Europe Debt Crisis

The European Debt Crisis. An empirical analysis and evidence from the macroeconomic variables of the EU members.

Dr Michel Zaki Guirguis 14/08/2014

Bournemouth University1

Institute of Business and LawFern BarrowPoole, BH12 5BB, UKTel:0030-210-9841550Mobile:0030-6982044429Email: [email protected]

Biographical notes

I hold a PhD in Finance from Bournemouth University in the U.K. I have worked for several multinational companies including JP Morgan Chase and Interamerican Insurance and Investment Company in Greece. Through seminars, I learned how to manage and select the right mutual funds according to various clients needs. I supported and assisted the team in terms of six sigma project and accounts reconciliation. Application of six sigma project in JP Morgan Chase in terms of statistical analysis is important to improve the efficiency of the department. Professor Philip Hardwick and I have published a chapter in a book entitled “International Insurance and Financial Markets: Global Dynamics and Local Contingencies”, edited by Cummins and Venard at Wharton Business School (University of Pennsylvania in US). I am working on several papers that focus on the Financial Services Sector.

1 I have left from Bournemouth University since 2006. The permanent address of the author’s is, 94, Terpsichoris road, Palaio – Faliro, Post Code: 17562, Athens – Greece.

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Abstract

This article describes the current sovereign debt crisis of Greece, Ireland, Portugal and Spain, (GIPS). Using data from the International Monetary Fund, IMF, we illustrate the degree of the problem for the period 2009 - 2015. Macroeconomic indicators such as gross domestic product constant prices as percent change, general government net lending/borrowing as percent of GDP, general government net debt as a percent of GDP, unemployment rate, general government revenue as percent of GDP, general government total expenditure as percent of GDP, current account balance as percent of GDP, inflation end of period consumer prices as percent change, total investment as percent of GDP, gross national savings as percent of GDP, volume of imports of goods and services as percent change, volume of exports of goods and services as percent change would be used to show the violations from the Maastricht Treaty which was signed in 1992. The biggest problem was that the Treaty signed without taking into consideration the Greek Orthodox approach. This was the biggest mistake that resulted to magnify the debt and deficit among the EU countries. If there is no blessing from the Orthodox Church, then the decisions and the project will not be sustainable and successful for a long – period of time.

Keywords: gross domestic product constant prices as percent change, general government net lending/borrowing as percent of GDP, government net and gross debt, unemployment rate, general government revenue as percent of GDP, general government total expenditure as percent of GDP, current account balance as percent of GDP, inflation end of period consumer prices as percent change, total investment as percent of GDP, gross national savings as percent of GDP, volume of imports of goods and services as percent change, volume of exports of goods and services as percent change, Maastricht Treaty, Greek Orthodox approach.

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Introduction

All the European countries struggled to meet the convergence criteria set out in the Maastricht treaty in order to enter into the EMU. The most important are inflation and fiscal ones. Specifically, it is required that countries must have an average of inflation that does not exceed by more than 1.5%, and the budget deficits should not exceed 3% of GDP. In addition, Euro members require a ratio of debt to GDP that does not exceed 60%. The most important question at this point is how the fiscal and monetary policies will affect gross domestic product constant prices as percent change, general government net lending/borrowing as percent of GDP, government net and gross debt, unemployment rate, general government revenue as percent of GDP, general government total expenditure as percent of GDP, current account balance as percent of GDP, inflation end of period consumer prices as percent change, total investment as percent of GDP, gross national savings as percent of GDP volume of imports of goods and services as percent change, volume of exports of goods and services as percent change will affect Europe over the next years. Currently, Greece, Ireland, Portugal and Spain budget deficits are too high, and they try to reduce it through tax increases, which reduce the profitability of businesses in the short and medium term. As a result, the austerity measures create wage pressure, redundancy and unemployment. Reduced profitability and unemployment lead small to medium businesses to bankrupt, and as a result the GDP of the Euro countries is negative or slightly positive. There is no growth and is not accompanied by investment from abroad, which leads the Euro countries to borrow in a continuous basis from the International Monetary Fund, (IMF), and the European Central bank, which is located in Germany.

