Posted by: Dirk | May 6, 2010

Would introducing tariffs help Greece?

The big problem that Greece has in the long-run is its international competitiveness. In the euro zone, it is one of many countries that struggles with Germany’s pace, where wages have been growing less than productivity in the last years. This means that German products are cheaper than Greek ones. The common market ensures that Greek consumers have a choice, and they will buy the cheaper German products. The problem is that this has destroyed many Greek jobs and will continue to do so. In the last years this was not a problem since the money spend on German goods and services came back through the European banking system. Net imports were ultimately financed by increasing foreign debt. (Of course, this happened indirectly.) Remember that net imports to Greece are equivalent to increasing foreign debt. Therefore, from a political economy point of view, net imports are ‘bad’.

In order to regain competitiveness, lower wages in Greece are needed. The problem with this is that asset prices (real estate, Greek stocks and so on) are likely to take a dive because of lower incomes. If the Greek government cuts wages and pensions as well the prices for real estate will go down. This is bad news for everyone who has borrowed in order to buy real estate. The issue is well-known since the problems in real estate markets worldwide that started to be visible in the media in 2007. If home owners subsequently default on their mortgages, the Greek banking sector will be i trouble as well. And I am very sure that many European banks have lent to those banks, therefore contagion would be an issue once more.

If it is essential that Greece regains its international competitiveness, it used to have the option of devaluing the Greek drachma. With the euro, that’s history. Are there no options left on the table to make Greek goods relatively more cheap? Well, speaking as an economist and thinking outside the box, there is the possibility of introducing tariffs. Greece is geographically isolated, and introducing tariffs shouldn’t be that hard. It has few borders and a lot of goods enter the country via ports, with Piraeus being the major one. Imposing a tariff would make foreign goods in Greece relatively more expensive, thereby shifting demand towards domestic goods. This would certainly help to create jobs in Greece. Of course, it is a textbook protectionist trade policy.

On the other hand, Germany’s policy of letting wages rise less than productivity could also be called a protectionist policy. It increases exports and decreases imports. Let’s not get into the question why growth in real wages was like it was (this time). However, like China’s fixing the exchange rate, letting a gap open between marginal productivity and wages certainly increases exports. Other countries are forced to absorb those goods, and could only retaliate by keeping their own wages from growing as well. Since the net exporter turns into a net lender, this will be difficult to achieve. Greece and other countries in the periphery had enjoyed a boom in the last decade, and politicians that would have called for moderate wage growth would have been voted out of office for sure.

So, given that Germany is not willing to increase its wages – or lower its productivity – and given that the euro is still the currency of choice, introducing a tariff would alleviate the pain for Greece. After all, just like arguing for US tariffs against China’s undervalued currency, it would be a reaction to dumping. It could buy some time for Greece, increase employment and therefore taxes, reduce  and put pressure on the surplus country (Germany) to help solve the mess that it helped to create.

By the way: US financial markets have wobbled today. We have seen this before: financial globalization has led to global portfolios, so whoever has the flu, contagion will hit everybody. If stock markets tumble in Europe, they tumble worldwide. That is a result of risk diversification.

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