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NYC Urbanomics Part 1: New York City Redevelopment, a template for urban renaissance and commercial boom

—————————————————————————————————-This is the first of a series of posts about the Economics of Urban Centers as depicted by trends in economy and society in one of the most important globally: New York City. In this first post we’ll cover how NYC has emerged over the last decades into a thriving commercial and real estate center, taking distance from a depressed past. We’ll present facts and thoughts on how this transformation was brought about in what may serve as inspiration for others. The analysis will also highlight some of the reasons for which NYC is a prime consumer market for existing and new businesses and products.


According to the 2012 Economist Intelligence Unit, New York City is ranked on top of the competitiveness list of all cities globally.  New York is characterized as an Alpha ++ world center, sharing this highest title only with London. Although not the most populous globally, NYC is considered of immense importance as developments there can have an effect around the world.  Its importance is also demonstrated by ability to attract capital, businesses, talent and visitors. For these reason NYC, is the necessary point of presence for global businesses and brands but can also serve as launching pad for new products and concepts.

Some interesting NYC highlights:

  • NYC’s population is estimated at 8.3 million, spread over its five boroughs (Manhattan, Queens, Brooklyn, Bronx and State Island). It is growing and expected to surpass 9 million by 2020.  The broader NYC metropolitan area, includes parts of Long Island, Connecticut, New Jersey, even Pennsylvania. This area has a total population of 20 million.  Many of them commute to NYC’s center daily where population almost doubles during the workday.  Manhattan is the most densely populated in the US; as illustrated by the many high-rises that keep on spreading there as in the surrounding boroughs.
  • NYC’s GDP stands at $1.4 trn or 11% of the whole US. If taken separately, this could place it in the top 20 countries worldwide, close to Australia.  In the same way NYC’s theoretical GDP per capita is estimated at $57,000 by the Brookings Institute which could place it higher than countries such as Japan, France or Germany.  NYC differs from the rest of the US in terms of demographics, character and economy. For all these factors NYC can be approached as a separate market on its own comparable to those of Belgium or Switzerland.
  • New York boasts some of the most expensive neighborhoods in all America with family incomes exceeding $100,000 for a large part of Manhattan. Other high income areas are located in New Jersey, Long Island and Connecticut Nearly 400,000 millionaires live in New York. Retail space is one of the most expensive in the world. Multimillion apartments are sold to international investors and new residential skyscrapers go up as fast as ever to cater for this demand.

NYC Population and Tourism 1900-2010

  • NYC’s economy has recovered well after the 2007-2008 financial crisis and is being diversified away from overreliance to the financial sector, assisted by tourism as well as investment in real estate, education, new media and technology. Population is increasing driven by internal and international immigration. New York City has evolved from the tumultuous ‘70s of urban decay and population decline to a magnet for tourism and expensive real estate investment.  There are currently 52 million tourists each year steadily growing, contribution $37bn to the economy. Who would imagine that as recent as in the 90’s?

So how did this happen?


Much has been attributed, sort of a cornerstone, to the increase in safety and gentrification. Back in the ’70s-‘80s, NYC was a dangerous place, even in its iconic Times Square, as depicted in this era’s movies.  It’s almost hard to imagine that today, same as it’s hard to envision the tenement era misery.  Much of the crime reduction has been attributed to Mayor Giuliani and his heritage of tough handed policing such as the ambiguous “broken windows” concept.  There were 2,245 murders in 1990 but have fallen by 90% to 240 in 2013.  Other crime statistics have also been in decline. That off course it’s making it safe for people to live there or visit and spend on retail and entertainment. And that in turn is building confidence for real estate and other business investment.

42nd street in 70s and 2010

Urban landscaping

This has to do with architecture and creating communities that promote certain consumer, leisure or business activities. For example, much of the Times Square turnaround has been attributed to the arrival of high profile business offices, starting with advertising firm Conde Nast a move considered odd at that time.  In this context whole neighborhoods have been redeveloped, often changing names to take distance from their past. The process is well documented: first avant-garde artists and youth move in driven by low prices and inspiration from disenchanted surroundings.  NYC being liberal and welcoming assists to that. Soon others flock in for this unique character and to rub shoulders with the famous. Prices start to go up with preexisting residents moving out and eventually the artists themselves.  That’s what happened, with some variations, to SoHo, Village, Tribeca, DUMBO, Lower East Side, Meatpacking.  The trend has been assisted by rezoning policies. During Bloomberg’s administration almost 40% of New York has been rezoned, changing use for large blocks and transforming once industrials sites. Meatpacking or the Brooklyn river side parks are such examples.  Once industrial uses are phased out, new businesses step in to support residential development.

City branding

This we would say involves the development of a city image that promotes a place as a destination. A tool for enhancing NYC’s image and establishing it as a magnet internationally is through arts such as movies, music and fiction. “If you can make it there, you can make it anywhere” the saying goes that has stuck with many, even probably if it’s probably harder to make it in other places.  On the local radio and TV, New York is called “the greatest city in the world”. This might be true under some metrics but it’s quite subjective isn’t it? In any case saying it, is believing it; it sticks.  This image development didn’t happen accidentally either. Filming in NYC has been benefited from a municipal program instigated some 40 years ago (see NYC’s Mayor’s Office of Film, Theatre & Broadcasting (MOFTB)). This has also created many jobs such as film crews, catering and other support not to mention celebrity coverage.

Population increase and Urbanization

As traditional economic thought has it, an economy is growing where population is growing and vice versa. NYC’s population has considerably increased during the last 30 years both from domestic and international immigration.  Apart from the quest for opportunities this is also attributed to an attitude shift among younger generations that now favor urbanization and city centers over suburbs. According to the 2013 Urban Land Institute Survey, 62% of Americans planning to move in the next five years, would prefer to settle in mix-use communities (they offer entertainment, shops, offices).  Indeed in 2011, for the first time, population growth outpaced suburban growth.  As Michael Bloomberg put it in his last speech as Mayor: “It’s clear that the golden age of the suburb is over, and it’s being replaced by a new urban renaissance”.  

Urban trends by generation

The younger generation in particular, called the Millenials (or Generation Y) are the ones favoring urban centers. The Millenials (estimated at 80 million in the US) are more individualistic, challenge status quo, drive less, are more sensitive to civic issues and activism such as ecology. They are more attached to technology and online communities, less committed to employers than previous generations and more interested in work-life balance that allows for free-time.  They not only change city planning but marketing as well.

Technology and startups

Among the most critical parts of NYC’s population increase have been the influx of the young and the brightest.  This has been assisted by high paid jobs in finance and law but more recently from a lively startup scene that is now compared to that of the West Coast.  Silicon Alley in Manhattan or the Brooklyn Navy Yard are such startup and tech hubs. Business sectors are been reinvented. The loss of print media is counterbalanced by the rise in online and social media.  Technology growth is supported by conscious political decisions such as expansion of Columbia’s Engineering School and the development of the Cornell-Technion Graduate School at Roosevelt Island.  Another critical component is availability of financing.  Venture Capital funds invested in the New York City area were valued at $1.2 billion, in the fourth quarter of 2013 according to PWC research. This marked a 49% increase over the same period the year before, surpassing Boston for the first time since 2001. NYC is now only trailing Silicon Valley in this area, the undisputed leaders, that raised $3.2 billion during the same period.

The special character

The saying goes that NYers are a special breed.  May be this is a myth may be not. It’s still an intriguing thought. But who are the NYers? Those born there or the ones that immigrated? The NYers of the tough past? The high net worth investors? The aspiring artists? The young transplants searching for urban thrills? Those searching a break? The yuppies? The old school? Probably all of them.  So it’s probably difficult to pinpoint to a common denominator. NYers seem rude by American standards but then again coexist in a multiethnic, multiracial, multidenominational environment, they are self-consumed but civic, and although liberal they coexist with the highest income inequalities. Manhattan is one of the most densely populated American cities yet over 50% of its residents live alone. (Going Solo: The Extraordinary Rise and Surprising Appeal of Living Alone, 2013, Eric Klinberg). In a way living together in isolation This is not typical for the US and may illustrate differences in character. Back in 1957, a University of Michigan survey showed that 80% of respondents believed that people who preferred being unmarried were “sick,” “immoral,” or “neurotic.”  Something like a Scorcese or Woody Allen movie character or if you subscribe to the notion that media create stereotypes or reflect them popular series like Seinfeld, Girls, Sex and the City, Friends etc.  Back in the 50’s more than 70% of US adults were married something that although changing now still from the norm in NYC.  So what are the implications? No matter what the NY character is allowing for so much variety, freedom of expression but also privacy probably fuelled population growth mainly by singles. It would have been more difficult for families to move in Manhattan let alone afford it.  Living alone doesn’t come cheap even when sharing apartments.  This in turn supports or justifies high real estate prices.

Real Estate boom

NYC real estate prices have soared over time. Median sales price in Manhattan has reached $1,050,000 ($3,500,000 for townhouses) in 2013 according to Trulia and Douglas Elliman more than doubling over the last decade with average price per sq. ft at $1,260. Median rental price reached $3,100 with a vacancy rate of just 2.8%.  Brooklyn has also developed rapidly with prices reaching those of Manhattan especially at the neighborhoods close to it such as Williamsburg and more lately downtown Brooklyn that have attracted a crowd of young professionals, startups and hipsters, a self-contained community. Although the other boroughs have not followed at the same pace there are pockets of interest developing in Long Island City in Queens that has seen spectacular development with high-rises lately.  Proximity to Manhattan also counts in this migration as higher prices there are pushing people further and further. There’s even talk about South Bronx. It’s now called SoBro…

NYC avg price per sq feet 2000-2013

And if you’d think that was it, then wait to see the new wave of megastructures currently under development such as Hudson Yards, 432 Park (89floors, the tallest residential at least building in NYC, penthouse sold for $95m), One57, 30 Park Place (68 floors), 225 West 57th Street (88 floors), 220 Central Park South (41 floors).

Chinese buyers invested $22 bn on real estate between March 2013-2014 up from $12.8 billion the year before according to the National Association of Realtors. It’s something more than simple pied-à-terre; it’s trophy investment. New expensive buildings on 57th with views on Central Park have earned it the name Billionaire’s Belt. The retail sector is booming.  Seventyone fashion stores opened in 2012, one every 5 days and even this metric can hardly illustrate the level of activity. Prime retail rents go for as high as $3,500 per square foot.