A number of unfavourable factors have resulted to a deterioration of their deficit such as increase of unemployment and inability to service their repayments over the following years. The first reason was the lack of Orthodox Finance. There was a gap between the theological theory and the application of the gospel. There was no spiritual alignment to formulate a fiscal and monetary policy that will combine and co-ordinate the spiritual with the economic and financial goals. The Maastricht Treaty was based only on numbers and economic goals by excluding the spiritual effort that the individual has to make to achieve equilibrium and save his/ her soul, which is the primary objective of his/her existence in the society. In other words, The Maastricht Treaty ignored the Greek Orthodox Christianity and its importance in the alignment and balance of economic and spiritual goals.

The second reason was that the OPEC cartel has increased the price of Brent crude oil from $20 per barrel to $140 per barrel. The Euro countries responded to the sudden increase in oil fluctuation in order to keep inflation low. The fluctuation meant an increase in their unemployment levels. The GIPS countries adopted a tight monetary policy in order that to control its inflation rate. When the crisis started, they did not succeed and preferred to borrow funds and their debt according to the IMF staff has increased from 298.706 billions in 2009 to 383.577 billions in 2013.

The recession had a negative effect on the GIPS countries because it had reduced their export volumes from a negative figure to a slightly positive and reduced the price of their exports leading to a substantial fall in their export earnings. Their ability to raise revenues to finance the repayments had diminished and their expenses have

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increased. On the other hand, domestic economic policy mismanagement played an important role in the debtor’s problems. The banks underestimated the risks of lending by increasing the sovereign risks. The banks normally supply new loans only if the interest rate could compensate the cost of the loans. They will reject to issue new loans, which lead to a backward slope supply of new loans. Thus, the most important point is to avoid the default and at the same time to attempt to minimize the financial losses for the banks involved. Sovereign default could be the result as most of the loans were taken by the government in bonds with high spreads and credit derivatives products.

The costs that are facing the GIPS countries of declaring default are huge and possible exclusion from future borrowing. A country that is not able to repay back its short and long-term obligations will be excluded from future external borrowing. IMF and World Bank will stop the financing procedure, which will create further problems as the country has negative growth due to low revenues and gross national savings. In addition, the country will not be able to borrow on international capital markets, as it has lost credibility and reliability form international creditors. As a result, the current account in the balance of payment will be in deficit.

Moreover, they will be reduced gains from exports in international trade. The volume of trade will be reduced and there will be welfare losses from the domestic companies. The creditors would loose credibility and a large proportion of the gold and foreign exchange reserves of the GIPS countries would be exchanged to cover the deficit and their debt obligations.

To avoid the risk of bankruptcy, the country that is borrowing should reduce the cost of servicing the debt and the perceived costs of default. One successful strategy will be to reduce the principal repayments due by restructuring debt repayments over longer time horizons in relation to reduction in interest rate repayments. The regulatory, tax regimes and appropriate policy should be designed to fit the debt characteristics. Another strategy is to reduce interest rate repayments below market rates and narrowing the spread of the government and corporate bonds. If the austerity measures will not work, then there will be a serious threat of the financial stability of banks involved. The debtor or GIPS countries have accepted an IMF adjustment package that aimed to increase revenue and taxes, eliminate the public debt and privatize the public sector to improve efficiency and transparency. Greece has done a tremendous progress towards privatization of public companies to the Chinese in order to raise finance. There was an effort to increase domestic saving, but still the general government total expenditure is too high. In general, the GIPS countries have adopted tight fiscal policies to reduce government expenditure, inflation and increase government revenue. The loose monetary policy has increased European interest rates and then the tight monetary policy was aimed to stabilize inflation by controlling the money supply and aggregate demand. In specific circumstances, a devaluation of the Euro currency is needed to increase and encourage more exports and competition. Such measures are often costly and painful in the short to medium term and result in low and even negative economic growth or recession accompanied by increased unemployment and rises in the prices of basic commodities such as food and beverages. IMF packages or austerity measures mean in general reduced living standards.

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The failure and the burden of the austerity plan is that the households have many loans from the local commercial banks in relation to the loans that the government has from the IMF. The proportion of debt is increasing from the household’s inside the country and from outside creditors. There is negative incentive, currently, for banks to issue further new loans, as their revenues get worse and the liability side is increasing day by day. Especially, when the debt problem becomes long – term, then the banks become unwilling to supply new funds due to liquidity and solvency problems. On the other hand, the government of the GIPS countries are facing a tremendous problem to finance their debt in relation to negative investment.

