It is known that Greece has constant problems that arise within its economic system, leading to social and political disruptions. In order to understand the core problems lying behind its crises we can use different statistical statements and sources, but one of the best options is the Balance of Payments. It characterizes the general development of foreign trade, the level of production, rate of employment and consumption. Its figures let us realize the ways the country uses to bring the foreign investments and the instruments it employs to cover its foreign debt. Overall, the BOP is the prior source of statistics for the System of National Accounts.
Before starting the analysis of Greece`s Balance of Payments, it would be quite useful to define the core principles that constitute the basis for our analysis. First of all, we are going to use the fifth edition of the Balance of Payments Manual, because the vast majority of the figures were calculated according to the guidelines of this Manual. For example, the Bank of Greece employed this edition of the Manual until end 2014, whereas our report will cover the period from the year of 2000 to the year of 2013.
According to the description of the 5th edition of the Balance of Payments Manual by the IMF (1996), the BOP is a statistical system that depicts all the external economic transactions between the economy of the given country and economies of other countries during the certain period of time. It consists of several accounts, i.e. the Current Account and the Capital and Financial Account. In turn, the latter can be divided into the capital account and the financial account. The purpose of this paper is to give a brief analysis of the BOP as a whole, to observe the current account and the capital account and to define the trend of the BOP over this period. In addition to the objectives mentioned above, we will analyze the exchange rate regime in Greece and characterize its main trade partners and its trade balance.
The Greece`s Balance of Payments Analysis
As we have already mentioned, the BOP of Greece consists of several major accounts (see Appendix A for table containing the general figures of the BOP). These figures from the Appendix A were retrieved from the Eurostat (2015), because it employed the same calculation approach during the whole period that we are going to analyze.
With the exception of sharp fall in 2008 year, the Current Account grew slightly within the given period (see Figure 1). It constituted €1361 million in 2013, with its indicator gradually increasing from 2008 year (the year when the downfall took place). Despite its constant growth, it reached the surplus only in 2013. The most significant part of the Current Account is built upon trade balance of goods and services. The indicator of net export of goods was always deficit in Greece, but starting from 2008 year it showed certain improvement. In 2008 year it was nearly minus €34602 million, and in 2013 year it became approximately half of its previous amount. On the other hand, balance of services has a positive trend: its net export increased by almost €8000 over the given period.
Figure 1. Dynamics of Major BOP Accounts of Greece, million euro. This figure illustrates changes in major BOP Accounts of Greece over the given period.
Income changes follow the general trend of the Current Account. After bottoming out in 2008 year its negative indicator started to improve, but it never reached the zero threshold. In comparison to income the current transfers were positive during the given period, but some fluctuations can still be observed, for example, after the world financial crisis in 2008 year.
Another major account is the Capital and Financial Account. Although the Capital Account remained almost stable over time, with only some fluctuations, the Financial Account rose dramatically from 2000 till 2008. It finished the year of world financial crisis at €29914 million (see Figure 2). According to our data, the major changes in the Financial Account were caused by changes in portfolio investment and other investment. For instance, other investment reached the peak in 2012, whereas portfolio investment hit the bottom. The general government borrowing was the main reason for such drastic changes in this account.
Figure 2. Greece`s Financial Account, million euro. This figure illustrates the dynamics of the Financial Account of Greece within the period of 2000-2013 years.
Moreover, the Greece`s Current Account perfectly corresponds with its Capital and Financial Account. It means that if our Current Account is negative, we have to finance it by means of the latter account. Figure 1 shows that the Financial Account of Greece symmetrically reflects the Current Account. So, the theoretical hypothesis are confirmed by the practice in this case. Overall BOP Account can be calculated by adding up all the accounts and net errors and omissions (see Figure 3). The International Monetary Fund introduced this term in order to identify the misleading in figures that occurs due to different sources from which the data for BOP calculation is taken.
Figure 3. The BOP Account of Greece. The dotted line shows the BOP trend during the given period.
We can observe the sharp declines in 2001 and in 2008. However, the overall linear trend shows the up-coming direction due to high indicators of this Account in 2012 and 2013. We can suggest that the downfall in 2001 year was caused by introduction of new currency in Greece, namely euro. The Greek government decided to enter the Eurozone, that is why it imposed certain restrictions and limitations that led to the net outflow of investments. In turns, the Financial Account wasn`t enough to cover the deficit of the Current Account, so the negative BOP Account occurred. The decline in 2008 is quite understandable, because it has the same pattern as the indicators of the European Union countries.
