Inputs are imported too

Ted Diamantis, an importer of Greek wines who is based in Chicago, has been helping his suppliers stock up on bottles, labels and printing ink. The barrels, though, have him worried.

In two or three weeks, some of Greece’s winemaking regions will begin their annual grape harvest. The wineries Mr. Diamantis buys from age their wine in barrels from Italy and France, but Greece’s capital controls make it difficult for them to send money out of the country to pay for the barrels they need for this season. No barrels means no wine for Mr. Diamantis.

“Without the ability to access your capital, you can’t buy anything,” said Mr. Diamantis, who is in Greece meeting with his business partners. “The marketplace is frozen.”

That is from Stacy Cowley at the NYT.  Similar examples illustrate why Greece leaving the euro, even if a better idea for the longer term, would not have been such a picnic in the short run.  Exports would have collapsed, not boomed.


Greece's economy is almost a dream example of the point. Look at their exports (in a handy visual form from Wikipedia):

Their largest export is refined petroleum/oil, at 9.4% of the total. Greece isn't making that oil, it's importing it, refining it, and sending it along. They're also major exporters of aluminum products, which I understand to be a 'byproduct' of their relatively large sources of energy, but they import the bauxite. I also can't see how the packaged medicament industry in Greece doesn't require imports of capital for everything from industrial fermenters to ovens, etc., but I'd suspect that most of that is pretty durable and so more imports won't be needed for a while (though capital controls make would paradoxically make it almost impossible for a successful company to add capacity). Greece also exports a lot of agricultural products, but imports the farm machinery needed to make modern agriculture work.

Greece could print new drachmas until the cows came home and these industries would be unable to expand without new import to capital.

Use Bitcoins ......

They used clay amphorae in antiquity, didn't they?

Welcome to the world of currency risk. Being out of the Euro would do what exactly? Have their input prices swing 50% from quarter to quarter?

This is where sometimes economists should get out more. The Euro and other currency pegs are an attempt to remove one source of price instability that is totally out of the control of or predictable by those who would invest in short term 10 year or longer time line production facilities of manufacturing. (Can Democrats do the universe a favor and put HRC out of her misery). There is a reason why the northern states have done well; they have resource development that can support their high cost welfare states, that is valuable at a wider currency range. But manufacturing gets slaughtered. I've seen a 25% price increase of some of my inputs due to the change in the Canadian dollar, over what time horizon Hillary?

So what we see outside of primary resource development is that manufacturing becomes a value added proposition where you import as many inputs from your export market, add value in some way, then sell it back. And don't stock anything, and hedge your currency risk by contract price or other hedging mechanisms. Anything you manufacture can and will be 25% less valuable depending on the whims of Yellen and some chinese guy whose interests are not yours.

So Greece having their own currency would not solve anything, in fact would make things worse in many ways. This begs the question, what is the problem? Isn't it obvious? Deficit spending and excess borrowing to pay for profligate welfare states. We are seeing two provinces face debt downgrades, the two provinces that have been for a long time the drivers of the canadian economy, Alberta and Ontario. Why? They spend too much money and borrow too much money.

All you people blathering on about austerity are wrong.

"Have their input prices swing 50% from quarter to quarter? This is where sometimes economists should get out more. The Euro and other currency pegs are an attempt to remove one source of price instability that is totally out of the control of or predictable by those who would invest in short term 10 year or longer time line production facilities of manufacturing."

It is not as if no economist ever thought about this before. 50% is, of course, not typical for floating exchange regimes that are properly managed. Companies that are exposed to significant foreign exchange risk can and should hedge that risk. Fixed exchange rate regimes have their own, very serious problems and entire books have been written on this.

"I’ve seen a 25% price increase of some of my inputs due to the change in the Canadian dollar, over what time horizon Hillary? "

At age 67+, I have been hearing about swings in the US-CAN exchange rates for my entire life, mostly as an argument about the incompetence of government, both when going up and down.

So, you designed your business to depend on Canadian imports with full knowledge of the long term swings in exchange rate affecting the prices of the imports. If you plan long term, you planned for the past swings occurring in the future, and took steps to mitigate them.

If you are opposing what Clinton advocates, I'd say you are a short term planner who has been blaming the government for your failure to account for international events beyond the control of US policy makers.

Besides, what does Canada produce that you can't source from the USA?

No matter how much the economy crashes in one State, the price of new cars made in the US stay the same as in the States where the economy is booming.