The rest of the paper is organized as follows. Section 1 describes the macroeconomic variables analysis. Section 2 describes the Greek Orthodox approach and Section 3 summarizes and concludes.

1. Macroeconomic variables analysis

Table 1 shows the gross domestic product, constant prices as percent change for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece -2.339 -4.354 -5.00 -2.00 1.500 2.300 3.00Ireland -6.995 -0.430 0.363 1.484 2.181 2.845 3.302Portugal -2.507 1.331 -2.159 -1.844 1.190 2.453 2.220Spain -3.722 -0.147 0.775 1.123 1.769 1.863 1.945Source: IMF statistics and estimates.

GDP is the amount of consumption, investment, government purchases of goods and services, and net exports that take place within a calendar year. It is measured in this case by using the expenditure approach.

GDP = C + I + G + ( X – M)

Where:

C is consumption. I is investment. G is government purchases of goods and services. X – M: Net exports, which is exports minus imports.

According to Table 1, the GDP figures of the GIPS countries are negative and slightly positive, which substantiate a negative or minimum growth. For example, Greece in 2009 has a GDP of -2.339% and in 2011 the figure was -5.00%. Then, from 2013 the figures are slightly positive. Portugal has a GDP of -2.507% in 2009 and -1.844% in 2012.

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Table 2 shows general government net lending/borrowing as percent of GDP for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece -15.513 -10.420 -7.982 -6.874 -5.159 -2.798 -2.813Ireland -14.197 -31.977 -10.315 -8.593 -6.816 -4.437 -4.117Portugal -10.107 -9.138 -5.865 -4.492 -3.009 -2.345 -1.925Spain -11.130 -9.242 -6.143 -5.162 -4.395 -4.064 -4.073Source: IMF statistics and estimates.

Net lending minus borrowing is calculated as revenue minus expenditure according to the IMF subject information. According to Table 2, all figures for GIPS countries are negative, which display a deficit and not a surplus. For example, Greece shows a figure of -15.513 % in 2009 and -5.159 % in 2013. Ireland displays a negative figure of -14.197% in 2009 and -6.816 % in 2013. Spain has a negative figure of -11.130% in 2009 and -4.395% in 2013.

Table 3 shows general government net debt as a percent of GDP for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece 127.100 142.757 153.083 175.432 173.432 163.640 149.773Ireland 42.309 78.042 98.751 104.640 107.435 105.697 103.144Portugal 78.790 88.698 101.809 107.572 110.708 110.378 108.319Spain 41.901 48.749 56.048 58.707 61.337 63.375 64.658Source: IMF statistics and estimates.

According to the IMF subject information, net debt is calculated as gross debt minus financial assets corresponding to debt instruments. These financial assets are: monetary, gold, currency and deposits, debt securities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivable. As we can see from Table 3, the net debt as a percent of GDP is very high for all GIPS countries and increased against the convergence criteria of the Maastricht Treaty. For example, Greece net debt has increased significantly from 127.100 % in 2009 to 173.432% in 2013. Ireland net debt has increased from 42.309% in 2009 to 107.435% in 2013. Portugal has a net debt of 78.790% in 2009 and reached 110.708% in 2013.

Table 4 shows the unemployment rate, percent of total labor force for the period 2009 -2015.


According to the International Labour Organisation, ILO, unemployed are defined as people of working age who are without work, available to start work within two

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weeks and actively seeking employment or waiting to work. According to Table 4, there was an increase in unemployment rate for Greece. In 2009, the unemployment rate was 9.375% and in 2013 it reached 18.987%. In Portugal, the unemployment rate in 2009 was 10.633% and in 2013, it reached 13.397%.

Table 5 shows the general government revenue as percent of GDP for the period 2009 – 2015.


According to the IMF subject information, revenue consists of taxes, social contributions, grants receivables, and other revenue. According to Table 5, there is a slight increase in revenue from 2009 to 2013 for all GIPS countries. For example, in Greece, in 2009, the general government revenue as percent of GDP was 37.323% and in 2013, it was 40.552%. In Portugal, we have a small increase from 39.723% in 2009 to 42.235% in 2013. Similarly, in Spain there was a slight increase from 34.671% in 2009 to 37.048% in 2013.

