Is the capital account a Trojan horse?

From the European Commission assessment and recommendations for Greece’s stability and growth plan —

Over the last several years, the external accounts of the Greek economy have deteriorated significantly, with the high and persistent external imbalances mirroring to a large extent, the marked deterioration of the country’s fiscal position. The net international position has markedly worsened since 2004. The negative net international investment position already exceeds 115% of GDP in 2009. Consequently, the government sector is not only absorbing the main part of the available external financing, but also crowding out private-sector access to financing (p19).

That’s one way to look at it.  The government has done all the borrowing from abroad in recent years.  The other way is to ask: what if that same public borrowing had to be done domestically?   Then you’re into the simple Keynesian mechanics whereby the only way to achieve domestic lending to the government is to compress economic activity so much that the private sector becomes a net saver.  Current account correction through expenditure reduction.  That’s Ireland.  And note: even on the revised figures, Greece will have had an extremely mild recession in 2009 and 2010 by global standards.  Yes there are structural problems.  This highlights one key thing.  The hawks who compare Greece to, say, Ireland, present the matter as coming down to the willingness to take on the public sector.  But it’s also about the willingness to pull the rug from under your GDP.  You’re only crowding out your private sector when there’s a private sector generating enough activity to be crowded out.

6 thoughts on “Is the capital account a Trojan horse?

  1. The crowding out is not only financial it is cultural, social. The State corrupts everything everywhere.

    You also don’t understand that 4 days week- with proportional salary- is the path because private sector is highly efficient.

    There was a natural deflation due to increased productivity and quality in private sector and the contrary in ever growing state sector. This isn’t only a temporary crisis it is a structural change.

    Private sector shrinked due to quality of its products and droppoing costs. Sooner we will have another shock when people have the good enough computer and start only to change them every 10 years instead of 3 years.
    In my country we have more than 2 homes for every family while 30 years there was lack of homes.
    Our Portuguese Socialist Government is putting the country in bankrupcy because besides many quangos is making the second or third Lisboa-Porto highway. For which obviously there are no users. And obviously a TGV which again have no users to make it profitable even in use.

    Do you think it is rational to make things that no ones needs?

    The artificial hot private sector- house bubble- was necessary to pay the increased imbalance between private and public sectors.
    Now we are seeing the truth: Private sector drops-of course now too much- and the state sector continues to spend like nothing happened.
    It can’t cut.

  2. Yes, of course there is a private sector in Greece and it is crowded by the bloated public sector.

  3. “You’re only crowding out your private sector when there’s a private sector generating enough activity to be crowded out.”

    Absolutely P O’Neill. People are normally forgetting the ageing society element here. Domestic consumer activity is unlikely to revive, as we have seen earlier in cases like Japan, Germany and Italy. It’s all about exports now, and rather than “crowding out” the government have simply been picking up demand slack, but they have been doing it in such a way as to totally distort the economy, and make it import not export dependent. Now these distorsions need to be unravelled, but this is going to need more like ten years than two or three, at least at the pace we are going it is.

  4. So to your point above Mr. Hugh, do you think that we’ll be seeing a more “global version” of Japan’s Lost Decade? Not global as it affects everyone equally, some more than others of course.

  5. I agree Tortoise but the crowding out coming from size of government is very different from the crowding out due to government borrowing in a recession. Greece has both but I think the commission has the 2nd one wrong. The borrowing from abroad helped prevent a worse recession.

  6. Good that more and more people understand the NEED for a 4-day workweek with proportionally reduced salary. And quality of life will increase, because there will be more time to enjoy all the “things” that people on this consumer society have accumulated at their homes, but which are gathering dust (making them nothing else than “junk”).

    As for the efficiency of the State vs. the Private: even if I agree that private is more efficient than public, it all depends on how efficient is the State in the first place. The Finnish State is way more efficient than Portuguese private sector, for instance. Otherwise, like in ALL Southern Europe, the private sector only accommodates itself to what the State does. Funny, but true, the “push” for efficiency has to be done by the State, instead of the theories that say that Privates have a “natural” and absolute propensity to go for efficiency.

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