Measuring indebtedness of GIPS countries

Measuring indebtedness of Greece, Italy, Portugal and Spain, (GIPS), in terms of general government net lending/borrowing, general government net debt, current account balance, total investment, gross national savings, general government structural balance and output gap.

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 the US). I am working on several papers that focus on the Financial Services Sector.

Abstract1 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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This article measures the total government indebtedness, total investment and gross national savings of Greece, Italy, Portugal, and Spain, (GIPS). Using data from the International Monetary Fund, (IMF), we describe the current situation for the period 2000 to 2018. Macroeconomic indicators such as general government net lending/ borrowing, general government net debt, current account balance, total investment, gross national savings, general government structural balance and output gap would be used to show the government’s budget deficit and the monetary fluctuations. A distinction would be made between the cyclically – adjusted government budget balance and the structural budget balance. The purpose of this article is to show how government budgets could eliminate and stop poverty by stimulating investment and developing the infrastructure through gross national savings and taxation. Implementation of an equitable progressive income taxation system would be achieved in combination with the Greek Orthodox approach that redistributes incomes to the poor’s, the prostitutes, the beggars or any person that is financially underrepresented in the society. In other words, the effort will be to accumulate in the central bank reserves around 100 trillions of four different currencies, namely, EURO, GBP, USD and AUD. Government surpluses of 100 trillions without involving any borrowing will aim to achieve equilibrium by avoiding that someone will become better off and someone else worse off. We want marginal social benefit to equal marginal social cost by integrating the Greek Orthodox principles in the daily routines of the households and the politicians. The prerequisite to achieve the above is to establish first class communication and collaboration between the Orthodox Church, the government and the households.

Keywords: general government net lending / borrowing, general government net debt, current account balance, total investment, gross national savings, general government structural balance and output gap.

Introduction

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This article describes and measures mmacroeconomic indicators such as general government net lending/ borrowing as percent of GDP, general government net debt as percent of GDP, current account balance as percent of GDP, total investment as percent of GDP, gross national savings as percent of GDP, general government structural balance and output gap in terms of percent of potential GDP of Greece, Italy, Portugal, and Spain, (GIPS) countries.

According to the virtual bank of Biz/ed, there are four different policies that the Reserve bank could adopt. The policies that could be adopted are a deflationary, a reflationary, a supply – side and a policy that redistributes income from better – off to the worse – off. The main policy tools available to the bank staff are as follows:

1. Income taxes2. VAT3. Government expenditures4. Interest rates

The first policy is a deflationary policy that reduces the level of aggregate demand, growth and inflation and as a result increases unemployment. It is using the level of government expenditure and taxation to reduce the level of aggregate demand. The government should use different classes of taxes such as regressive taxes, progressive taxes and proportional taxes. According to the virtual bank of Biz/ed, deflationary fiscal policies could include:

1. Increase the basic level of income tax from 22% to 24% and the higher rate of tax from 40% to 42%.2. Reduce government expenditure by 3%.3. Increasing VAT and other indirect taxes.4. Increase the base interest rate by 1 percentage point.

The second policy is a reflationary policy. It will increase the level of aggregate demand, the level of economic growth, but it could create higher inflation. For example, a reflationary fiscal policy could be used to reduce the level of taxation. The disposable incomes the households accumulate lead them to increase consumption, and, therefore, output and employment. Reflationary fiscal policies could include:

1. Reduce the lower tax rate from 10% to 8%.2. Reduce the basic rate of tax from 22% to 20%.3. Reduce the top rate of tax from 40% to 38%.4. Reduce the base interest rate by 1 percentage point.5. Increase government expenditure by 3%.

The third approach is a supply – side policy. This policy focuses on increasing the potential level of output in the economy, namely, the aggregate supply. This approach is based on cutting taxes to encourage every person to work harder. In addition, this policy decreases interest rates to foster the growth of local industries or create more investment. This policy is based on economic growth and is supported by the classical and monetarist economists. Classical economists support the view that taxes should be

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very low and the effort is rewarded based on hard work. Supply side policy could include:

1. Reduce the top rate of tax from 40% to 36%.2. Reduce the basic rate of tax from 22% to 20%.3. Reduce the interest rate by 1 percentage point.4. Reduce government current and capital expenditure by 1%. This includes investments in buildings, equipments, roads, salaries and wages.5. Increase the tax threshold on the basic rate.

The fourth approach is a policy that redistributes income from the better – off to the worse – off. This approach focuses on changing the distribution of income by increasing top tax rates and lowering tax rates at the bottom level of the income scale. The increased benefits through taxation are used to help the unemployed persons. Redistribution of income policy could include:

1. Increase the personal allowance.2. Decrease the lower rate of tax from 10% to 8%.3. Decrease the basic rate of tax from 22% to 20%.4. Increase the top tax rate from 40% to 41%.5. Reduce the tax threshold on the basic rate.6. Increase income support by 5%.