(Listening to many economists on the Euro, it seems to me Alabama, Louisiana, Mississippi should each have their own currency so they will be invested in to set up car factories so they don't need to import cars from other States and thus reduce the prices of cars in those States.)

Perhaps not at the state level but Jane Jacoobs did argue that the rust belt staes in the USA during the 70s would have benefited from having local currencies. The basic argument was that the common currency in the USA economy forced most of the adjustment into the Q aspect rather than allowing P changes that exchange rates would support.

Greek red wines from the Nimea region, just south of Corinth (and home of the Hercules Nimea lion, which went extinct in BC), are enjoying a bit of a trendy renaissance I heard, and won some minor awards. They are OK (nothing like French or California wines). When I visited the region with a date a few years ago I was told they don't do wine tours. We make our own wine, the best wine is a sort of grape juice, a young wine that's not yet too heavy on the alcohol, about 5% - 7%, sort of like a Sangria. It tastes better if you make your own.

"and home of the Hercules Nimea lion, which went extinct in BC"

Damned dentists!

Traders have a long history of evading currency controls.

This problem should be relatively easy to resolve. Have the people they sell the wine to (Diamantis). buy the barrels and ship them to Greece.
The Greeks will then discount the price of the wine exports to those buyers to compensate them for the barrels.

Simpler and less risky to send tanker trucks into Greece with bags of Euros to buy the fresh crushed grapes at distressed prices by dangling Euros at desperate Greeks, and then truck it to Italy to put in Italian wine barrels for fermentation and aging and then for blending and bottling under Italian quality control and branding and marketing.

Capitalists should never fail to exploit a crisis to profit from exploiting the victims.

And the Greeks asked to be exploited by voting for Syriza which opposes all profits while at the same time spending money buying products with high monopoly profits.

If the Greeks elected Syriza on the basis of trading the Greek port ownership to China in exchange for China giving Greeks payment in iPhones based on a cost of $200 each eliminating $400 in Apple monopoly profits so Syrazi can sell iPhones for $200 plus $30 VAT, that would have made some sense.

You're proposing that a guy in Chicago get into the European barrel-buying and barrel-shipping business. Just think for a few minutes about what that particular business must entail, how much there must be to arrange, all the things that can go wrong and all the opportunities to be cheated if you don't know what you're doing.

It would be interesting to know how the financing in the wine-importing business works normally. If the guy in Chicago has money up front you could maybe arrange to finance the wineries' barrel purchases through a bank in France and keep that buyer-seller tie intact.

Anyway, for small to medium firms that deal with a local bank, this kind of thing is not easy, and you'd have to track how finance typically moves through the whole supply chain. It would likely be hard to rejigger that chain without some new finance somewhere and someone taking on a different kind of risk.

The buyer doesn't need to do that. He just needs to call the barrel supplier and say "send the barrels to Sofia like you always do. Where do I send the money?" The buyer is already used to buying from Greece so he knows how to move money around.

The one risk he's taking is that the wine-maker goes bankrupt and takes the accumulated credit down with him. How close a business relationship does he have with Sofia?

You're assuming the Chicago guy is buying all the wineries' output. And I still wonder how commodified and simple the used barrel biz is.

This story is complete bull. What happened to last year's barrels? If they need ink and labels, they are bottling locally. The barrels they buy are previously used. So use them again. Or get the Chicago merchant to pay them in barrels. Doesn't take a genius, does it? Plus, what proportion of Greek exports are wine vs tourism (which requires very few imports).

You should probably travel to Greece and explain to the local wine makers how to efficiently make wine. I'm sure the idea of re-using last seasons barrels has never entered their minds. They'd probably be grateful to have your expertise available.

It does take a genius- the wine industry is a bloomin minefield, in every damn drop there's fifty parts art and fifty parts science. I used to think that was crap- then I studied up on it and talked to people...

The barrel doesn't just store the wine, it imparts flavour to it. The newer the wine barrel, the more flavour imparted to the wine.
After a few vintages, the barrel has lost a significant amount of its flavour. You can, however, shave off the inside of the barrel to get more life out of it, or add a bag of oak chips to them.
The used oak barrels from the first-use beverages are then used in the production of spirits. It does depend individually on the distillery, but some barrels will go from initial use in sherry, then to bourbon, then to rum. That "chain of reuse" can be anything from just one product to around four!
This can form a significant cost-reduction strategy for some wineries - the strategic production of wines which will produce a more favourable barrel by-product, such as sweet wines & sherries, as these can then be sold to distilleries. Distilleries are spoilt for choice and there will always be an excess of barrels- so inevitably some wine barrels won't get reused- plenty of used wine barrels lose out on their flavour profile as compared to the competition.

