Tuesday, August 6, 2013

Betting on expectations...

It has been a while since the public discourse of the "success story" begun, generating discussions over whether there is some short of success or not and, if yes, to what extent. Anyway, I am with those who strongly believe that there is no "success story" at all to talk about. However, there is something that I have failed to pay attention to: the expectations and the way they make the economy - and the world - move. Expectations play a very important role in any economy and, although they do not constitute the main nor the major factor of economic (both financial and non) incidents, they can make scenarios materialize that otherwise would not; mostly through a self-fulfilling prophecy. 

What am I trying to suggest? That the only reason why our prime minister might argue for a success (story) is to create the perception that the ongoing reforms have begun bearing fruit and subsequently to form the expectation that economic environment is going to improve. Apparently, he believes that Greek economy only needs the expectation of growth to start recovering like there are no austerity measures dragging economic activity towards contraction. Not only that, but growth is projected by the European Commission to occur during 2014 in Greece and in many other countries running over the austerity rails; a fact that, in combination with publicly arguing that the worst part is over and economic activity is likely to start increasing, nourishes the expectation of growth being imminent. It is like betting on the powerfulness of expectations! 

Well...

As a matter of fact, expectations are not that powerful and most certainly cannot be harnessed that easily. Otherwise, Keynes would not had proposed budget deficits in order to fight the animal spirits... 

This bet reminds me that of Mr. Trichet who back in 2011 further raised the ECB rate intending, to some extent, to signal that forecasts favour the scenario of growth.

Anyway, IMF Country Report No. 13/241 enlightens us (pp: 35-44). Among many things, the IMF report reveals many aspects - key factors - of the recession in Greece and fails to convince us on how this state of affairs will be reversed next year. This report also foresees growth in 2014 driven by 8.4% increase in investment (gross fixed capital formation).

How can I be sure that these "success story" and imminent-growth things are really an attempt to form expectations of recovery? I am not! Not at all! I just cannot find any other reason why anyone could argue for success while unemployment rate increases more and more. Nor can I see how investment is going to increase that much while the production contraction in all sectors is attributed to diminishing demand, exports are straggling and negative price developments are likely to persist (again IMF Country Report No. 13/241, pp: 35-44). Needless to say that I also fail to recognise the economic theory lying behind lowering labor cost (supply-side measure) while recognising decreasing demand to be inhibiting private production.

Of course I am not suggesting that there is some short of conspiracy that aims to deceive us or something!

Anyway, we will have to wait yet another year to see what happens... But, aren't we lacking the luxury called "time"?