We shouldn’t forget mentioning the office space coming in the market with the World Trade Center development. Conde Nast has left Times Square to occupy One World Trade Center and the nearby former World Financial Center is turning into a dining wonder. Development in Hudson Yards and subway expansion coming in line for first time after many years, accommodate coverage over wider areas.

Eventually NYC real estate has developed into a coveted, safe investment. An interesting aspect is that with so much foreign investment a risk of recession for the city is not purely dependent on the US economy. On the other hand a crisis could be just as easily triggered by overseas economic instability. And at the same time problems here will be felt far away.

There’s the other side too

Closing we wouldn’t like to ignore some negative effects from development. Gentrification and tough police practices don’t come without complaints. The financially weaker suffer from housing prices. They have to leave their neighborhoods or pay a higher percentage of salary to rent than in other US cities, pretty much living month to month.  Until the ‘70s in most US metro areas average median homes worth roughly three times median income; in New York now the ratio reaches 6 or 7 and during the housing boom at 10 (How Can We Be So Dense?, Forbes). In NYC the average rent to income ratio is 50% in 2012 while in Miami at 29% (Priciest Cities to Rent, CNBC). Many have to move out, whole communities and lives change. But the social effects are a discussion we won’t cover in this post; we only focused on the business/commercial aspect of the development.

The NYC self-actualized consumer profile

NYC, or at least Manhattan, is pretty much run as a business; companies go there to hire the best, access high returns and promote their global image. Through that they provide income for the city directly as well as through their employees that bear a high living cost for all the amenities offered. Tourists flock in to see the numerous NYC attractions promoted by media while new ones are continuously created (such as the High Line and other parks, new museums etc). Capital flows into high-end real estate, clothing, luxury goods and gourmet food creating many jobs.  But earning these consumer dollars is not straightforward.  Consumer preferences in such upscale markets tend to satisfy not some basic needs but self-actualization or projection of status, , it’s maybe what Veblen called “conspicuous consumption” and Bourdieu “identity statement”.

Marketers have to adopt new techniques to cater for the self-actualized consumer psyche. We will cover the economics and characterizes of the self-actualized consumer in other posts as it applies in doing business in retail, food or other.

Closing: NYC a template for urban redevelopment and economic growth but at what cost?

New York always was a great business center. But during the last couple decades NYC has gone a long distance from the rough ‘70s and ‘80s to evolve into a coveted real estate investment destination and a consumer Mecca. Global brands can’t afford not to be present there and new concepts are tested and spread out globally. This transformation couldn’t have happened accidentally.  Certain policy decisions as well as intelligent urban planning have been critical in promoting the city’s image and in attracting immigration and the type of business activity that can favor growth.  We tried to identify some of these policies in order to provide food for thought for other urban development attempts elsewhere.  Off course there are always positive and negative effects in such situations.  There are complaints for NYC’s loss of character and high cost of living especially for the weakest.

Some may call it a global center, some a business, some playground of the rich or Theme Park for grown ups. A type of Disneyland, a Manhattan-land if one could coin this term, for urban consumers and tourists.  Probably Travis Bickle (the Taxi Driver protagonist) wouldn’t recognize NYC any more; he would have found it very hard to fit in anyway….


By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Effectiveness in the Implementation of European Bailout Plans and the Cultural Perspective; Individualism vs Collectivism in the Greek Case

Much has been said about European periphery’s economic problems and how they led to economic crises and the IMF intervention. Much of the discussion centers on overleverage, lost competitiveness and other macroeconomic figures. This is what one could call technical analysis. On the other side much of the “softer” or at times irresponsibly “casual” analysis gravitates towards cultural traits some of them being well-indented and some not so.

Let’s look at the Greek crisis in particular: The Troika(lenders) are complaining about inefficient public administration, corruption, opportunistic political system and the absence of civic society as manifested through tax evasion and other. On the other side Greeks are complaining about the recovery plan being unrealistic, recessionary, insensitive, flawed. The bailout plan supporters may jump into what’s called in psychology attribution bias error confirming their prejudices while the subjects find painful gratification in self fulfilling prophecies: since we are not up to par why bother trying improve after all? But then again and allow this parenthesis why Greeks or other nationalities perform much better in well structured economic systems such as that the immigrant communities in the US, Australia or Germany prosper? Is it because of the existence of institutional framework in these countries as argued by the work of Daron Acemoglou (Why Nations Fail: The Origins of Power, Prosperity, and Poverty)?

Whatever the cause of the economic malice, the slow implementation or failure of the bailout plans may be attributed to mistakes in analyzing the problem in the first place both from technical but equally importantly from cultural and sociological perspective ie the doctor has to prescribe the right treatment before complaining that the patient didn’t respond, as well as not well managed expectations and communications if that was the case. In this article we will focus on the sociological/cultural perspective. Before proceeding however we have to caution that culture can become an uneasy topic as such discussions may raise concerns over stereotyping. However, cultures do exist and do interfere with life and business decisions same as corporate cultures, a much celebrated principle in management, that has been coined for many company successes or failures. It’s not that new of invention, after all the saying goes: “when in Rome do as the Romans do”.

Culture, when it refers to ethnographic aspects is a rather new addition to management topics mainly gaining attention with the rise of multinational companies. In such environments people from different ethnic backgrounds, often painfully, realize that what’s considered the norm in one culture is not so in another. Stories about egalitarian Americans using first name or hierarchy conscious Asians hesitating to ask questions or challenge a position have been abundant. The result is miscommunication and inefficiencies. Other instances in the context of cross-border M&As, are equally amusing but painfully costly. Once somebody mentioned a story about an investment in Eastern Asia; after closing a deal the Westerner went with signed contract in hand to plan implementation; the local executive laughed took out a bottle of wine and invited to start the real discussion about what’s to be done now that the legal part was out of the way…. In another instance in Eastern Europe Westerners and local investors were planning an investment. The tender called for cash and follow-up investment as part of the consideration. The local partner laughed: “that’s good. We can surely outbid anybody by promising a high follow-up investment”. But this is not possible” replied the buyers, “we can’t afford that”. “Don’t worry, we’ll just promise and never do it….” he replied. Off course the judicial system plays a role in enforcing such documents but sometimes it also seem to be accommodating or follow the traits of the surrounding cultures.

So how could culture play a role in the European economic crisis and the success or failure of the restructuring plans? Let’s analyze the theoretical background to that. To do so we will refer to the work of Max Weber, Geert Hofstede and even Samuel Huntington to name a few. To some extent they have used religion as a paradigm for peoples’ social psyche. In this respect European societies could be distinguished between:

a. Northern Europe that follow Protestantism/Calvinism/Lutheranism that lean towards individualism and embrace free market or regulated capitalism. North American and certain Commonwealth cultures follow these patterns too.
b. South and Eastern Europe that follow Roman Catholicism and Orthodoxy, which are characterized as collectivist in nature and lean towards corporatism.

According to Weber for example the Calvinist teaching calls for hard work as the road to business success while profits should be reinvested rather than spent in frivolous pleasures. The Protestant endorsement of usury, contrary to Roman Catholicism at the early ages might have affected economic development in some extent. Same effects mat be attributed to Orthodoxy’s mysticism and its apprehension towards materialism as also manifested in Greek philosophy’s Stoicism and Epicureanism.

According to Geert Hofstede’s famous Cultural Dimensions Theory (not accidental that was developed within multinational IBM) there are 5 traits upon which cultures can be characterized:

– Power distance (we’d call that in other words “respect towards hierarchies”)
– Individualism (or the “degree of interdependence” within the society)
– Masculinity/Femininity (we’d prefer to call that “materialism vs. spiritualism” )
– Uncertainty avoidance (we’d prefer to call this “adaptability” or “resistance towards change”)
– Long term orientation (pretty much self-explanatory: long term versus short term society focus)

In our case now: Greece is a collectivist culture where although business is conducted in a rather relaxed way, power distance is high and respect is important. In collectivist cultures more important than anything are relationships and accountability towards the person’s immediate social grouping be it immediate family, extended family, locality, ethnic group, company, union etc. Next to relationships, written communications might fade (especially when mandated by an outsider to the group). A Greek minister once even admitted that have not even read the bailout plan. There was no time for that or no purpose considering its supposed inevitability or stakes in hand. Obviously the details could be envisioned negotiable later, even after signing. Actually objections started soon after signing. It’s also well documented that statistics were falsified to achieve EU admission. Pretty much the same as ticking the box on Important Terms and Conditions before downloading a software. Who bothers? On the other hand Northern European cultures are in large individualistic where power distance is also high but relationships are not that important and communication can often be blunt. Written communications are respected and highly valued. There’s also a strong avoidance over uncertainty, which may be exacerbated with current financial problems and extremely high unemployment. These differences as illustrated by different scoring in Hofstede’s parameters are shown in the diagram below for Greece and a group of Northern European individualistic cultures.

Blog Graph Greece and Individualists

But let’s set aside the major manifestations of individualism and collectivism and focus, for the interest of brevity, to the issue of how decisions are taken and communicated in these cultures. For example in our case, what went wrong, at least in the beginning, with the restructuring plan? The EU officials have been frustrated with the low pace and erratic implementation. When shortcomings occur they note with disdain their discontent: the plan has been agreed and signed departures from its wording are not expected. In AngloSaxons societies it’s normal for written agreements to be kept; that’s why negotiations are long. On the other hand in societies such as Greece’s, written agreements are of limited value. These are places where one can hear more often the phrase “that’s how we do things here” or these things are not possible here” versus the expression “that’s the law” that explains actions in individualistic countries.

Blog Graph Greece and Collectivists

In individualistic countries is quite straightforward, even to the not educated, of how they should operate within the society. In collectivist cultures however it’s not always possible to understand how things work if not through upbringing and subconscious. Locals mostly can adjust to that it’s just an outsider that might feel lost. It takes empathy and inquisitiveness to prosper. As one said don’t get distracted with what the law says but what the people really do.

