The latest balance of payments (BOP) figures released by the Bank of Greece show a larger deficit than in the Great Recession of 2009
Despite turbulent conditions around the world, the greek economy grew in 2022 at a rate above its average Euro zone.
GDP growth, driven mainly by large increases in public spending, helped the ND government achieve much-desired results, such as reduced unemployment, a (albeit small) primary fiscal surplus, and a reduction in the ratio of nominal public debt/ GDP. .
The increase in inflation contributed significantly to the reduction of the public debt ratio from 208.3% of GDP in 2021 to 173.3%, in nominal terms.
According to available data, following the COVID-19 pandemic, GDP increased dramatically in 2022, exceeding 2019 levels.
“However, this good news did not come… without bloodshed,” reports the Levy Institute.
The latest balance of payments (BOP) figures released by the Bank of Greece show a larger deficit than in the Great Recession of 2009 (Table 1).
The dramatic contractionary impact of the Greek crisis, exacerbated by subsequent austerity policies, had reduced the deficit in the current account of the high levels reached before 2008.
In the following years, the good performance of the tourism sector contributed positively to the reduction of the current account deficit to less than 3,000 million euros in 2019.
Then the impact of COVID-19 turned things around again, with tourism plummeting, with balance of payments receipts falling from €18 billion in 2019 to just €4 billion in 2020.
The end of the restrictions related to the COVID-19 pandemic marked a reset for the tourism industry: although tourism receipts have yet to recover to record 2019 levels, they have come close… amounting to €17.6 billion a year. end of 2022.
“Since our first political contribution to the Greek economy (Papadimitriou et al. 2012), we have pointed out that the multiple challenges it faces lie not in its fiscal profligacy, but in its current account balance and trade deficit, largely caused by due to imbalances in the private sector.
As we have argued many times in our reports, the main source of macroeconomic instability is the deficit position of the private sector as a whole, which means that this sector sells its assets to other sectors, that is, to foreigners.
Simple macroeconomic accounting shows that the excess of private sector saving over investment, which is equal to the increase in net financial assets, is always equal to the sum of the current account and the budget deficit.
Therefore, it is important to identify the determinants of the deterioration of the current account in order to adopt the appropriate policies, taking into account the lack of depreciation capacity of the currency in the context of the euro”, says Levy and continues:
In Figure 2 we show how the trade balance is structured in oil, non-oil goods and services.
As the graph shows, exports of services increased significantly in 2022, by around €7 billion, but the increase in imports was much larger, with a €7 billion increase in net oil imports and a €5 billion increase in net imports of other goods.
The oil problem…
“Part of the problem lies in the dynamics of world oil prices.
In principle, these prices should not affect the net balance of oil, since Greece imports crude oil, refines it and exports the production, reflecting the current price of both sides (imports and exports).
However, our estimates show that the price elasticity of Greek oil imports is low relative to the price elasticity of exports, which means that the increase in world prices did not significantly reduce the quantities imported, but slightly reduced the imports. Greek oil exports.
We cross-check results from similar countries that specialize in refining imported oil that suffered the same impact from the war in Ukraine.
In the euro area, a similar pattern can be detected in the oil trade balances of the Netherlands, Finland and Lithuania.
All three countries have gross imports of crude oil and gross exports of refined oil that are higher than the world average.
These countries experienced a deterioration in the oil balance, and only Finland recovered in the last quarter of 2022,” the Levy economists note.
The evil of… Tourism
Another cause for concern is the dependence of the Greek tourism industry on imported goods.
Levy’s estimates show that a 1% increase in exports of services (tourism) will have an immediate impact on imports of real goods of 0.1% and a long-term impact of around 1.1%.
Given that exports of services (tourism) grew by 9.9% year-on-year in 2022, this explains a not insignificant part of the increase in imports of goods, which strengthened by 11.2% in the same period, given that spending private sector, that is, the sum of household consumption and gross capital formation, grew by only 10.5% in the same period.
By contrast, public spending on goods and services fell by 1.6% between 2021 and 2022.
It would be interesting to get an overview of the financial compensation of the current account deficit.
However, there is still no relevant data for the last quarter of 2022, apart from the financial account of the balance of payments, which shows an increase in new loans to the public abroad in 2022 (4.5 billion euros, compared to 957 million euros in 2022). 2021), part of which is mainly related to Recovery Fund funds, an increase in foreign direct investment, and a lower increase in domestic demand for foreign financial assets.
Data on the external debt position, also published by the Bank of Greece up to the third quarter of 2022, shows that internal loans were transferred to foreign financial institutions, resulting in private debt with Greek banks that resulted in in higher passives (passives) vs. rest around the world.
Conclusion
Clearly, the strong performance of the Greek economy in 2022 has created a major problem due to the deterioration in the country’s current account balance.
Greece is still dependent on loans, on open foreign markets.
Government bonds are not yet investment grade and their financing terms reflect the creditworthiness of the country at the interest rates it pays.
Given the ECB’s monetary policy of trying to curb inflation by raising interest rates, this does not bode well.
Higher interest rates will worsen the current account deficit and the balance of payments.
The first figures show that Tourism will be further strengthened this year (2023), reaching a gross income of 22 billion euros, which, however, indicates an even higher level of imports, therefore more pressure on the current account balance.
In other words, let’s not celebrate that tourists will increase, which will increase imports…
Ultimately, it is up to policymakers to support private sector renewable energy initiatives.
The implementation of policies aimed at tourism-related import substitution, while increasing the country’s net economic benefit from tourism, will simultaneously improve net exports and the country’s current account balance.
Policies aimed at developing renewable energy sources can reduce the country’s dependence on foreign energy and thus further improve its external economic position.
Keep reading here the Levy Institute analysis
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