Now let`s proceed to the deeper analysis of the Current Account (see Appendix B). We have already described the general trends seen here, but some divisions of this Account have their own subdivisions that are of the greatest importance, e.g. Services consist of transportation, travel and other services. We separate transportation and travel Services, because they are considered to be substantial for the Greek economy (see Figure 4).
Figure 4. The Composition of the Current Account of Greece. This figure illustrates the internal changes in the Current Account of Greece.
Transportation services went up steadily until the year of 2008. However, the world financial crisis negatively affected it in 2008, leading to the decline by approximately €3000 million. After the crisis, it recovered its growth, but in 2013 it stood at the level below 2008 year. On the other hand, due to the vulnerability and strong dependence of travel services on the global economic situation and thus the level of incomes, temps of growth of travel services slowed down after the world financial crisis. Despite that fact, they continue to remain the leading service industry of Greece.
Compensation of employees and investment income form the Income section. Investments play the greater role here, because the amount of compensation is comparatively small in comparison with the investment income. The greatest decrease in income in 2008 year was caused mainly by investment income decline, namely it fell by €10579 million leading to the decrease of income by €10644 million.
The last section of the Current Account is the current transfers. We should note one distinctive feature of it: the general government transfers reached the same level as the transfers from other sectors until 2007 year, but the situation changed in 2007, and the government transfers started to dominate over other sectors` transfers.
Moreover, I suggest describing the composition of the Capital Account (see Appendix B). Generally, there are two main sections, i.e. capital transfers and acquisition disposal of non-produced non-financial assets (see Figure 5).
Figure 5. The Composition of the Capital Account of Greece. This figure illustrates the internal changes in the Capital Account of Greece.
The graph clearly illustrates that the Greece`s Capital Account is based totally on capital transfers and acquisition disposal of non-produced non-financial assets simply can be avoided during the analysis because of its insignificant amount.
The Trade Balance of Greece and Its Trade Partners
Kroon (2008) stated, that we can use the statistical data given in the Balance of Payments of Greece in order to provide the information on the trade balance of this country. Such data is given in the Current Account under the section “Goods and Services”. Its net balance constitute the trade balance (see Figure 6).
Figure 6. Greece`s Trade Balance. This figure illustrates the dynamics of trade balance of Greece.
The graph above demonstrates that trade balance of Greece was in constant deficit due to negative indicator of goods balance. In contrast to goods, balance services were above zero, thus aligning the total trade balance.
According to the Observatory of Economic Complexity, in 2013 the export of Greece comprised of refined petroleum (36%), packaged medicaments (3,2%), pure olive oil (2%), aluminum plating (1,9%) and non-fillet fresh fish (1,7%), whereas the import included crude petroleum (24%), refined petroleum (6,9%), packaged medicaments (5%), petroleum gas (3%) and passenger and cargo ships (2%).
All in all, we can state that Greece has the negative trade balance. This can be explained by the wide range of reasons, but the major problems that Greece faces today are the complicated internal economic situation and the high pressure of foreign debts.
Analyzing the trade partners of Greece we can see certain changes in their composition over the given period. For example, the first trade partner of Greece in 2013 was Turkey. The volume of export to this country increased drastically since 2009, whereas export volumes to Germany and Italy remained at the same level, omitting some fluctuations. Another important country where Greece has established its distribution market is Bulgaria. The United Kingdom that was previously one of the main trade partners of Greece has lost its positions and now it is not included in the TOP-5 Greece`s Exports Destinations.
The list of major Greece`s importers is quite differing. The top import origins of Greece were Russia with 13% of total import volume, Germany with 10%, Italy with 8%, Iraq that has increased its export to Greece during the given period and now its part equals 7,4% and France with 4,9%. It should be noticed that the Russian Federation was the outsider in import origins` rankings, but in recent years its export to Greece went up gradually, leaving behind such strong economies of the European Union as Germany and Italy that were the traditional partners of Greece. However, the trade between Greece and the Russian Federation can deteriorate in the near future due to sanctions imposed by the European Union`s authorities. These sanctions contain restrictions on the supply of certain goods and services, that`s why the trade volume between those countries can decrease leading to the weakening of economic and political relations between Greece and the Russian Federation. If the current situation doesn`t change for the better, we can assume that Germany and Italy will again become the top trade partners of Greece.
The Exchange Rate Regime of Greece
According to the number of dictionaries, the exchange rate regime is referred to as a policy a government uses in order to provide control of its national currency with regard to currencies of the other countries. The International Monetary Fund uses its own classification to define the exchange rater regime of the country, and basically this classification includes four major types of regime, i.e. floating, soft pegs, hard pegs and residual. Most of the Western developed countries employ floating exchange rate regime, and the European Union is not the exception.