So what’s the conclusion, the moral meaning from this analysis regarding enforcement of the restructuring plan? For Troika: should place more attention to what people think than what say or sign. Monitor implementation. Identify power brokers, decision-makers and involve them. Respect sensitivities, be introspective, try figure out motives and hidden messages and agendas. For Greeks: don’t hope for leniency, for lenders giving up or being intimidated. Not that they don’t have feelings; it’s just that they keep them away from work and don’t let them affect the goal. Be upfront and clear on intentions and concerns. Discuss and argue constructively.

This article has been in the making for quite a while. In the meantime it’s good to see that Troika is pretty much adjusting their approach now monitoring evaluation setting gradual landmarks and acting based on progress. Communications from North has been toned down a bit too, it’s so much of an unnecessary distraction anyway. Greeks have also given up on talking, bluffing and protesting and doing more. But then again most people know what’s right or wrong, large parts of what’s happening in the past was illustration of Mental Exit (something that Hirschman refers to in his famous book Exit, Voice, and Loyalty). Mental or Physical Exit by playing along, evading, immigrating and much of the frustration is also put up for other purposes. Once a football(soccer) player was asked why complaining so vividly to the referee for a decision since there was little chance to change opinion. Well, he said, this decision is lost but I may make him think twice about the next one and even if that doesn’t happen and we loose then I’ll put up a good excuse to the fans in bad refereeing…”.

For sure the story unfolds on this crisis and it’s quite early to jump into conclusions. The purpose of the article is just to contribute towards decision making and action taking from a cultural perspective both in this or other instances.

By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Pete Chatziplis, a finance and management consultant, is the creator of the Transatlantic Business Forum. Drawing on global work-experience he has been part of the Cultural Detective Organization (Intercultural Effectiveness, Increase Productivity-Strengthen Relationships) contributing to the development of a training manual about intercultural understanding.

A European Tale: the debt crisis in other words; Select your ending…

Once upon a time there was a European family… Their life was all happy and mellow and everybody looked up to them. However times changed and they were struck by a terrible crisis. The following story might be true and might be an allegory for something else happening right now in real life… It’s also an unfinished story; you can vote for the outcome right at the end of it. But let’s take it from the start…

Family Background

The mother came from an aristocratic family of intellectuals. You could notice that in her elaborate and polite manners, style and often flamboyant ways. She had rich education in humanities and sciences something evident in her discussions. She was working in fashion, everything that had to do with quality of life but was also very active with civic organizations, charity and arts. She would give grace to whatever she set her eyes on. Then there was the father, a busy, laborious, industrialist; diligent and hard working. It’s not that he didn’t have many intellectuals in his family but he took more pride in discipline, practicality, moderation and self-restraint. He had few words to waste; he often expressed himself without much tact which often got him misunderstood.

It was a rather odd couple some would say but for others it seemed that they complemented each other very well. But it was not always like that. Their families didn’t get along very well in the past. They had many disputes which caused great distraught and pain to them and others. These were tough times, with violence and poverty. However, through much pain they realized it was much better to put all that behind and instead of hating, care about things they shared, cherished and valued. So they concentrated on making their lives better which brought them much happiness and wealth.

As time went by and the wedding grew stronger they also decided to grow their family; so they had kids. It was a happy family they had, full of respect and ideals but little time did they have for each other. The parents were busy and even when they had some time, they wouldn’t seriously care about their kids; they would even find their kids’ mischiefs amusing. The kids were independent-minded though and felt perfectly fine to stay away from their parents’ attention. They were pretty much growing up on their own as the product of circumstances, handouts and serendipity. You see they were receiving a monthly stipend and had nannies and all the care in the world. You could say that they were spoilt.

When they grew up and became adults their parents gave them credit cards. It was supposed to mark their coming of age. Kids could now plan their future; take a loan to study and grow professionally or start a business. Instead kids however rolled down to the easy life. After all they didn’t care much about growing up and making a life for themselves; actually they were not even prepared for doing so.

When parents were asking how they were doing in school or their businesses the kids would say that everything was going well. That was a blatant lie and they were surprised to pull it through; they guessed their parents were probably turning the blind eye. Nonetheless they were afraid that this couldn’t go on for ever and at some point they would get in trouble; but then again it was too difficult to stop. There were so many distractions. There were cars, trips and nice clothes, all easy within their reach; why bother change after all? Dazed from their easy life at times they felt gifted, they felt that they deserved having things coming easy to their way. At other times, when targets seemed tough to accomplish they would feel incompetent and helpless as ambitious targets where out of their reach; after all, their family’s haven was enough.

Crisis breaks out

But nice stories at sometime come to an end. Times changed and the family business was not doing that well anymore. The parents were starting to age and worry about the future and their finances. The world was also changing; it was becoming a more competitive, a less forgiving place. So they started to pay more attention to their family and business. Their kids’ mischiefs were not that amusing anymore. They started to worry more about them and ask questions. It was not long before they realized that things were not going well, but they would postpone taking action. In the end it was a call from the bank telling that credit cards were maxed out and asking for money transfers to cover overdrafts…. It was the last drop in the bucket, they were infuriated…

As a matter of fact the parents assumed that something was not going well, but they were too busy and too distant. . In a way they might even be buying their “silence” for being absent, so that they could go on with their lives undistracted. They didn’t want to face their responsibilities and would blame it to each other or on the kids’ character. On the other hand they knew they just had to bring them to the point of no return to get them on the right track. As somebody said; a crisis is too good of a thing to go wasted. And now it was exactly that time. This situation couldn’t go on for anymore. It was time for everybody to sober up and carry their share of family responsibilities. Yes, the party had to stop one way or the other; but it was not easy.

The kids at the begging denied everything; they tried mislead their parents that everything was still going well. But the parents looked around the home and found expensive clothes and motorbikes and other things that they were hiding that couldn’t be explained. That was not the life they have earned or they could sustain on their own. That was not a life of responsibility that the father was brought up with or wanted for his family.

Parents also asked around and stories started to come out about the ways kids spent their money; they felt embarrassed from what they heard. Everybody thought something seemed wrong with the kids’ way of living, however nobody tried do anything about it; they just looked the other way. The kids would also always have excuses for everything. For example when asked about their expensive cars they would say that they were test drives, or gifts or other funny excuses. In the end the kids started to confess everything.

Stories came out about people giving them loans as they’d assume that their parents would pay for them in the end. A local banker even occasionally reversed some credit card charges or moved them to other ones to erase some debt so that it didn’t hit the credit limit. When they asked him what he was doing he mentioned three letters, showed some lengthy documents and off course asked for a good commission. Kids didn’t understand much but didn’t even bother about it as long as it kept things going.

Not all the kids were the same however. While the younger ones maxed out their credit cards by spending in good life the older ones were a little more responsible but made some bad investments. People started to question everybody anyway. In the end, none of the kids could survive without their parents’ help and now this help was questioned. Even one of their uncles, a bon viveur, with great education and property but extravagant ways fell into disbelief and had to cut down his expenses too. In a way it was him that everybody was worrying about if he’d come to the point of asking for help too. Therefore parents had to sober up everybody, starting from kids. They had to put up a tough face; it was time for action…

Crisis Deliberations

At the beginning kids accepted their fault but said it was impossible to change at once; they asked for more money to give them time. Off course they promised they have learned their lesson and they’d now use their money for good. But they said that before… The parents didn’t buy it.

Then the kids pointed out to some of their friends that when they racked up too much debt they didn’t pay. They argued they were fooled by shop owners and banks; transactions were erroneous, debts were phony; they were simply tricked in. With all this these kids saved face in some way, they said. Even if they managed to walk out of their obligations however little talk was made about these kids been grounded, changed school and losing their club memberships and amenities. These losses would have been unbearable to the European family’s kids. They knew that.

Some of their friends told them that their parents are suppressive and insensitive. They told them they would be better off if they left home, break up with the past life and live ascetically in a communal. All this sounded t romantic, even though they haven’t tried something like that before. Impulsively, a part of them wanted to go this way, but that was merely an impulse.

Then kids thread their parents they’d leave home and family if not having it their way. They didn’t really mean it nor did their parents want them too; however after some initial surprise and frustration parents shrugged their shoulders and told them they were free to go if they’d wish and if they left behind all their goodies. Parents wanted to keep the family together albeit not at any cost, not if the family had no meaning. Kids thought parents were bluffing about sending them away but they couldn’t say for sure; in the end maybe they both were bluffing.

Outside the family, everybody the kids knew, the banker, the nightclub promoter, the shop owners, argued that the parents were unfair for treating their kids this way, for cutting down their stipend and credit cards. They said that this was not a way for kids to grow. Deep inside they were worrying about losing the kids’ business. Some others were saying that kids are incompetent; unable to stand on their own feet. They should be either sent away (and not worry about them) or sustained for ever. It was the parents that have failed in their roles; they were the ones that destroyed the kids and now enjoy torturing them; it was a mockery of a family. Some even remembered the father’s bullying past something left behind but still hurt him to remember.

The father’s family thought kids were useless and that the wedding was a mistake all from the start; a crazy idea, too much of a trouble. The mother, the kids were different people from the father; they were hopeless due to their upbringing. It is probably what you would call in psychology group attribution error. Off course they ignored their positive sides too and the many benefits this wedding brought everybody such as stability and complementary aspects but it was not a good time to bring this up.

An odd aunt that they were not seeing that often and never liked the idea about the marriage, started to throw her poison too. She had good ideas always but never really showed any sincere interest to family issues. You know it’s this kind of aunt that always has an idea about everything but doesn’t do anything about it. She would just love to draw attention on her as in her glory days so that she didn’t feel overshadowed and an odd loner.

The Rehabilitation Plan

After much talking, true to the family’s traditions, the parents came up with a detailed action plan. They said that kids should either leave home and make their living the hard way or stay and embark on a long “rehabilitation process”. They would have to study and at the same time work and contribute to the family’s expenses to the extent they can. They should also pay back their debt. The father was relentless; he said credit was over, they would have to start living within their means. He was strict and absolute while the mother was trying to show some tenderness and flexibility to keep some balance. Parents also hired a strict personal trainer with experience in such “rehabilitations”. They said he had to be tougher with the younger kids so that they motivate the older ones and set a good example for the community around them too.