Table 6 shows general government total expenditure as percent of GDP for the period 2009 – 2015.


According to the IMF subject information, total expenditure consists of total expense and the net acquisition of non-financial assets. According to Table 6, there was a slight decrease in total expenditure in all GIPS countries. According to Table 2, all figures for GIPS countries, which measure net lending minus borrowing or revenue minus expenditure are negative, which display a deficit and not a surplus. For example, in Portugal, there was a slight decrease from 49.829% in 2009 to 45.245% in 2013.

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Table 6 shows the gross national savings as percent of GDP for the period 2009 – 2015.


According to the IMF subject information, gross national savings as percent of GDP is expressed as a ratio of gross national savings in current local currency and GDP in current local currency. Gross national saving is gross disposable income less final consumption expenditure after taking account of an adjustment for pension funds. For most of the countries there was no substantial increase in gross national savings and in Spain we had a decrease. In 2009, Spain displayed a figure of 19.251% and in 2013 a figure of 18.719%. Greece in 2009 showed a figure of 5.117% and in 2013 a trivial increase of 5.193%.

Table 7 shows the volume of imports of goods and services as percent change for the period 2009 -2015.

2009 2010 2011 2012 2013 2014 2015Greece -18.608 -4.850 -9.877 -2.421 1.675 2.428 2.893Ireland -9.300 2.712 2.969 3.850 4.200 4.300 4.900Portugal -12.531 -4.841 -3.221 -0.214 2.824 4.766 4.570Spain -17.806 5.441 2.100 0.762 3.251 3.858 4.656Source: IMF statistics and estimates.

According to the IMF subject information, volume of imports of goods and services as percent change refers to the aggregate change in the quantities of total imports whose characteristics are unchanged. Changes are the result of quantities only and not their prices. In 2009, all GIPS countries showed significant negative figures. Greece has a figure of -18.608% and Spain showed a negative value of -17.806%. In 2013, all GIPS countries have recorded a slight positive figure.

Table 8 shows the volume of exports of goods and services as percent change for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece -20.071 3.843 7.024 7.433 7.022 6.916 6.698Ireland -4.197 6.306 6.012 5.200 5.140 5.000 4.850Portugal -12.271 0.481 7.512 6.330 6.617 6.653 6.212Spain -11.580 10.279 8.728 2.998 4.700 5.000 5.300Source: IMF statistics and estimates.

According to the IMF subject information, volume of exports of goods and services as percent change refers to the aggregate change in the quantities of total exports whose characteristics are unchanged. Changes are the result of quantities only and not their

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prices. The worst period for all GIPS countries was in 2009, where they recorded negative figures. For example, Greece displayed a negative figure of -20.071%, in 2009. In the same period, Spain showed a negative figure of -11.580. In 2013, Greece showed a positive figure of 7.022% and Portugal a positive figure of 6.617%. By combining Table 7 and 8, we can see that net exports, which is exports minus imports for 2013 is positive for all GIPS countries.

Table 9 shows current account balance as percent of GDP for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece -10.986 -10.453 -8.371 -6.653 -6.046 -5.287 -3.804Ireland -2.925 0.488 1.771 1.895 1.387 1.508 1.092Portugal -10.916 -9.892 -8.641 -6.397 -5.347 -4.660 -3.692Spain -5.169 -4.555 -3.792 -3.145 -2.816 -2.501 -2.328Source: IMF statistics and estimates.

According to the IMF subject information, current account is all transactions other than those in financial and capital items. It is divided into different categories such as trade in goods account, trade in services account, income flows, and current transfers of money. A current account surplus is where credits exceed debits. According to Table 9, most figures in different years are negative and displaying a deficit. The worst period for all GIPS countries is 2009. For example, Greece showed a current account balance deficit as percent of GDP of -10.986% and Portugal displayed a figure of -10.916%. Ireland was the only country to display a positive figure or surplus after 2009. The most worrying thing is that Greece has showed a deficit of excess of 5% of the GDP. This is an alarming sign that was illustrated in International Finance models such as Dorbusch et al. (1995), Mishkin, (1996), Roubini and Wachtel, (1998) and Sachs et al, (1996).