But! I'm going to go on the defence of the winemakers; you can't just expect these wineries to change their product strategies due to the current situation, and make a profit on it. By using the barrels they use, in the way that they do, these winemakers are targeting specific price segments of the wine market.
From what I have talked with wineries/winemakers, and what I have read, switching to a "ship juice in IBC's (plastic bulk containers) and ferment in stainless steel vats with oak chips", "reuse old barrels", or other strategies which tend to tilt their brand/product towards the lower price segments, just may not be that wise.
It's a very significant and risky tradeoff, because price premium and brand is profit for many wineries. Moreover, wineries (usually) are settled in their niche, changing strategy has both plenty of risk and opportunity costs attached. I'd guess the wineries' brains trusts will be working overtime, to figure out what to do.
If all these premium and artisanal producers absolutely can't stick to their guns (i.e. can't get their barrels) and change what they do, this will almost definitely cause a glut in other segments of the market.
It does happen- from the growing side especially. Grape growers have often gone bust when planting a new "hit variety", only to have the vines that they ripped out attract a price premium 5 years later, and the new variety experiences a glut. Or, the flavour profiles demanded by consumers change. Even more risk & reward in the industry- from both changing, and from not changing!

Sometimes changing strategy and using cost reduction (like barrel reuse and/or stainless steel fermentation) can work out.
A very common example is wineries that produce an icon range (the very best, the flagship of a winery) that they make a loss on, but greatly increases the brand awareness of their wine product, allowing them to sell more of a super-premium/premium (or even basic) wine which has a lower cost to produce AND is popular with a price-conscious consumer ( these premiums, even only at $15 a bottle, can be extremely good drops). The latter can "carry" the business, but the former is necessary for the latter's success!
The point of all this, is that it "may" actually be the best strategy to be using new wine barrels every season, especially the more expensive barrels from France, rather than cheaper US or Eastern Europe barrels. Especially, considering the depressed wages in Greece, there's a lowered labour input cost for hand-picked grapes (which make better wines), so combining this with good quality barrels might just be a match made in heaven to produce wine that attracts a higher price premium.

The wine market is .. microeconomic heaven, IMHO. A really good and fun market to study; I am friends with a guy whose worked in a few parts of the industry, who has not studied a single lesson of economics, yet his knowledge of the wine business would be enough to build a very good principles of economics course.

An interesting and thoughtful response, thank you.

I wonder if it would have been practical for them to accept crude oil as (partial) payment for refined petroleum, bauxite as payment for aluminum etc. until the drachma stabilized in value.

Germany's Grexit offer included support for the new currency from the ECB so that capital controls could be lifted quickly.

China will send anyone (Econ 101) substitutes for everything, and will even provide a three continents market for whatever product.

EU is nothing but a complements chain

The problem with the wine barrel imports is almost the exact opposite of what TC says. Outside the Euro there would be no need for capital controls to support an overvalued exchange rate and an exporter would have no problem buying imported inputs.

So the only quick solution is the one outlined by Charles Calomiris
My proposal begins with government action to write down the value of all euro-denominated contracts enforced within Greece. This “redenomination” would make all existing contracts – wages, pensions, deposits, and loans – legally worth only, say, 70% of their current nominal value. This policy would kill several birds with one stone. It would significantly reduce pensions, relieving fiscal pressure and satisfying troika demands for fiscal sustainability. It would do so in a way that would also mitigate the purchasing power consequences for pensioners, because an across-the-board redenomination would lower prices throughout the economy, making the reduction in nominal pensions more bearable. By applying redenomination to deposits and loans, banks’ health would be revived – their loans would now be payable and therefore more valuable, and their net worth would consequently rise. The 30% wage reduction would further reduce fiscal problems and make Greek producers competitive, and operate as an “internal devaluation” to raise demand for Greek products and tourism. Most importantly, this internal devaluation – by solving the problems of fiscal deficits, non-competitiveness and bank insolvency – would inspire confidence in Athens’ ability to stay within the eurozone, which should bring deposits back into the banking system to fuel a rebirth of lending.

John Cochrane adds a 1 week price control:

Thus, the redenomination should probably come with a (say) one week price control. Every price must be lowered 30% over what it was the previous day, for a week, Just long enough for each store to see that its competitors and suppliers has also really lowered prices. Then stores can do what they want.

Fat chance any politicians proposing that and enough Greek people might ignore it to make it not work.

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