The kids accepted and to formalize that signed an agreement but without even looking at it. Reality is kids dreaded the rehabilitation idea and they could find a lot of theories to argue on that. But in the end they just wanted to keep on with their ways or if they had to work they would rather work in some office in the family business; but they had no such experience or skills. The parents never worried about equipping them with such skills; or give them jobs in their companies, but that’s another story… In the end kids thought it made sense just to take it easy as parents made enough money for everybody. So they proposed to work in their local club. They ended up however spending most of the time socializing if they would even ever go to work. Kids also said they were taking evening classes but they often skipped and went on partying. In the end they just cared about getting through another day; a vane, meaningless pursuit to others.

So in the end their rehabilitation was failing. They claimed it was due to the plan which was not realistic. They said they were unable to contribute to the family; a self-fulfilling prophecy or what you would probably call in psychology a self-serving bias. The kids thought that parents would be forgiving, fed-up and ignore them so that they could go back to their own busy lives. The single aunt off course said it’s wasted time; the kids were a lost case; will never get in the right truck. But parent were not the sort of giving up. They asked around and found out about their kids’ ways. They were furious about their cheating. They assumed that kids would do what they were asked and signed to do.

The Rehabilitation Plan gets serious…

So the parents said that we’ll have to follow up with what kids were doing every day. At least parents were becoming more involved this time. Issues were to be discussed together and decisions were also taken jointly. They also emphasized to the personal tutor to be extra vigilant. They’d also have to work at a really tough job not like the easy ones they were having up to now. They should start working at a factory. They braced for a long “rehabilitation process”. It was not going to be easy

Story Ending?

Let’s say this story is a metaphor; depicting the European debt crisis. You can try guess parallels between figures here and in the crisis. On the other hand it might just be a simple story on a common family and any resemblance to facts, real persons is purely coincidental:). Let’s also say that this story is stil developing. Taking this in mind feel free to guess potential outcomes (left open as there are so many views on such matters these days..).

So here are some possible endings we could think for this European tale (or add yours):

1st Tale Ending:

Kids kept on failing. The family didn’t pull it together. It broke apart. Kids were sent away from home and:
i. became criminals.
ii. sobered up but never got where they could had they stayed in their family.
iii. they excelled surpassing even their parents’ successes. They probably struck a lottery or came up with a great invention (ok crazy things happen in fairy tales…)

2nd Tale Ending:

Kids and the family stayed together. Kids sobered up and became responsible citizens and successful professionals.

3rd Tale Ending:

Kids and the family stayed together. The kids never really sobered up; they grew up always dependent on their parents but at least they didn’t get into trouble and wrack up debt. They were always dependent on handovers; after all their parents were too possessive to turn over some of their businesses to them. They all just muddled through.

The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.


Entrepreneurism in Greece: causes and problems behind the high numbers

It is often said that Greeks are entrepreneurial. According to OECD, Greece ranks higher among European nations in self-employment; 35.9% of the working population is self-employed, or 28.6% if agricultural employment is excluded. The same pattern is evident in other Southern European economies such as Italy, Portugal and Spain. By contrast the respective US number is only 7.2%.

Some consider the high level of self-employment as a sign of economic vitality; in reality it might well be the opposite. In developed economies, the self-employed represent on average 13% of the workforce while in Africa and South America 37% και 34% respectively. But there’s more to that. Greece and the other PIIGS countries also exhibit a high percentage of very small companies so this is a common pattern. For example, 35.3% of Greeks work in enterprises that employ less than 20 people when the respective number in Germany is 13.0% and in the US 11.1%. Even US high tech computer and research companies that are generally nimble, employ mostly more than 100 people.

As a consequence of fragmentation, Greek companies at least, lack resources to produce innovative, high value added products, take advantage of lower operating costs arising from economies of scale, export in large quantities, grow, hire people and eventually help the country to prosper. But then again that was not probably the idea in the first place. The Greek economy is characterized by a large public sector spanning both state administration and corporations, few big private enterprises and a large number of self-employed. All parties cooperate in harmony in a typical corporatist outlay. This model pretty much worked well, while the economy was mobilized by state funds funneled through public sector payrolls and infrastructure investment towards consumption. In the absence of access to sovereign debt capital markets this model has reached its limitations.

In 2009; a year before the debt crisis and the EU/IMF bailout program was signed, almost half of Greek tax revenues were generated from salaries and pensions. Corporate profits contributed a further 35% while the self-employed, farmers, very small businesses and income earners contributed 17%. In other words although one in three Greeks is self-employed; he/she contributed less than 20% of total tax revenue. In fact 83% of self-employed reported annual revenues below the non-taxable level of Euro 10,500 and paid no taxes. Many suggest that the reason for that is massive tax evasion. It might be; on the other hand that many self-employed truly generate very low revenues. In the absence of better alternatives being self-employed might be a necessity rather an option. It might also be a way for employers to overcome payroll taxes and benefits; employing somebody as independent contractor produced lower overall taxes for both employers and employees.

To increase revenues and cut spending, the Greek government is now pressed to reduce public sector payrolls and increase taxes. No surprise that these plans face severe opposition. As seen by the numbers, public sector workers as well as the self-employed, who are at the core of the Greek corporatist economic system also constitute two large voting blocks; together they form the majority of Greek voters. The government is also considering reintroducing formula-based tax calculation for the self-employed using “objective criteria” as reference. This may as well drive out of business many that indeed generate very low revenues. However it seems the only solution for tax authorities that pretty much have given up on curbing tax evasion. Without trying to find excuses it might not be that easy to keep up with so many self-employed. Imagine if one in three Americans was self-employed or in very small companies; how easy would it have been to administer such an economy?

All these changes will bring, if passed, dramatic changes to the Greek economy and society. Market consolidation might be painful to many small businesses such as independent retailers facing steep competition from large retail chains, but seem as inevitable development judging from experience in developed countries. In this process economic activity should be expanded beyond trade, infrastructure or real estate to industries that will contribute to the reduction of trade deficit. Large companies should be motivated to take advantage of the relatively low, for the European Union, operating costs in Greece and increase production there.

On the other hand this shouldn’t mean the end of Greek entrepreneurism, albeit its transformation to one where innovative, dynamic companies will grow into larger enterprises that will create jobs and exports. In the end, these jobs might be better than some self-employed now have.


Prepared by Pete Chatziplis, CFA, ACCA, MBA.
The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.


Επιχειρηματικότητα στην Ελλαδα: αιτίες και προβλήματα πίσω από τα υψηλά νούμερα

Λέγεται συχνά ότι οι Έλληνες διακρινονται για την επιχειρηματικότητα τους. Υπάρχουν πολλά λαμπρα σχετικα παραδείγματα αναμεσα στις ελληνικες κοινοτήτες ανά τον κόσμο. Πουθενά όμως δεν είναι αυτό πιο εμφανες από ό,τι στην ίδια την Ελλάδα. Σύμφωνα με τον ΟΟΣΑ, η Ελλάδα κατατάσσεται υψηλότερα μεταξύ των ευρωπαϊκών κρατων οσο αφορα στην αυτοαπασχόληση, 35,9% του ενεργού πληθυσμού της Ελλαδας είναι ελευθεροι επαγγελματιες. Εαν εξαιρεθει η γεωργική απασχόληση τοτε το ποσοστο αυτο διαμορφωνεται σε 28,6%. Ανάλογη εικόνα παρουσιάζεται και σε άλλες χώρες της Νότιας Ευρώπης όπως η Ιταλία, η Ισπανία και η Πορτογαλία ότι δηλαδή αποκαλείται σήμερα με το ακρωνύμια PIIGS. Συγκριτικα, το αντίστοιχο ποσοστο στις ΗΠΑ είναι μόλις 7,2%.

Ορισμένοι θεωρούν ότι το υψηλό επίπεδο αυτοαπασχόλησης ένα σημάδι ζωτικότητας της οικονομιας. Στην πραγματικότητα, μπορει να είναι και το αντίθετο. Στις ανεπτυγμένες οικονομίες, οι αυτοαπασχολούμενοι αντιπροσωπεύουν κατά μέσο όρο το 13% του εργατικού δυναμικού, ενώ στην Αφρική και τη Λατινική Αμερική το 37% και 34% αντίστοιχα. Αλλα δεν ειναι μονο αυτο. Η Ελληνικη οικονομια παρουσιάζει επισης υψηλό ποσοστό πολύ μικρών επιχειρήσεων, 35,3% των Ελλήνων εργάζονται σε επιχειρήσεις που απασχολούν λιγότερους από 20 εργαζομένους, όταν το αντίστοιχο ποσοστο στη Γερμανία είναι 13,0% και στις ΗΠΑ 11,1%. Ακόμα και οι Αμερικανικες εταιρείες υψηλής τεχνολογίας, υπολογιστών και έρευνας που είναι γενικά περιορισμενου μεγεθους, απασχολούν ως επί το πλείστον πάνω από 100 άτομα.

Ως συνέπεια του κατακερματισμού, οι Ελληνικές εταιρείες στερουνται των δυνατοτητων παραγωγης καινοτόμων και υψηλής προστιθέμενης αξίας προϊόντων, να εξοικονομησουν λειτουργίκα εξοδα μεσα απο οικονομίες κλίμακας, να εξαγουν σε μεγάλες ποσότητες, να αναπτυχθουν, να δημιουργησουν θεσεις εργασιας και τελικά να βοηθήσουν στην προοδο της χώρας. Ισως ομως και αυτος να μην ήταν ο αρχικος σκοπος της υπαρξης τους. Η ελληνική οικονομία χαρακτηρίζεται από ένα μεγάλο δημόσιο τομέα που καλυπτει τοσο κρατική διοίκηση οσο και εταιρείες, λίγες μεγάλες ιδιωτικές επιχειρήσεις καθώς και μεγάλος αριθμός ελευθερων επαγγελματιων. Όλα τα μέρη συνεργάζονται αρμονικά σε μια τυπική μορφή κορπορατισμού (ή συντεχνιών). Το μοντέλο αυτό λειτούργησε ικανοποιητικά όσο η οικονομία τροφοδοτούνταν από κρατικά κεφάλαια τα οποία διοχετεύονταν μέσω του δημόσιου τομέα σε υποδομές και κατανάλωση, αλλά έχει εξαντλήσει πλέον τα όριά τους δεδομένης της έλλειψη πρόσβασης του κράτους στις κεφαλαιαγορές.