According to the Convergence Report (2014), Greece has been a member-state of the Eurozone since 2001. It means that currently its national currency is euro and the significant part of the monetary guidelines come from the European Central Bank. Moreover, it should be mentioned that Greece was the first country to take part in the Eurozone enlargement (see Figure 7).
Before the year of 1996, Greece was the EU member outside European Exchange Rate Mechanism (the ERM). It had its own national currency called drachma and employed flee float exchange rate regime. In 1996, the situation changed and Greece pegged its currency to D-Mark/ECU/euro, but still it remained outside the ERM.
Figure 7. Exchange Rate Regime of Greece. This figure is based upon the Convergence Reports and illustrates the change of exchange rate regimes of Greece.
Greece joined the Exchange Rate Mechanism only in 1998. The major purpose of this Mechanism is to reduce the variability of exchange rates and increase stability of currencies. This is extremely important if country expresses a firm wish to become a part of the Eurozone, because in order to adopt the euro as national currency it should meet certain requirements that can be achieved by means of the ERM. The Exchange Rate Mechanism is based upon the exchange rates that can vary within the fixed margin exchange rate margins. Sometimes this whole system introduced by the European Union is referred to as semi-pegged system.
The period of adaptation was over in 2001, and Greece became a member of the Eurozone. It means that Greece has adopted euro as its national currency. Moreover, the Greek government has followed other guidelines set by the Stability and Growth Pact. For instance, some of the guidelines were to provide certain policy dealing with inflation, to regulate the interest rates and to modify the internal laws in order to meet the framework of European laws and regulations. The initial Eurozone was created in 1999, so we can state that it took only 2 years for Greece to become the part of this zone.
In recent years the debt crisis in Greece has deepened and the overall situation has deteriorated. That`s why there were some rumors and even talks on the possibility of temporary withdrawal of Greece from the Eurozone or of temporary use of two currencies: euro and drachma. Some analysts even said that the Greek government could adopt such currency as geuro in order to deal with the crisis that is taking place in their economy. According to Thomas Mayer of Deutsche Bank, such pseudo-currency would have the following exchange rate – 50 euro cents for each geuro. Such geuro currency would be temporary. However, today these talks are nearly over, because the situation has changed drastically. Nevertheless, such ideas didn`t find any realization and now when Greece has agreed to the requirements of its creditors all these ideas entered the deadlock. Now Greece is obliged to follow the guidelines prescribed by the European financial community and other international financial institutions that gave a massive bailout to this country.
Taking into consideration all the facts and all the statistical data indicated in the report we can formulate the conclusion with regard to this topic. We have analyzed the Balance of Payments of Greece, have described the composition of its Current and Financial Accounts, have investigated the trade balance of this country and have paid attention to the exchange rate regime. Now we can conclude that although certain downfalls occurred during the given period, the linear trend of the Balance of Payments is up-coming.
Analyzing the trade balance, we have indicated that it is negative. The goods net balance is in deficit over the whole given period, with sales net balance being positive. The structure of export shows us that Greece has the comparative advantage in production and selling of the refined petroleum, packaged medicaments, pure olive oil, aluminum plating and non-fillet fresh fish. The structure of import is following - crude petroleum, refined petroleum, packaged medicaments, petroleum gas and passenger and cargo ships. The trade partners of Greece have changed over time, for instance, Turkey has become the first export destination for Greece, while Russia has become the top exporter to Greece.
Exchange rate regime analysis showed us that nowadays Greece is a part of the Eurozone, that`s why its policy corresponds totally to the guidelines provided by the European Central Bank. Previously, Greece employed the Exchange Rate Mechanism in order to prepare its economy for the transformation of currency within it, and in 2001 the national currency changed from drachma to euro. In the near future no changes in exchange rate regime can be foreseen, because now the monetary policy of Greece is highly influenced by its creditors.
European Central Bank. (2014). Convergence Report. Frankfurt am Main. Retrieved from http://www.ecb.europa.eu/pub/pdf/conrep/cr201406en.pdf?c759d9b132af38d2cde1900f23c35ce9
Eurostat. (2015). The Balance of Payments by Country. Retrieved from http://appsso.eurostat.ec.europa.eu/nui/show.do
International Monetary Fund. (1996). Balance of Payments Manual, 5th Ed. Washington DC . Retrieved from https://www.imf.org/external/np/sta/bop/BOPman.pdf
Kroon. (2015). Easier Techniques of Balance of Payments Analysis. Kroon&Economy, 1/2008. 63-75.
The Observatory of Economic Complexity. (2013). Visualization of Trade Statistics. Retrieved from http://atlas.media.mit.edu/en/profile/country/grc/
Greece`s Balance of Payments
Greece`s Current Account and Capital Account