Table 10 shows inflation end of period consumer prices as percent change for the period 2009 – 2015.

2009 2010 2011 2012 2013 2014 2015Greece 1.987 5.079 2.121 0.599 1.016 1.016 1.000Ireland -2.581 -0.189 1.340 1.088 1.504 1.715 1.828Portugal -0.139 2.161 3.176 2.130 1.300 1.670 1.600Spain 0.893 2.861 1.990 1.440 1.515 1.642 1.804Source: IMF statistics and estimates.

According to the IMF subject information, inflation end of period consumer prices, percent change is annual percentage of average consumer prices and is calculated each year. In 2009, in Ireland and Portugal, we had negative figures of inflation or deflation. In Greece, in 2010, the inflation has increased substantially to 5.079% from 1.987 % in 2009. This was a violation of the Maastricht convergence criteria, which set up that inflation should not exceed 1.5%. In 2013, in Greece, we had a significant drop of inflation to 1.016%.

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Table 11 shows total investment as percent of GDP for the period 2009 – 2105.


According to the IMF subject information, total investment as percent of GDP is expressed as a ratio of total investment in current local currency and GDP in current local currency. All the GIPS countries are displaying a decrease in total investment as percent of GDP. For example, in Greece, in 2013, total investment decreased to 11.238% from 16.103% in 2009. In 2013, Portugal has a decrease of 16.385% from 19.916% in 2009. In 2012, Ireland displayed a decrease of 9.926% from 14.340% in 2009.

The macroeconomic variables that were described above illustrated the economic picture of the Euro countries. The debt crisis is creating a long-term liquidity problem in terms of servicing the loan payments. Decrease in total investment expressed as percent of GDP in relation to current account deficit and no substantial increase in gross national savings have deteriorated the balance of payments. In addition, high unemployment figures in relation to negative or slightly positive GDP figures have showed negative growth and output, which resulted to a recession. Finally, net lending minus borrowing is calculated as revenue minus expenditure and the figures for GIPS countries are negative, which display a deficit and not a surplus. The net debt as a percent of GDP is very high for all GIPS countries and increased against the convergence criteria of the Maastricht Treaty. For example, Greece net debt has increased significantly from 127.100 % in 2009 to 173.432% in 2013.

The aim is to strengthen financial system, improve governance and transparency, restore economic competitiveness, and strengthen the legal and regulatory environment by integrating the principles of the Greek Orthodox Church. Professor Joseph Stiglitz is a Nobel Prize winner and argued that bad advice in economic policy in terms of asymmetric information has created long-term problems in many countries by making them vulnerable to external creditors. Tight fiscal policy was used as a corrective mechanism for helping the current account to return to surplus and used as a means of using efficiently scarce government resources on various projects. On the other hand, Krugman (1991), support that trade integration will lead to regional concentration of industrial activities to profit from economies of scale. As a result, regions will be affected by asymmetric shocks, which will affect unemployment negatively. Krugman theory of asymmetric shocks is the result of lack of transparency, credibility and reliability that the Orthodox Church could improve and eliminate . The successful manipulation of thoughts through the help of the Orthodox spiritual father in relation to the sincere repentance and confession and regular acceptance of the Holy Communion will improve tremendously the integrity problem.

The solution of the European deficit crisis could be achieved by adopting the Greek Orthodox approach, which is based on maximizing spiritual integrity that leads certainly towards social welfare and economic efficiency of scarce resources. The

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problem of imperfect information is minimized as the correct manipulation of thoughts creates a transparency in strategic management. The Greek Orthodox approach would help to minimize the principal agent problem and the debt by restricting the politician’s to make unnecessary expenditures and by using the EURO money to make continuous investment in different cities around the country. This is what we are going to analyze in the next section.

2. Greek Orthodox approach

The Greek government and the other EU countries have adopted a tough fiscal policy in relation to high taxes, and high unemployment. The lack of Orthodox Finance has resulted to a huge account deficit. Systematic repayment of loans to international institutions, negative output and growth, low national savings, and decrease of total investment from worldwide investment banks such as JP Morgan and Merrill Lynch has resulted to slower economic growth rates.