Το 2009, ενα χρόνο πριν από την κρίση του χρέους και την υπαγωγη στο πρόγραμμα διάσωσης της ΕΕ/ΔΝΤ, σχεδόν το ήμισυ των ελληνικών φορολογικών εσόδων προήλθαν από μισθούς και συντάξεις. Οι επιχειρησεις συνέβαλαν ένα επιπλέον 35%, ενώ ελευθεροι επαγγελματιες, αγρότες, εμποροβιοτεχνες και εισοδήματιες συνεισφεραν το 17%. Με άλλα λόγια, παρόλο που ένας στους τρεις Έλληνες είναι ελευθερος επαγγελματιας, συνείσφερε λιγότερο από το 20% των συνολικών φορολογικών εσόδων. Στην πραγματικότητα, το 83% των ελευθερων επαγγελματιών δηλωσε ετήσια έσοδα κάτω από το αφορολογητο οριο των 10.500 Ευρώ και συνεπως δεν κατέβαλε φόρους. Πολλοί θεωρουν την εκτεταμενη φοροδιαφυγή ως την κυρια αιτια γι ‘αυτό. Αν και κατι τετοιο μπορει και να ευσταθει, από την άλλη πλευρά μπορεί και οντως πολλοί ελευθεροι επαγγελματιες να διαθετουν πολύ χαμηλά εισοδήματα. Ο λογος που ειναι αυτοαπασχολούμενοι μπορει να οφειλεται σε ελλειψη καλυτερων επιλογων.

Η Ελληνική Κυβέρνηση προκειμένου να αυξησει τα έσοδα της και να μειώσει τις δαπάνες σχεδιαζει να μειώσει τα εξοδα μισθοδοσιας στο δημόσιο και να αυξησει τους φόρους. Οπως ειναι αναμενο, αυτα τα μετρα αντιμετωπιζουν σφοδρες αντιδρασεις. Συμφωνα με τα στατιστικα δεδομενα, οι εργαζόμενοι του δημόσιου τομέα, καθώς και οι ελευθεροι επαγγελματιες οι οποίοι βρίσκονται στην καρδιά του Ελληνικού κορπορατικού μοντέλου, αποτελούν δύο μεγάλα κομματια της ελληνικης κοινωνιας και συνολικα αντιπροσωπευουν την πλειοψηφία των Ελλήνων ψηφοφόρων. Η κυβέρνηση εξετάζει επίσης την επαναφορά του υπολογισμου των φορων των ελευθερων επαγγελματιων με βαση “αντικειμενικά κριτήρια”. Αυτό μπορεί να οδηγησει πολλους επαγγελματιες που πράγματι εχουν πολύ χαμηλά έσοδα, να μην μπορουν να συνεχισουν την δραστηριοτητα τους. Ωστόσο, αυτο το μετρο φαίνεται ως η μόνη λύση για τις φορολογικές αρχές που υστερουν στην προσπαθεια καταστολής της φοροδιαφυγής. Βεβαια, χωρίς να προσπαθει να βρει κανεις δικαιολογίες ισως και να είναι οντως δύσκολο να παρακολουθουνται τόσοι πολλοι ελευθεροι επαγγελματιες. Φανταστείτε εάν ένας στους τρεις Αμερικανούς ήταν ελευθερος επαγγελματιας, πόσο εύκολο θα ήταν να ελεγχθει μια μια τέτοια κατασταση;

Όλες αυτές οι αλλαγές, εάν πραγματοποιηθουν, θα επιφερουν δραματικές αλλαγές στην ελληνική οικονομία και κοινωνία. Ο εξορθολιγισμος της αγορας μπορεί να είναι επώδυνος για πολλές μικρές επιχειρήσεις όπως τα μικρα καταστηματα που αντιμετωπίζουν σφοδρο ανταγωνισμό από μεγάλες αλυσίδες λιανικού εμπορίου, αλλά φαίνεται ως αναπόφευκτη εξέλιξη αν κρίνουμε από την εμπειρια στις ανεπτυγμενες χώρες. Σε αυτή τη διαδικασία εκσυγχρονισμου της οικονομιας θα πρέπει ομως να ενταθει η δραστηριοτητα πέρα από το εμπόριο, τις κατασκευες και τα ακινήτα σε τομεις που μπορουν να συντεινουν στην μειωση του εμπορικου ελλειματος. Θα πρεπει να δοθουν κινητρα σε μεγάλες εταιρείες να επωφεληθούν από το σχετικα χαμηλο για την Ευρωπαικη Ενωση λειτουργικο κοστος στην Ελλαδα και να αυξησουν την παραγωγή τους εκεί.

Από την άλλη πλευρά αυτό δεν πρέπει να σημάνει το τέλος της ελληνικής επιχειρηματικότητας, αλλα την διοχετευση της στην δημιουργια καινοτόμων, δυναμικων μικρων επιχειρήσεων που θα εκελιχθουν σε μεγάλες επιχειρήσεις που θα δημιουργούν θέσεις εργασίας και εξαγωγές. Τελικα, αυτές οι θέσεις εργασίας μπορει και να είναι καλύτερες από αυτες που κάποιοι ελευθεροι επαγγελματιες έχουν σημερα.


Συντάχθηκε από: Παναγιώτη Χατζηπλή, CFA, ACCA, MBA.
Οι απόψεις που εκφράζονται στο ιστολόγιο αυτό δεν απηχούν υποχρεωτικά τις απόψεις του Transatlantic Business Forum.


The Greek crisis: hidden interests and a case study in the making

The Greek bailout is a heated topic of discussion over the last two years. There are those in favor and those against. Those that believe that Greece should go bankrupt and those that support a rescue plan. There are economists, politicians and businesspeople with differing objectives and audiences preaching their views with passion. It’s very difficult to be informed and follow all aspects of the topic. Although Greece is in the epicenter of the discussion there are further repercussions from the action taken there.

We won’t cover the issues that led to the Greek problem here. We will only attempt to highlight some reasons behind the wide coverage that the Greek issue receives. This extensive interest might sound strange considering the rather small size of Greece’s debt and economy relative to the European Union. It’s also unexpected to see some newly developed support towards Greece. Some in Greece might be delighted with that; however this support shouldn’t be necessarily taken at face value. There may be certain hidden motives behind that. The following list is not inclusive but attempts to highlight some of them:

• Eurosceptics: Not everybody is in favor of strengthening the decision making process and powers of the European Union. Problems emanating from Greece and other economies if escalated can cast some doubts upon EU’s ability to handle such issues, at least under its current form. Some might even go as far as recommend writing-off the debt as a sign of leniency towards Greeks but do not expand on the repercussion if other EU countries or even countries outside the EU will likewise ask for the same treatment. Probably this act would be detrimental to the EU’s finances. Talk is cheap for the supporters of these views; they probably hold no position in the Greek debt or may even have invested on its default. On the other hand tax payers in Northern Europe that are critical of Greece’s economy are also going to foot the bill in the end. Some in Greece and elsewhere believe that this generosity is due to fear that a Greek default would create havoc; on the other hand these fears might be overplayed. They also point out to a potential “sell-off” of Greek assets; although these assets and their management where not able to avert the crisis up to now. In any case the criticism lays the finger on well known problems of the Greek economy that have made many Greeks suffer up to now; it’s probably the way it’s expressed that annoys; but then again all criticisms are annoying.

• Corporatists and power brokers: by this we refer to the corporatist nature of the Greek economy. Under the current model the economy was energized by state funds that were funneled through public sector payrolls and infrastructure investment to consumption, while some leaked away to the undercover economy. In any case the public sector, professional groups and small businesses worked in tandem through an interwoven grid of common interests. This model has reached its limitation due to the lack of access to sovereign debt markets. Change for many will not be easy; hence the unrest.

• Speculators: there’s a lot of money to be made in foreign exchange, sovereign debt and stock markets globally. In the aftermath of the 2008-09 crisis massive amounts of capital moved to macro funds that since then are doing pretty well. Each time that the Greek issue looks like heading to a deadlock then doubts over the Euro’s long term viability are granted and speculation can run rampant. A lot of money can be made in this trade. Capital markets can act more quickly than political systems in taking advantage of market panic or optimism. Don’t forget the fortunes made with the sterling’s exit from the ECU in 1992.

• Bigots: there are people within the European Union and elsewhere that would prefer Greece and other countries outside the European Union. Mistrust, even reservation between Europe’s south and the north exists; these feelings in some people can be magnified in difficult times. In this context many have found the opportunity to support Greece’s exit from the Euro, even the EU claiming that this will be to its benefit, it will better suit it’s economy. No discussion off course on whether this would solve Greece’s problems in the medium to long term.

• Economic debate: it won’t be surprising to see in future textbooks Greece feature as a case study on economic policy. The theoretical debate in developed but aging economies is whether to sustain the high cost of living and social welfare by increasing taxes and national debt or curb entitlements. This is an ongoing discussion in the US and elsewhere. Apart from the opinion that prevails in the end; the Greek case may not be the most suitable example for this discussion. For example the massive Greek public sector, low tax revenue base and labor productivity is not comparable to that of other western economies. What might work in one environment might be tragic in Greece and vice versa. However, the theoretical debate and prejudices complicate action taking on the ground.

As said this list is not inclusive. There’s more in to come as history is made.

The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

The Greek economy’s Competitiveness: Myths, Reality and Prospects

The sovereign debt crisis brought Greece to the spotlight of world news, albeit in a rather undeserving way. As the country struggles to meet the requirements of its IMF/EU bailout plan but as well to grow out of a recession, attention is finally starting to draw to the core of the Greek economy’s problem: competitiveness, or lack thereof.

Looking back at the time that Greece joined the European Union its GDP stood at 65% of the European average; infrastructure, production capabilities and exports were not that great either. Over the years the Greek economy had to converge to the European average. But how could this happen? It seems that Greece’s and European Union’s plan, either intentional or not was to achieve that through public spending either by raising debt or EU subsidies that eventually trickled down to consumption and real estate. State spending accounts for 50% of the Greek economy and without elaborating further here, much of it as well as of EU subsidies, has been consumed in unproductive ways. This shouldn’t have to be this way, but unfortunately it is. What are the results? An overburdened state budget and a marginalized private sector.

