After going through various aspects of the Greek economy since the mid-90’s in the previous post (based on a Levy Institute paper), I ‘ll try and look into other factors of the post-Euro period, mainly of the goods foreign trade. First, using AMECO information for the Real Effective Exchange Rate (based on ULC), here’s the relevant REER for Greece and other major Euro economies since 2000:
What is clear is that the Greek REER (relative to the rest of 35 industrial countries) was actually lower than the Euro area aggregate figure and was quite close to the France numbers. Furthermore, Germany embarked on a significant ‘deflationary’ route and managed to keep its 2008 REER 5% lower than 2000. This is even more visible in the case of the REER relative to the rest of the former EU-15:
Greece followed the Euro area figure while Germany managed a 13% devaluation in this case. Looking into the Euro nominal effective exchange rate (again relative to the rest of 35 industrial countries), the evidence suggests that Greek exchange rate appreciation happened only because of nominal factors and was actually much lower than the Euro area, the same as Germany and other major Euro countries:
Given the strong Euro 2% inflation target (which should make the Euro REER the ‘equilibrium’ rate) and the fact that Greece outperformed the Euro REER for extra-Euro trade and was in line with the relevant intra-Euro REER, any loss of competitiveness was mainly due to nominal exchange rate fluctuations and not because of large wage appreciation. This is also evident in OECD minimum wage data which show that, relative to the productivity increase and the 2% inflation target, minimum wage setting was not inflationary, except for 2005 and 2008:
Before turning to actual trade data, it is interesting to take a look at the terms of trade. Any large appreciation will allow a country to improve its trade balance without actually increasing its export volume, while the opposite will require higher volumes (relative to imports) just to stand still:
Greek terms of trade were actually 2.5% worse than 2000, a pattern which emerged since 2003. With the exception of Italy, most countries show small changes which means that any improvement in their trade balances should have come from actual volume (and probably composition) changes.
Since the AMECO database provides goods imports and exports categorized into intra and extra-EU trade it is interesting to examine the relative growth figures. One should keep in mind that during the 2000-2008 period, EU GDP grew by 35.5% while Greek GDP by 72.5% in nominal terms.
Intra-EU Goods Imports and Exports:
Greek Intra-EU imports rose 46% while exports 48%. Greece managed to follow the aggregate EU figure for exports, a number much higher than EU GDP growth, while import growth lagged GDP growth by more than 25%. Just for comparison, both France and Italy achieved much lower growth figures and only countries such as Germany and the Netherlands managed to grow over 50%. Overall, arguing that Greek goods lost ground in the EU seems rather hard.
Extra-EU Goods Imports and Exports:
In the case of Extra-EU trade the patterns are quite different and show that core and periphery countries did not follow the same path. Both Greece and Spain (as well as Italy and Portugal to a lower extent) dramatically increased their imports without managing to compensate through higher exports. France was a low growth outlier while both Germany and the Netherlands recorded much higher export than import growth.
These trends also show up in the following tables from an excellent IMF Euro Area Imbalances study:
Imports from commodity exporters grew strongly (in a large part due to higher oil and other commodity prices) without a corresponding increase in exports. Emerging Asia exports also gained market share but periphery products (except for Portugal) were not in high demand and did not cover the expanded deficits. The strength of Germany is explained by the different goods export composition (an emphasis on capital goods and high quality/strong brand name machinery and pharmaceuticals). In the case of Greece, Emerging Asia and commodity Exporters account for 3.5% GDP higher goods deficit in 2008.
So it seems that the goods balance deficit for Greece was mostly the outcome of Extra-EU trade. Intra-EU deficit went from €15.6bn to €22.6bn while Extra-EU from €7.9bn to €22.5bn or in terms of GDP from 11.6% to 9.7% and from 5.9% to 9.7%. In any country without strong inflows (from services exports and income) to service a goods deficit of 10% GDP the exchange rate would have highly depreciated. In the Greek case, it actually appreciated. Strong inflows from other sources were also not available since the services surplus went from €8.1bn to €14.9bn while net primary income from €0.4 to -€7.6bn thus worsening the overall balance.
The above are more clear in the following graphs of Intra and Extra-EU trade and REER:
The Intra-EU trade deficit (as %GDP) is actually quite stable during the Euro period despite the REER appreciating. On the other hand, the Extra-EU trade deficit more than doubles and basically follows the REER appreciation after 2001. Other factors (probably private credit) seem to play an important role since the deficit growth does not seem to be influenced by the drop in the REER in 1999-2001.
A scatter plot of the REER to EU-15 and the Intra-EU deficit does not produce any meaningful relationship (something which is evident in the Intra-EU trade chart). On the other hand, scatter plots on the REER and NEER with other 35 industrial countries and the Extra-EU deficit display a clear upward slopping relationship:
One could probably blame the Greek authorities and private sector for not targeting the extra-EU tradable sector better. But the clear conclusion is that the Greek goods deficit problem was mainly one of an appreciating currency and large deficits towards the Extra-EU world, not one of loss of competitiveness inside the Euro area. Pushing for demand destruction through internal devaluation while having an overvalued exchange rate sounds like bad advice.
Using BoG data to look at the trade balance excluding fuel and ships leads to an impressive result. The trade deficit was declining between 2000 and 2004 and only increased by 2% GDP between 2004 and 2008, probably driven by the very large credit expansion during that period: