal exchange rates and fundamentals of early 2006, and should thus be revised upwards.

³¹ These are the EU-27 countries, plus the US, Japan, Mexico, Canada, Switzerland, Norway, Australia, New Zealand and Turkey.

5. Epilogue

Successive analyses of Greece’s external trade over the past few years, including previous versions of the report at hand, had emphasised the precariousness of the country’s balance of payments position, particularly its sensitivity to external disturbances and the inevitable unwinding of the domestic credit-driven boom. It was clear that a state of affairs whereby goods imports amounted to more than 3.2 times the country’s exports could not be sustained indefinitely, and that sooner or later the country would have to bridge the competitiveness deficit and correct its external imbalances. Being a member of the euro zone and the WTO, Greece could hardly resort to such ‘traditional’ remedies as exchange rate devaluations or protectionist measures. Still, there were several adjustment paths available and the challenge for policymakers consisted in minimising the costs of the process, whilst reconciling it with uninterrupted growth and employment. The recent experiences of both Portugal and Spain – where protracted periods of credit-driven expansion and rising asset prices were reversed once credit conditions deteriorated and expectations faltered – served to remind policymakers of the dangers involved in allowing demand booms to undermine competitiveness within a monetary union. Both countries sank into periods of painful competitive disinflation, closing the competitiveness gap through falling (relative) wages and prices – against the background of deep recessions and spiralling unemployment rates. Whilst developments on the Iberian peninsula represent the worst case scenario of external adjustment, Greece would have been well served by attempts to close the competitiveness deficit whilst it was still registering strong growth: combining greater wage moderation with high productivity gains, stimulating competition in goods markets and taking advantage of strong growth to curtail public sector deficits would have undoubtedly improved the country’s competitive position without exacting too high a price from the economy.

Unfortunately, precious time was lost as successive years of strong growth were not combined with much-needed structural reforms or genuine fiscal consolidation. Instead, the demand boom was allowed to erode international competitiveness, as the country amassed enormous foreign liabilities through external borrowing and portfolio investments. The onset of the crisis thus found Greece’s balance of payments over-exposed to short-term capital flows and interest rate hikes, its public finances overstretched, and its domestic growth rates already decelerating.

By now it is almost certain that Greece will enter its first post-1993 recession sometime within the next few months. Whilst recent developments in the balance of payments have been encouraging – inasmuch as they have pointed to a narrowing of the trade deficit – they remain largely cyclical, rather than structural in nature. In this context, exports continue to be an invaluable source of demand, as well as the best means to redressing the country’s external imbalances. Unfortunately, all evidence available at the time this report was drafted, suggests that the next year will be dominated by an unprecedented contraction in European trade, from which Greece is unlikely to be exempt; having missed the opportunities offered by recent years of prosperity, Greece is now forced to weather the storm with little preparation, and with the spectre of competitive disinflation looming much closer ...