Salary levels and productivity: the facts

The EU with the recently proposed Competitiveness Pact, later renamed to Euro plus Pact, is aiming at raising weak European economies’ competitiveness by taking aim at their wages levels. It’s true that salaries in Greece have increased considerably over the last years, however when compared to European ones are already much lower. Therefore, contrary to simplifications and prejudices, this is not the cause of the problem, at least not the only one. In fact it may as well be its solution.

On the other hand equally important for competitiveness, is what’s produced with this labor cost. Looking at labor productivity we can see that Greeks work more hours than their Northern European counterparts, mainly due to shorter paid leave. At the same time however they produce much less in terms of output value, as indicated by GDP per hour worked. The simplified explanation is that they are not efficient or hard working; the actual one mainly lies with the type of production. The Greek economy is characterized by services and agriculture while Northern Europe’s by high value added/export oriented technological products. In simple words, there’s just as much olive oil one can produce, on the other hand car manufacturing output will always worth more. Ηowever low salaries αρε, Greece would still not be able to grow and converge to EU averages. A vicious cycle..

So what’s the solution?

Greek R&D expenditure accounts for 0.6% of GDP compared to 1.9% for the EU average and a 3% target. In 2000, there were 0.4 patents per 1,000 residents in Greece while the EU average is 2.3. Technology and Computing firms accounted for 6.7% and 2.2% of the Greek economy respectively compared to 19.6% and 7.7% for the EU average. The above figures highlight the backwardation of the Greek economy (Source:
Bust: Greece, the Euro and the Sovereign Debt Crisis, Matthew Lynn, Bloomberg Press, Wiley, 2011). Greeks don’t lack ingenuity as it’s proven by their record around the world; so this situation can change. Successful R&D however requires research infrastructures, sizeable pools of competent R&D personnel, venture capitals and well functioning regulations.

To enable the Greek economy’s transformation to a high value added, robustly growing economy, a well thought long term plan is needed as well as input from prominent investors. If we agree in that then the next question would be which industries to invest in. In our opinion it’s of paramount importance to focus on specific sectors and establish strong local champions that will create exports and jobs, directly and indirectly. Since Greece lacks heavy industry it would be realistic, at least in the medium term, to invest in less capital intensive industries such as software, niche technologies and services while further capitalize on transportation and tourism. Even outsourcing could be an option; Ireland has followed this path. Green technology is another option that can as well offer the additional benefit of reducing oil imports.

Greece, already offers a low cost European base and is currently under a long term overhaul administered by the IMF/EU. Well targeted investment can offer significant benefits to investors and the economy. It will also create employment for scientists and professional and avert another bailout.

Prepared by Pete Chatziplis, CFA, ACCA, MBA. Originally published at the Cosmopolis Greek American Magazine in June 2011.

The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.————–

Aνταγωνιστικότητα της ελληνικής οικονομίας: Μύθοι, Πραγματικότητα και Προοπτικές
Η κρίση του χρέους έφερε την Ελλάδα στο επίκεντρο των παγκοσμίων ειδήσεων, αν και οχι με τον καλυτερο τρόπο. Καθώς η χώρα αγωνίζεται να ικανοποιήσει τις απαιτήσεις του σχέδιου διάσωσης των ΔΝΤ/ΕΕ, αλλά και να εξελθει απο την υφεση, η προσοχή αρχίζει επιτέλους να στρεφεται στον πυρήνα του προβλήματος: της ελληνικής οικονομίας: το κατα ποσο δηλαδη ειναι ανταγωνιστικη.

Οταν η Ελλάδα προσχώρησε στην Ευρωπαϊκή Ένωση το ΑΕΠ της ανερχοταν στο 65% του ευρωπαϊκού μέσου όρου. Υποδομές, παραγωγικη δυναμικοτητα και εξαγωγες δεν ήταν ιδιαιτερα ισχυρες. Τα επομενα χρόνια η ελληνική οικονομία επρεπε να συγκλίνει προς τον ευρωπαϊκό μέσο όρο. Αλλά πώς θα μπορούσε να συμβεί αυτό; Φαίνεται ότι ο τροπος που επιλεχθηκε τοσο απο την Ελλάδα οσο και την ΕΕ, συνειδητα η οχι, ηταν μέσω δημοσίων δαπανών, είτε αυτες προερχονταν απο την αύξηση του εθνικου χρέους ειτε απο κοινοτικές επιδοτήσεις, οι οποιες κατεληξαν στην καταναλωση και την στεγαστικη αγορα. Οι δημοσιες δαπανες αναλογουν στο 50% της ελληνικής οικονομίας. Χωρίς να επεκταθουμε περαιτερω εδω, ένα μεγάλο μέρος αυτων καθώς και των ευρωπαϊκών επιδοτήσεων, ειναι αρκετα αποδεκτο οτι έχει αναλωθεί σε μη παραγωγικες χρησεις. Δεν θα επρέπε αναγκαστικα να ισχυει κατι τετοιο, αλλά δυστυχώς ισχυει. Ποια είναι τα αποτελέσματα; Ένας υπερβαρος κρατικος τομεας και ενας περιθωριοποιημένος ιδιωτικος.

Μισθοι και της παραγωγικότητα: η πραγματικη εικονα
Η ΕΕ με το πρόσφατα προταθεν Συμφώνο της Ανταγωνιστικότητας, το οποιο αργότερα μετονομάστηκε σε Σύμφωνο για το Ευρώ, στοχεύει στην αύξηση της ανταγωνιστικότητας των αδύναμων ευρωπαϊκών οικονομιών, επικεντρωνοντας κυριως στα επίπεδα των μισθών τους. Είναι αλήθεια ότι οι μισθοί στην Ελλάδα έχουν αυξηθεί σημαντικά τα τελευταία χρόνια, ωστόσο ειναι χαμηλότεροι σε σύγκριση με πολλους ευρωπαϊκους. Ως εκ τούτου, αποφευγωντας απλουστεύσεις και προκαταλήψεις, οι μισθοι δεν είναι η αιτία του προβλήματος, τουλάχιστον όχι μόνο αυτη. Στην πραγματικότητα, μπορεί επίσης να είναι και η λύση του.

Εξίσου σημαντική για την ανταγωνιστηκοτητα, είναι και το τι παραγεται με αυτο το εργατικο κοστος. Αν αναλυσουμε την παραγωγικότητα της εργασίας μπορούμε να δούμε ότι οι Έλληνες δουλευουν περισσότερες ώρες από τους Βόρειοευρωπαίους, κυρίως λόγω της μικρότερης άδειας που παιρνουν. Την ίδια στιγμή όμως παράγουν πολύ λιγότερη αξια, όπως προκύπτει από το μεγεθος του ΑΕΠ ανά ώρα εργασίας. Η ευκολη εξηγηση ειναι οτι δεν ειναι αποτελεσματικοι η εργατικοι, αλλα η αιτια βρισκεται κυριως στο παραγωμενο προιον. Η ελληνική οικονομία χαρακτηρίζεται από τις υπηρεσίες και τη γεωργία ενώ της Βόρειας Ευρώπης απο τα υψηλής προστιθέμενης αξίας και εξαγωγικού προσανατολισμού τεχνολογικα προϊόντα. Mε απλα λογια οσο ελαιολαδο και να παραχθει αυτο δεν μπορει να ειναι πιο προσοδοφορο απο την παραγωγη αυτοκινητων. Οσο χαμηλοί και να γινουν οι μισθοί, η Ελλάδα θα εξακολουθει να μην είναι σε θέση να αναπτυχθει και να συγκλίνει με τους Ευρωπαϊκους μέσους όρους. Ένας φαύλος κύκλος ..

Ποια είναι η λύση λοιπον;
Η δαπανη για ερευνα στην Ελλαδα αντιπροσωπευει το 0,6% του ΑΕΠ έναντι 1,9% για το μέσο όρο της ΕΕ και το στόχο του 3%. Το 2000 αναλογουσαν 0,4 διπλώματα ευρεσιτεχνίας ανά 1.000 κατοίκους στην Ελλάδα, ενώ ο μέσος όρος της ΕΕ είναι 2,3. Τεχνολογικες επιχειρήσεις και επιχειρησεις πληροφορικής αντιπροσώπευαν το 6,7% και 2,2% της ελληνικής οικονομίας αντιστοίχως, σε σύγκριση με 19,6% και 7,7% για τον μεσο ορο της Ευρωπαϊκή Ένωση. Τα παραπάνω στοιχεία υπογραμμίζουν την καθυστερηση της ελληνικής οικονομίας. Οι Έλληνες δεν υστερουν σε εφευρετικότητα όπως αποδεικνυεται από τις επιδοσεις τους σε ολον τον κόσμο. Συνεπως αυτή η κατάσταση μπορεί να αλλάξει. Για να αποδωσει η ερευνητικη δραστηριοτητα ομως απαιτουνται ερευνητικες υποδομές, σημαντικος αριθμος ικανου ερευνητικου προσωπικού, χρηματοδοτικα κεφαλαια (venture capital) και ορθο θεσμικο πλαισιο. Η ερευνα δεν μπορει να αποδώσει απο μονη της.

Για να μπορέσει η ελληνική οικονομία να μετασχηματισθει σε μια δυναμικά αναπτυσσόμενη οικονομια υψηλής προστιθέμενης αξίας, χρειαζεται ένα καλά μελετημένο μακροπρόθεσμο σχέδιο και ιδεες απο σημαντικους επενδυτες. Αν συμφωνούμε σε αυτό, τοτε το επόμενο ερώτημα πρεπει είναι σε ποιους τομείς θα πρεπει να κατευθυνθουν οι επενδύσεις. Κατά τη γνώμη μας, θα είναι πολυ σημαντικο να επικεντρωθεί η επενδυτικη δραστηριοτητα στη δημιουργια μεγαλων επιχειρησεων που θα δημιουργήσουν εξαγωγές και θέσεις απασχόλησης, τοσο άμεσα οσο και έμμεσα. Δεδομένου ότι η Ελλάδα δεν διαθέτει σημαντικη βαριά βιομηχανία, θα ήταν ρεαλιστικό, τουλάχιστον μεσοπρόθεσμα, να επενδυσει σε τομεις χαμηλης εντασεως κεφαλαιου, όπως η πληροφορικη, ορισμενες εξειδικευμενες εφαρμογες υψηλης τεχνολογιας και φυσικα να αξιοποίησει περαιτερω τις δυνατοτητες που υπαρχουν σε μεταφορες και τουρισμο. Ακόμη και η αναληψη δραστηριοτητων απο αλλες εταιριες (outsourcing) θα μπορούσε να είναι μια επιλογή. Η Ιρλανδία έχει ακολουθήσει αυτό την πρακτικη. Οι εναλλακτικες μορφες ενεργειας είναι μια άλλη επιλογή που μπορεί επίσης να προσφέρουν το πρόσθετο οφελος της μείωσης των εισαγωγών πετρελαίου.

