Greece, the odd one, still in.

In July the IMF came out with a harsh assessment about Greece.

Yet Greece still faces a €4.4 billion ($5.8 billion) funding gap next year, the IMF warns. It has given Greek officials a deadline of early October, when the draft 2014 budget goes to parliament, to find ways of covering the shortfall. The options are clear: unless tax revenues increase sharply during the rest of this year, “a credible 2014 budget would again need to be centred on painful expenditure cuts,” it says.

Bruegel looks at the trade adjustment in the euro area and Greece clearly sticks out, albeit for the wrong reasons.

Balance of trade adjustment in the euro area

Here is the good news:

Greece reduced its deficit from -14.5% to -2.3% over the last five years, and it is forecasted to nearly close the gap by 2014.

Tourism is also looking up:

Marketing Greece: Tourism leading the country’s gradual recovery.

Here is where it starts looking worrying as Greece seems to have completely decoupled from the euro zone.

Bruegel

Bruegel

In Greece, the price effect played a major role as rising export prices (+16%), offset the decrease in export volumes (-13%).

Bruegel

Bruegel

It can be noted that the drop in Greek imports is even larger (-44%) considering constant prices. On the other hand, Greece was the country with the fastest growing import prices (+21%).

Bruegel

Bruegel

While Germany is still fully involved in getting a government coalition off the ground and intent on sticking to strong austerity terms, it does not seem to work as intended.

This theory does not apply to Greece, which did not manage to substitue domestic demand by increasing exports. The underlying reason might be the absence of a strong tradeable sector. Therefore, wage adjustment does not necessarily help to support exports, since the economy is not able to shift towards an export orientated business model.

Full post here