Unemployment has increased due to the stickiness of wages to reach equilibrium in the short-term. Τhe efficiency wage rate hypothesis will only hold successfully under an Orthodox religious context. The main motivating factor that affects the balancing of demand and supply is the incorporation of the spiritual effort in pricing wages. The costs of production and operational risk of the firm will be reduced by adding the spiritual effort in the efficiency wage rate. But how this will be priced, measured and achieved in a global environment. There a tremendous mix of nationalities and religions. A universal application of the Greek Orthodox principle will help to eliminate this problem. According to this approach there will be no continuous rising or tremendous shifts above or below the level of the market-clearing real wage rate in order to safeguard fairness and justice. Thus, we will not have to wait in the long run until to reach equilibrium level. This hypothesis contradict Dornbusch, (1976,a,b) exchange rate overshooting model that it states that wages in the labour market are determined in sticky – price markets, and they only tend to change slowly over time in response to various shocks such as changes in the money supply. Prices and wages are resistant to downward pressure. This hypothesis will not held anymore, as the concept of satisfaction of human wants should be positioned under the Orthodox Church. It will enable individuals to select goods provided from the government and adjust their consumer habits based on the healthy need of their soul. Thus, spiritual wants will eliminate physical needs and, therefore, there will be a balance between what can be produced and consumed. Thus, prices and wages will be monitored and corrected immediately in the short-term, and there will not be time lags for readjustment. On the other hand, there will be a surplus in terms of extra growth as money saved will be diverted to unemployed, poor individuals and persons who are making poor economic decisions.

The roots and the causes that created the debt crisis were the lack of the Christian Orthodox approach that should be incorporated in the positive and normative economics decisions. This approach is working as a scale to achieve equilibrium between the spiritual and economics decisions. If the decisions are only scaled towards the economic benefit, then there is no blessing and the decisions turn out, as the time passes to be wrong. They are based on self - interest that excludes the spiritual effort that the normal Orthodox person should exercise in a continuous basis throughout his/her lifetime. Wisdom according to the Orthodox approach is the fear in

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a positive way and the respect that the individual should have towards the Holy Trinity, the powerful presence of Theotokos or Virgin Mary and the Ten Commandments. Thus, it is of paramount importance to form economics decisions based on the Orthodox Wisdom ONLY and not based on our corrupted thoughts, greed and self - best interest that the ancestral sin of Adam has created. It has destroyed the divine relationship and created disequilibrium in balancing the evil from the good thoughts. This condition or tendency of the heart towards sin remains even after the baptism has removed the ancestral sin. Thus, the economist, the politician, the household, the rich, and the vulnerable should have strong faith towards the Holy Trinity and beg for the blessing first from the spiritual father and then decide which decisions to take. This is the first condition to get out from the debt crisis. The grief caused from a broken and humbled heart that is focused on repentance and systematic confession that is aimed to reject the bad habits will not get despised from the grace of the Holy Trinity. Towards this direction the powerful presence of Virgin Mary will help the Christian Orthodox that strongly believes to her to get the best for his/her spirit, his/her body and the persons that are surrounded and affected by his/her decisions. Thus, the economic policy should target and cover every individual to achieve a balance between the spiritual and economic decisions.

The second condition is the application of the spiritual Orthodox model. The purpose of this model is to bring the individual close to God and help him/her to increase his/her faith in order that the Holy Spirit resides inside him/her. Then, he/she will able to adjust the behavior according to the principles of the Ten Commandments and the New Testament of the Gospel. To be able to do these things, the economic policy should take seriously into consideration the spiritual Orthodox model.

The circular flow of the spiritual effort of an individual shown, in Figure 1, consists of four major groups. God defined under the concept of the Holy Trinity, the Devil and the demons, individuals defined as household, firm or government and the spiritual father. Core values of the faith such as: the Holy Trinity, the Theotokos, the repentance, the confession and the Holy Communion, which are spiritual injections, are used to offset evil thoughts such as mortal sins, pardonable sins and sins of omissions, which are withdrawals. The inclusion of additive variables have direct link with the core values. Prayer, fast, prostrations, vigil, almsgiving, rejection of personal will, and humility, help to manipulate the thoughts. As individuals are taking decision, there should be a balance between spiritual and investment decisions.