H Ελλάδα, προσφερει μια χαμηλου κόστους παραγωγικη βαση στην ευρωπαϊκή και βρισκεται υπο αναδιάρθρωση υπο την επιβλεψη του ΔΝΤ και της ΕΕ. Καλα στοχευμένες επενδύσεις μπορούν να προσφέρουν σημαντικά οφέλη για τους επενδυτές και την οικονομία. Θα δημιουργήσει επίσης απασχόληση επιστημόνων και επαγγελματιών και να αποτρέψει μια αλλη οικονομικη κριση.


Συντάχθηκε από: Παναγιώτη Χατζηπλή, CFA, ACCA, MBA. Αρχικά δημοσιεύθηκε στο Ελληνοαμερικανικό περιοδικό Cosmopolis, Ιούλιος 2011.

Οι απόψεις που εκφράζονται στο ιστολόγιο αυτό δεν απηχούν υποχρεωτικά τις απόψεις του Transatlantic Business Forum.————–

European Competitiveness Pact: A breakthrough or a Red Ocean doom?

The European Competitiveness Pact is the latest proposal raising havoc among European Union members. Spearheaded by Germany and France it has been portrayed as a remedy to problems behind EU periphery’s debt crisis but also as precondition to much needed easing of their bailout terms in what has been bluntly dubbed as the “Grand Bargain”.

Sounds like euphemism in a way: what should have been an ambitious plan to push forward development and growth across European Union, it is mainly limited to restrictive fiscal policy, let alone promoted as a restrictive, punitive deal that causes public resentment. Furthermore, the introduction of a common policy apart from taking away power from national governments, a sensitive issue, risks creating uniformity across EU member states to the extent that doesn’t exist even in the US. This may increase correlation among European economies and take away a useful internal decoupling mechanism.

A. Decoding the ‘Great Bargain”

According to the original document circulated (and its unofficial translation), the Competitiveness Pact aims at achieving:
1 price competitiveness (eg, stability of real labor cost, realigning labor cost according to development of productivity);
2. Stability of public finance (explicit and implicit public debt);
3. Minimum rate for investments in research, development, education and infrastructure of x% of gross domestic product (value to be decided).

Going deeper into specific measures, the Pact proposes:
1. Abolition of wage/salary indexation systems;
2. Mutually recognize education diplomas and vocational qualifications for the promotion of mobility of workers in Europe;
3. Create a common basis for corporate income tax;
4. Connect pension system to demographic developments (ie, average age of retirement);
5. Oblige member states to commit to tight debt control through clauses in their constitutions;
6. Establish a national crisis management regime for banks.

Much can be said about each one of these metrics, the culprits targeted and their potential effectiveness. The common corporate tax basis for example is directed to Ireland’s low corporate tax rate (Irish claim is key to their growth), wage indexation is practiced in Portugal, Belgium, Greece as is lose fiscal policy and high indebtedness (but then again not only by them).

Trying to decode motivations behind the Pact one can appreciate Germany’s concern over allowing certain economies to roll back into the same crisis and require further bailouts in the future (much discussion has been done on moral hazard these days). On the other hand one should also be critical of these measures’ results and effectiveness.

In this posting we’ll focus on wage levels; after all deficits, public debt, social security and taxes are all related and have reached their limitations in several countries. Analyzing the labor cost we will address certain misconceptions and through that show why this Pact might be missing the mark in raising competitiveness where needed.

B. Labor Cost and Productivity across Europe: Myths and Reality

Comparing labor costs across Europe and other developed countries it’s clear that wages in the European South are much lower, both on gross and net basis.

Another interesting finding is that divergence between the Northern and Southern Europe figures is much higher on gross salary basis than on GDP per capita or net salary figures. This could be due to higher salary deductions in Northern Europe as well as higher levels of self-employment or unreported economic activity in the South. Even in the case of potential tax and social security contribution evasion the solution can’t only be lowering labor cost but rather taking corrective actions where needed, to boost state income and reduce liabilities over a period of time.

Wage level is not the main parameter affecting competitiveness; equally important is what’s produced with this labor cost. Looking at labor productivity across Europe, US and Asia we can see that Southern Europeans are working more hours than their Northern counterparts; contrary to stereotypes and prejudices repeated on various occasions. At the same time however they produce much less of what produced in Northern Europe in terms of output value (GDP per hour worked). Productivity is probably even lower from official figures if illegal labor is taken into the equation.

Low productivity can be attributed to inefficient production methods, low value added products, as well as restrictive legislation and other structural problems. Looking at the Greek economy for example, it is being characterized by services while Germany’s by high value added/export oriented technology sector. Greece is also suffering by a non-conducive to businesses legal framework and economic environment, as international rankings show. What’s the reason for that is a separate discussion, but it’s not a labor cost problem.

A straightforward expression of lower competitiveness can be found in the South’s much lower R&D expenditure. Undoubtedly these are economies that are coming from different starting points and move with different speeds. In the absence of no intervention these differences will persist in the future.

To be fair, the European Union has been trying for years to promote economic development across its members. The 2000 “Lisbon Strategy for Growth and Jobs” called for increase in innovation and employment over a ten year period. A minimum 3% R&D expense target across all Europe was set then which was not finally attained even by highly developed economies. The program also didn’t reach its employment targets. Some reasons for that was the difficulty in steering centrally planned policies through national governments and politicians that may have different priorities or capabilities.

Maybe the reason of this failure lies in the root of the European economic system that favors public investment and crowds out private investment discouraging this way productivity gains; the usual objection to Keynesian policies.

This phenomenon can be more evident in countries that are trying to catch up and usually lack a robust private sector: investment might end up in public projects of questionable utility that although may help in increasing wages and GDP, they don’t contribute in raising competitiveness and promoting long term sustainable development and growth.

In any case R&D investment, on its own, is not a panacea. To be effective it requires the existence of research infrastructure, know-how and a sizeable pool of R&D personnel, otherwise it will be money thrown out of the window raising more excuses against good intentions. Moreover it requires the existence of a business environment that will nurture innovation which cannot happen in economies that lack respective infrastructures. Researchers cannot produce in vacuum; students won’t be inspired without real life stimulus, role models and most importantly opportunities to work and grow professionally. Automobile research for example makes sense when carried out close to an established production base where scientists can have immediate access to automobile production, testing facilities and specialists to exchange views on a frequent basis. Marshal plan worked where there was an infrastructure to leverage; on the other hand, much higher foreign aid has failed elsewhere. Apart from technical infrastructure the financing capability should be there as well: next to Silicon Valley’s vibrant startup community stands a robust venture capital sector capable to lend a helping hand.

Finally, under current dire fiscal conditions in Europe’s debt-ridden periphery it is probably difficult to allocate 3% of GDP to R&D. Even if this is possible, R&D as a percentage of GDP might result in a meaningless number in absolute terms once applied over an already low GDP number. Three percent of a low GDP economy, might not yield the same results as three percent of a much larger GDP economy. It might simply not be sufficient for meaningful research to be carried out these days, especially when a low productivity country is struggling to catch up. For example it may be required to pay comparatively higher salaries to attract researchers to relocate there. Mutual recognition of diplomas that is proposed under the Pact can increase mobility but the real factor for that is employment opportunities; human capital will flow to where opportunity lies, causing underdeveloped regions a “brain drain”).

C. Management Perspective: Competitiveness Pact as a Red Ocean Doom

Going back to the Pact: what is then trying to achieve when it comes to labor cost?

In a typical European state run economy the public sector sets the stage for salary levels; these salaries may be even higher than those in the private sector due to collective bargaining or other inefficiencies. The consequence is that there’s limited propensity for people to “go the extra mile” once there’s secured and descent income in the public sector. That results in an inefficient, marginal private sector that is unable to compete internationally and lead countries out of the crisis. Since the corporate sector is not competent enough to productively invest in R&D; the government should again step in to support such efforts; a vicious cycle.

By lowering salary levels we are simply continuing to produce the same albeit at lower cost. Sounds like a typical Porter’s Cost Leadership strategy for those familiar with management literature; or referring to a newer terminology a “Red Ocean” doom. When applying this strategy the objective is to outperform the rivals in capturing a larger share of an existing market; in which case competition turns bloody.

That brings to mind a movie quote; it always does. As a manager that I respect used to say: movies have in them anything you need to know. Even if not, still a quote helps in making a point. So here’s what “Larry the Liquidator” from the “Other People’s Money” movie said at a proxy fight over an underperforming company:
And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure.
You know, at one time there must’ve been dozens of companies makin’ buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company?

Then you might wonder what market is European periphery competing in? Without getting into detail, economies are not that extrovert, they are more into services. In whatever they produce there are other countries that have far lower cost structures and will continue to do so for the foreseeable future. In the absence of higher value added output the proposed Competitiveness Pact seems like an attempt to perpetrate the same model in the South albeit at lower cost; a losing strategy not to mention the social and wider economy consequences of that. Even China has recently outlined plans to move from low cost production to high technology and new energy. US has made that shift long time ago with clear indications that the workforce should be retooled and education geared towards science and technology.

So is this Competitiveness Pact simply a damage control exercise? ie solidifying a Euro nanny-state where the periphery will be at perpetual life support/lower gear compared to developed EU states?

There can be another explanation right out of the Austrian School of Economics though: by lowering wages and increase unemployment through structural reforms a creative disruption might be created that will force unleash the economy’s potential to grow out of the crisis. Based on the above, this sounds like a risky strategy if not wishful thinking. Societies can’t jump start or adjust to new circumstances quickly; it would have been nice but can’t redeploy the workforce in new sectors. As the saying goes: “can’t teach an old dog new tricks”. Have to invest in education and transition over time to avoid social crises.

