Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Greece is not a net exporter of food. It has an agricultural trade deficit, and is spending 2.6 billion euros as of last year, to import food and livestock. This includes most types of meat and milk.

Being a net food importer with a trade deficit is really bad when you are planning to screw over your creditors. We'll need a more detailed breakdown of agricultural imports and exports to see whether Greece is a net calorie importer or exporter (and remember the caveat that calories are not all there is to food imports).

On the other hand, the fact that the imports are calorie-inefficient foods like meat and milk is good, because it means that there is a chance that you can actually produce enough food to feed your population in a pinch (Europeans on average eat way more meat than we have to).

Define essential imports: does, say, machinery required for various kinds of industries that produce export goods, or basic necessities, count?

Yes. Machinery that produces basic necessities is, of course, necessary, because it will typically be more expensive to import the necessities than to import the machines. Machinery that produces export goods shouldn't have a problem obtaining hard currency.

Devaluation does cause increased inflation, but as long as the economy's import quota is below 1, this increase eventually converges

Expand on this, it is unclear (to me) what you are saying...

Suppose you have a domestic structural inflation rate of, say, 4 % per year when your nominal exchange rate is constant. Suppose that your trading partners have a structural inflation rate of 2 % per year at constant nominal exchange. Then you have to devalue by 2 % per year to defend your real exchange rate. But if your import quota is - say - 1/3, then you get 2/3 of a percentage point additional inflation from this devaluation. You have to offset this with a further devaluation, which triggers a new, smaller inflation increase.

But the lucky point about this series is that it converges, as long as your import quota is below unity. So the increase in inflation from a floating currency is finite.

a total conversion to Drachma will actually repatriate wealth

Eh? How's that? I have 10 million in euros stashed somewhere in Greece (or deposited in a Greek bank), a radical government is elected and switches overnight to a new currency, say the drachma. Initially 1 Euro will buy you 1 drachma but in a week's time, you can bet that the legal exchange rate will be something like, say, 2 drachmas to a Euro - and wages and prices will be devalued with respect to Euros, so I increase my buying power in Greece when and if I decide to repatriate my foreign deposits...

Well, yes, if you have a suitcase full of Euro notes stashed somewhere, then you will gain. But if you have a bank account in Greece with ten million Euro in it, then you will, after the total conversion, end up having a bank account with ten million Drachma in it.

If you have a bank account in Switzerland with ten million Euro in it, then it means that a Greek bank owes ten million Euro to a Swiss bank (because that's how you move money to a foreign bank - the domestic bank writes in its ledger that it no longer owes you anything and it owes the foreign bank your deposit, and the foreign bank writes in its ledger that the domestic bank now owes it your deposit and it owes you your deposit). ...but after a total conversion, the domestic bank will owe the foreign bank ten million Drachma instead of ten million Euro (that's the whole point of doing a unilateral currency conversion).

The foreign bank may still decide to honour the deposit. But that's the foreign bank's affair - if it wants to give a Greek oligarch a gift of ten million Euro, then there's not much you can do about it, other than to lament the fact that it's aiding and abetting a tax cheat in protecting the proceeds from his thievery.

Capital controls: aren't those a no-no in the EU?

Yes. By the time that case is adjudicated in the European Court of Justice, the crisis will be over, one way or another.

Mind you that net EU funding for Greece was in 2009 a bit over 1% of GDP, so those funds could be suspended while waiting for a court decision on the matter...

I assumed that those funds would be suspended the moment you decided to leave the Euro. In the original diary, I wrote:

[The Powers That Be in the EU] have a variety of creative ways to screw Greece over. [...] They can refuse to release EU funds for Greece (which is a net recipient). [...] And a variety of other innovative forms of mean-spiritedness.

And there's this thing about freezing an asset: You can only do it once. You can't double-freeze the money, in the same way that you can't kill a dead man.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 6th, 2011 at 07:56:46 AM EST
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