There is a circular flow or indirect link between injections and withdrawals. Disequilibrium is created from sins, lack of dexterity to manipulate thoughts and the lack of the presence of the spiritual father. The link between them or the balance is achieved through the intervention of the spiritual father. His aim is to try to help the individual’s to withdraw the bad and evil thoughts from the inner part of his/her heart and increase the virtues in relation to the faith. In other words, his mission is to safeguard the salvation of the individual’s soul by linking him/her with the Ten Commandments and the injections that will lead him/her securely to the Upper Jerusalem after death.

In the short to medium term, on average, there is persistence of the various types of bad and evil thoughts. Although, the phenomenon could persist in the long-term if there is no intervention and supervision from the spiritual father. In the long-term, the

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person starts to be vigilant and persist in injecting the virtues and eliminating the vain and evil thoughts. An ideal situation will be that the person from an early age of his/her life to be supervised from the spiritual father. He will help him/her to cultivate an ascetic profile that will help him/her to develop the appropriate attitude that will sustain and develop the virtues.

In the long-term, we are all dead, so in the meantime we have to make sure that there is reconciliation between the economic, investment and mainly the spiritual ones. The ultimate objective is the salvation of the soul, so this principle should outweigh our investment decisions. Once this happens, then the initial effort will cause an ultimate effect, which is much larger, and this is the attraction of the Holy Spirit, as a free gift from God. Thus, the Holy Spirit helps the person to maintain and sustain spiritual injections in addition to the additive variables throughout his/her life. The effect of sustainable spiritual injections will reflect sound economic and financial decisions. Thus, we will arrive to a certain point that is very close to the equilibrium. Market will become perfect and strong form of market efficiency will manifest in asset pricing.

Figure 1 shows the circular flow of the individual’s spiritual effort.

Source: Author’s illustration

3. Summarizes and concludes

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DevilSatanDemons

Hell

God

Paradise

Withdrawals

Injections

Individuals as household/firm orgovernment

Thoughts manipulation/ spiritual father

Sins

The short-medium term

The longer-term

Mortal sins Pardonable sins Sins of omission

Core Values Holy Trinity Theotokos Repentance Confession Holy Communion

Holy Spirit

Additive variables Prayer Fast Prostrations Vigil Almsgiving Rejection of

personal will

I have tried to find an optimal solution of what constitute the economic problem and how to alleviate it through the intervention of Economists and the Greek Orthodox Church in a free market economy. The European debt crisis has started, as a result of ignoring the Greek Orthodox model and the pillar’s of wisdom, which focus on the fear in a positive way and the respect that we should have towards the Holy Trinity, Theotokos, the Saints, hermits, apostles, martyr’s, Archangel’s, the Ten Commandments, the Old and New Testament of the gospel, the cross and the resurrection of Jesus Christ and the Byzantine music of the Orthodox Church.

The individual additive variables that have contributed to measure and balance the thoughts are prayer, fast, prostrations, vigil, almsgiving, rejection of personal will, and humility. The above additive variables were supported by the core values of the faith such as: the Holy Trinity, the Theotokos, the repentance, the confession and the Holy Communion.

References

Dornbusch, R.,(1976a), Expectations and Exchange Rate Dynamics, Journal of Political Economy, vol.84, pp.1161 – 76.

Dornbusch, R.,(1976b), The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy, Scandinavian Journal of Economics, vol.84, pp.255 -75.

Dornbusch, et al., (1995), Currency Crises and Collapses. Brookings papers on Economic Activity No.1, p.219 -270.

Krugman.P.R, (1991), Increasing returns and economic geography, Journal of Political economy, 99: 483-99.

Mishkin, (1996), The Channels of Monetary Transmission: Lessons for Monetary Policy. NBER paper.

Roubini and Wachtel, (1998), Current Account Sustainability in Transition Economies. NBER Working Paper No. w6468.

Sachs et al, (1996), Financial Crises in Emerging Markets: The Lessons from 1995. Brookings Papers on Economic Activity, No.1. pp147 -215.

Stiglitz, J.,(2003), Nobel Prize for Asymmetric Information. The Economic Contributions of George Akerlof, Michael Spence, and Joseph Stiglitz. Review of Political Economy, Volume 15, Issue 1.

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Europe Debt Crisis