D. So where’s the solution? The Blue Ocean?

There are various ways to represent risk created by debt. Leverage can be quantified by the ratio of debt to GDP or debt to national wealth (problem is that the latter is difficult to measure). On the other hand the risk of debt servicing (liquidity risk) can be represented by the interest expense to total income. A country might be highly leveraged but at the same time might have significant property or ability to increase income (increasing taxes or curbing tax evasion being one).

The most commonly used leverage ratio of debt to GDP (solvency ratio), can be reduced by reducing the nominator (debt) or increasing the denominator (GDP). Ruling out bankruptcy as a solution, which wouldn’t benefit anybody (bondholders, Eurozone countries or global markets, even recently US expressed their concern over that), public debt can be reduced over time by cutting down deficits, restructuring the debt to lower interest expense or buying back some or spin it off through privatizations. Austerity can have its limitations though: after two years of austerity that caused the economy to contract, Ireland saw its deficit to increase and is realizing its bailout program might be unworkable. It now aims to renegotiate terms. Same might happen elsewhere.

Leverage can on the other hand be reduced by increasing GDP. Growth is of paramount importance not only to decrease that risk but also to ensure long term prosperity and competitiveness in today’s globalized economy. In other words, instead of a Cost Leadership strategy that would aim to reduce debt (ie the ratio’s denominator) the solution could be growing out of the crisis (increasing GDP, the nominator) by diversifying into new markets and high value added products. These new opportunities are called Blue Oceans under the respective strategy model.

To enable such transformation it would first be useful to remedy structural problems to provide the necessary breathing room for the private sector to flourish. Then the question would come to which industries to invest in? Looking at R&D expenditure around the world it seems that EU is investing proportionately more on pharmaceuticals, automobiles, aerospace, chemicals and communications. This is not coincidental; there are many dominant companies in these sectors, mainly in Northern Europe. On the other hand the US invests proportionately more on technology and software.

Europe’s periphery, apart from Spain, lacks to a large extent heavy industry. Therefore it would be wise to invest in less capital intensive industries such as software or niche technologies, even services (why not some outsourcing as well; there can be opportunities in certain niches). Ireland is following this path. Green technology is another sector that can be developed which brings the additional benefit of reducing imports.

Finally, going back to the decoupling argument, this investment could also have a positive effect elsewhere: considering the high growth and overheating of the German economy it could be possible to transfer certain production and research to the South and provide employment opportunities for scientists and professionals there.


Moody’s downgrades Greek debt; says it’s speculative.. Really?

Moody’s today downgraded Greece’s debt by three notches down to Ba1, lower than Egypt’s. Pretty much beating a dead horse. Greece is mostly out of debt markets and will remain like that for a year or so until internal structural reforms take shape. EU periphery’s debt has thus become a mostly internal EU issue. Political rhetoric apart, EU is probably holding a tough stance to keep pressure on reforms. Greece for example has introduced all requested reforms but now has to leave time to sit in; while also increase tax revenues at least from unreported activity (Greece has high self employment rates and that’s not straightforward to tax).

EFSF’s chief Regling recently stated that Greece’s plan implementation is going well and that Portugal and Spain seem safe for now. Same point made by IMF’s European chief Antonio Borges on the back of Moody’s downgrade. There’s certainly room to maneuver when it comes to fiscal policy within the periphery, as well as ability to support from EU’s core. A default wouldn’t benefit anyone since European banks hold much of periphery’s debt. If EU wants to provide support through the EFSF or ECB, it certainly can. So this downgrade or subsequent market speculation might not make a difference. Internal reforms are policy measures that with solvency risk out of the picture, their resolution is going to drag for some time. Seems like a long trade for shorts; do they have the time for that? On the other hand seems that shorts have moved to the US$ in light of ECB’s interest rate hike.

There can be an alternative reading to this downgrade though (which by the way happened just days before EU’s leadership meeting and the day before Greece was supposed to tap into markets for a 6month T-bill issue). Could this just be another act in the clash between the EU and rating agencies? EU is skeptical of their ratings and have placed them under supervision (from the European Securities and Markets Authority) so this might be some power struggle play unfolding. Credit ratings seem to place themselves on the buyers’ side; is this some market strategy shift at least on the sovereign debt sector? Due to this timing it will also be interesting to see whether ECB will step in support Greece’s issue as probably did with Portugal.

And by the way, was anybody waiting for Moody’s to call Greece’s debt speculative just now? Following the crisis, rating agencies are under fire on all fronts. It’s only opinions they say they are expressing. Thank you, we have ours too (and as history showed any sophisticated investor should better have their own going forward too).

PS. Stay tuned for additional commentary on why fiscal policy on its own is not sufficient to take Europe’s periphery out of the crisis and why growth policies are urgently needed.

Related links:

The European debt crisis as a foreign exchange control mechanism!

What has long been discussed as a rather cynical point of view among many, it was recently openly admitted by Germany’s Finance minister Wolfgang Schaeuble at an interview to the Focus magazine. There Mr Schaeuble mentioned that Greece’s exit from the Euro would lead to Euro appreciation and eventually hurt German exports. Despite of public and political concerns in Northern Europe, Euro’s relative weakness benefits Germany’s exports and strong rebound. At the same time healthy European economies can take their dividend from lending to the periphery for a markup through the EFSF/ESM facilities.

Mr Schaeuble is among the European politicians with the more sound positions regarding the European currency and governance, expressed throughout the crisis. He underlined long ago the need for a common fiscal policy to support the Euro, something which is challenging under EU members’ current governance regimes. It is long overdue though and would have averted excesses in certain countries should it have been in place or if effective supervision was exercised by EU mechanisms. Maybe a crisis was needed to bring about this change. Now a much needed support to debt ridden countries through debt buyback and rescheduling using the EFSF or ESM facilities could only be given the go-ahead pending acceptance of the proposed European Competitiveness Pact; what has bluntly been called by EU officers the “Great Bargain”.

We will revisit the European Competitiveness Pact as more information become available. At this point it seems however that fiscal measures included there cannot alone solve EU periphery’s developmental problems. More far reaching structural reforms and investment in innovation is needed for that. Maybe this will be the next centrally designed policy plan to be introduced on the back of a future crisis, once fiscal policy has run its limitations and can’t respond to employment/growth needs.

Or, are we aiming for a Euro nanny-state where the periphery will be in perpetual life support/lower gear compared to developed EU states?

Related articles:

EFSF and country bailouts: the European TARP or something more?

The EFSF (European Financial Stability Facility) is a special purpose vehicle that was created last year in order to provide support to troubled European economies. EFSF can issue loans backed by EU country guarantees and IMF loans. A maximum of €750 billion can be raised under the current agreement although much less will in order to keep its AAA rating.

EFSF’s creation was shadowed by market turmoil and public unrest. However, half a year later, it starts to show how an important tool can be for the European Union. According to its operating guidelines EFSF can provide loans to eurozone countries, recapitalize banks or buy sovereign debt. In EFSF’s first band issue as part of the EU/IMF financial support package agreed for Ireland €5 billion were raised at 2.89% which will be loaned out to 5.8%. Not that bad deal after all for the Eurozone. And in the meantime the whole crisis devalues the Euro much to the benefit of the export-driven European nations. No much doubt that the facility can be increased if need to take more economies under its wings. Although this European “bailouts” seem to face some political headwinds they make economic sense. On the other hand isn’t the EFSF effectively becoming the financing arm in the course of shaping a rather “invisible” common European economic policy? Countries that request support have to align their policies under IMF/EFSF guidance; the ones coming under the EFSF being probably are the ones that have lost their credibility. To take it a step further, isn’t the latest bond issue a type of Eurobond that so much discussion have been made about lately? Eurobonds may be some years away; in the meantime Germany and other healthy economies are keeping their financing ability and rating intact.

But let’s go back to the economic consequences from EFSF’s actions. In the European setting, buying back government debt, the “toxic assets” behind the European crisis, pretty much means recapitalizing the banks. European banks hold much of the European debt; they mostly had to, under the European economic model. That’s the case with the Greek debt held by large European banks and all of Greek banks. Restructuring Greek debt to 50% of face value, as current market valuations imply, would decimate the Greek banking system requiring massive recapitalization for its size to satisfy capital adequacy guidelines. One objection here would be that Greek banks hold most of the debt in their investment portfolios i.e. at book values so they might seem indifferent towards a buyback in the wake of having to take losses. Even so though, the main problem is that their market capitalization has evaporated during the crisis as well as their funding capability. In this way the EFSS buyback can free up capital to finance economic growth and push back the “toxic asset” issue: effectively growing Europe’s way out of the crisis. Isn’t this what TARP meant to do?

I guess the main issue would be the timing of such buyback and be the haircut. Probably this couldn’t happen earlier than market reforms have been implemented. In the case of Greece this will happen after the first half of 2011. As regards to the haircut, certainly this should be lower than the 50% markets imply for Greece. Probably, somewhere in the 25% range, considering recent rumors and the target effective government borrowing after refinancing at lower rates (discussions are for 25% discount on 15-20% of debt outstanding). Some might say that this would still maintain a high, not manageable, debt level for Greece. However should it starts growing again with a sound plan, which should be the main concern., and manage to get its finances in order by reducing useless, unproductive spending and get tax income finally flowing in, then, it will be able to serve interest payments. For those in doubt mind that this time the whole process is administered by the IMF/EU. As regards to the debt/GDP ratio this is only an indicator; it’s probably more useful to focus on the interest/GDP indicators. Furthermore one has to consider the country’s true wealth, what that actually should be for Greece considering its stealth economy? In the end Greece was surviving with 100% debt/GDP for years as did Italy or Belgium without raising concerns.

On the other hand: maxing up your credit card makes you more conservative as a buyer or at least limits your options….. So not bad as a self-restraining measure. This will be a good lesson; but will need some time to sit in with the people.

After all: Every cloud has a silver lining or from another view “You never want a serious crisis to go to waste”. I see the European stockmarkets, especially those of the PIGS to move lately. Would they know something?