Seeing the erred ways of my thinking… (7)

I begin with a flashback to 1992.

Ross Perot was running for President as a third candidate. He was a smart man who had articulated the reasons why the U.S. had a dinosaur economy based on consumption. The North American Free Trade Agreement (NAFTA) was under discussion then. Perot predicted that NAFTA would generate a “giant sucking sound” (jobs leaving the U.S.). Those jobs would be gone forever. Thereafter, “we all sell each other hamburgers and buy Chinese crap and South Korean cars and televisions”.

I was mistaken to think that Greek political leaders, but above all EU-political leaders, would have considered that something similar might happen in Greece with the Euro. Alright, I forgive them for not thinking about it before the fact. But I would have never thought that, later on, they would not have noticed that “giant sucking sound” of imports and loans being sucked into Greece and domestic production being decimated.

Finally, I would have thought that EU-leadership would have noticed, once the Greek crisis erupted, that the Greek economy had de facto become a zombie-economy of services. To paraphrase Ross Perot: an economy where people sold each other souvlaki at inflated prices and paid for it with money borrowed abroad.

Had they admitted the right diagnosis, I would have expected them to make the following announcement: “Severe imbalances of product and capital flows have developed between the Core and the Periphery leading to the cross-border debt problem of today. We have to implement policies and incentives within the Eurozone which will lead to a reversal of this process. We will incentivate companies in the Core to shift some of those investments which they would make outside the Eurozone to the Periphery of the Eurozone. The Core will be incentivated to buy more of the products which the Periphery will then produce”.

Much has been said about Greece’s being by nature more of a services economy than a production economy. If one accepts that as an unalterable fact, then one has to accept that Greece will by nature return to being a poor economy.

A service economy can only survive if enough services are provided to customers outside the country to generate the foreign funding necessary for the import of production goods. Could Greece exist purely as a service economy? Theoretically, it could. In practice, very unlikely.

Moral of the story
Economics 101 is normally the course where one learns about things like the above. If one has never passed through Economics 101, it would be sufficient to apply common sense to a country’s Balance of Payments.

The final question
Why in the world don’t EU-politicians start now to think about the lessons from Economics 101? It certainly is not yet too late!

PS: previous posts in this series: P1, P2, P3, P4, P5, P6.

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2 Responses to Seeing the erred ways of my thinking… (7)

  1. I recently replaced most of my electric tools – drills, saws, routers etc. There is a very large tool shop nearby – imagine 3 floors full of every tool you can imagine, I visited the shop for a couple hours on a couple occasions – talking to staff, getting prices and pamphlets.I decided to buy Bosch, their tools looked good, felt good in the hand, with all the extra's you could want. Yes they were more expensive than the Made in China, Korea, Japan AND Made in USA equivalents, but what the heck its only money. As the man piled up my boxes in an industrial scale trolley I picked up the electric screwdriver – turned it over shock horror Made in Malaysia. But they feel so German I said to myself.I got on the net, indeed Bosch does assemble many of its tools in Malaysia, from precision engineered components imported from German Austrian and Slovakian Mittlestand firms. I am pretty sure that in Malaysia the assembly worker jobs are "valued" much more than they would be in Greece, as consequence the quality of the product will be better with less QA workers and lower reject rates. Move those jobs from Malaysia to Greece you will find the quality will decline, the costs will increase and people like me will ask – "Why would I buy this expensive stuff from Europe when I can buy a similar quality Korean product for half the price".So you would have to put trade barriers up to deny the Europeans of doing what I would do. And the rest of the World will have the EU in front of the WTO before you can say …So you will have to move the Mittlestand jobs to Greece – are the skills available – no, is the culture available – no, is the money available – no. I guess you could use the Soviet Command Economy Model – All Hand Tools will be Made in Thessaloniki, all Cars will be Made in Cadiz. Then you could transport the skilled German, Austrian and Slovak workers in cattle trucks to their new Labor Camps in Greece and Spain. Whilst the Greeks and Spaniards continue to get their gold plated pensions, whilst working as waiters serving coffee to the slave labourers from the North.Welcome to Yet Another Brave New WorldEurope must become _globally_ competitive in its own right, either by dissolving the EMU and letting each country manage its own economy or by forming a USE and removing the economic sovereignty of member states. In its current configuration the EU/EMU etc has reached its Use By Date – bin the bloody thing.CK

  2. kleingut says:

    I have to differ with you slightly. You are assuming that every consumer is appreciative (and wants!) near-perfect top German quality. You have to ask the consumer what he wants and not the producers.Flash-back to the mid 1980s. I was in a conversation with a Mercedes dealer in the US Midwest. He told me how one of his wealthy lady customers had just bought the top of the line Mercedes at a huge expense. She came back to say that the brakes were kind of rough. Mercedes, near-perfect in customer relations, had an expert fly in to examine the vehicle. His conclusion: the brakes were perfect; they were desigend to be a bit rough.The wealthy lady said she didn't like rough brakes, whether they were perfect or not.I appreciate your appreciation of top near-perfect German quality. You are not the only consumer in the world. Some consumers are happy enough with something that works (and which they will throw away anyway after some period of time).I don't think one should play down Greeks (or anyone else, for that matter) to a role where they are really not capable of anything. One doesn't have to be so "capable" in the German sense to accomplish something.One of my best customers was Toni Kathrein, the owner of the Kathrein-Group, the world's leading manufacturer of high-tech antennas and other sophisticated high-tech stuff. You look at his products and you think that only Germans can produce that kind of perfection.Wrong! He produces in about 50 countries world-wide, including some countries where one might assume illiteracy. He could produce anywhere as long as the business framework was right and as long as he could get the kind of employees who wanted to work for him with enthusiasm. The quality-orientation and everything else that was part of the Kathrein-image he could teach them.It is an absolute fallacy to think that Greeks are some kind of abnormal people who genetically cannot do the kind of quality work that is being done by other people. I have dealt with many foreign companies in Greece who would attest to the opposite.Greeks may not start a Kathrein-Group on their own but Greeks – just like any other people – can perform the kind of work which everyone else is able to perform.So I guarantee you: if Greece could convince a few dozens of Kathrein's to start operations in Greece, those Kathrein's would do it. The question is: what would Greece have to offer to those Kathrein's by way of economic framework so that they would voluntarily invest in Greece.

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