The Orthodox Church in relation to the government, the central reserve bank and the households will decide which policy is at the best interest of the citizens of each country during different time periods. For example, in the fourth approach of redistribution of income, it is not fair to increase the top tax rate to 50% for the wealthy persons. The wealthy persons should get involved with the Orthodox approach and through the spiritual effort should decide in a free way, which is the best way to use their wealth. There should be another solution related to the redistribution of income to the poors such as printing more money from the central reserve bank. The money that will be printed is to alleviate the financial pain of the poor’s, the prostitutes and strengthen the financial benefit of the unemployed persons. The printed money will not be an uncontrolled action of the money supply that could lead to inflation and, therefore, increased goods prices. Demand – pull inflation is not desirable! If this happen, then it is going to create a vicious cycle as the poors, the beggars and the prostitutes could not afford to buy at reasonable and affordable prices. The problem of uncontrolled printed money is the result of limited production, supply side problem and sudden increased demand and consumption. According to Sloman, (2004), Figure 1 shows the demand – pull inflation problem.

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Figure 1 shows the demand – pull inflation problem.

Price

P4 P3 P2 P1

Q1 Q2 Q3 Q4 Quantity or total outputSource: author’s illustration.

According to Figure 1, the demand – pull inflation problem could be solved if the money supply beyond a certain limit is decreased. This could happen if the banks hold a higher liquidity ratio and the government has a surplus in public sector. For example, if the local bank operates with a 20 per cent liquidity ratio and receives 200 millions Euros of cash deposits, the liquidity ratio is 20 / 200 = 0.1. The bank deposits multiplier is 1 / 0.1 = 10. The total deposits after the multiplier took place are 200 millions x 10 = 2000 millions Euros. The Orthodox Church with the help of the government should control the liquidity ratios, the velocity of money circulation, the credit and the amount of loans that are authorized and circulated in the economy.

Before to proceed with our analysis, it is important to make a distinction between cyclically – adjusted and structural budget balance.

Cyclically – adjusted budget balance

The cyclically adjusted balance is the fiscal balance adjusted for the effects of the economic cycle. The budget balance will change as the economic activity start to decrease or increase. For example, the budget deficit will increase in a recession as revenues from taxes fall and social security expenditure increases as a result of lower incomes and higher unemployment. It does not take only into consideration government revenues and expenditures, but it is influenced by national and international economic conditions that are created at a particular point of the business cycle. This cycle is not predictable and could last several years. Thus it is important to incorporate changes in national income, interest costs of government debts, taxes and spending policies.

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General government structural budget balance

General government structural budget balance is structured irrelevant from the business cycle. It includes information concerning government revenues, expenditures interest payments, and past debt accumulation. If a structural budget deficit is combined with a cyclical budget deficit in a recessionary phase of the economy, then, the government could face an increase in total indebtedness. The government borrowing could get uncontrolled and accompanied by high interest rates, monetary and inflation increase. The accumulation of debt will increase the general government net debt as a percent of GDP. Structural deficit could be eliminated by reducing government spending or by increasing taxation. If the government set as a strategic objective to eliminate a planned structural deficit, then it could use the gross national savings to invest and expand the capacity of the economy. For example, it could invest in infrastructure, National Health Service, education, law and order. Again, the government should take great care that the expenditures do not exceed revenues as a large deficit will affect negatively the confidence of the creditors and the investors. This is exactly what happens with Greece, Italy, Portugal and Spain, (GIPS) countries. In this article, we focus only on general government structural budget balance.

The rest of the paper is organized as follows. Section 1 describes the patterns of the macroeconomic variables of the GIPS countries. Section 2 shows the integration of the Christian Orthodox approach, equilibrium price and equitable redistribution of income in a macroeconomic level. Section 3 summarizes and concludes.

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1. Patterns of the macroeconomic variables of Greece, Italy, Portugal and Spain.

In this section, we describe indebtedness and investment measures of Greece, Italy, Portugal and Spain, (GIPS), in terms of general government net lending/borrowing, general government net debt, current account balance, total investment, gross national savings, general government structural balance and output gap.

Table 1 shows the general government net lending/borrowing as percent of GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.

Greece Italy Portugal Spain2000 -3.734 -0.911 -3.313 -0.9562001 -4.44 -3.187 -4.811 -0.5452002 -4.835 -3.164 -3.432 -0.2362003 -5.714 -3.646 -3.745 -0.372004 -7.422 -3.567 -4.041 -0.1122005 -5.635 -4.492 -6.489 0.952006 -6.036 -3.411 -3.752 2.3692007 -6.789 -1.59 -3.212 1.9222008 -9.9 -2.673 -3.697 -4.4932009 -15.598 -5.369 -10.169 -11.1772010 -10.74 -4.332 -9.834 -9.6712011 -9.444 -3.664 -4.389 -9.4422012 -6.426 -3.03 -4.892 -10.3182013 -4.575 -2.558 -5.48 -6.6062014 -3.393 -2.336 -4.042 -6.9372015 -2.188 -2.132 -2.528 -6.5882016 -0.599 -1.751 -1.857 -6.1952017 -0.655 -1.356 -1.612 -5.9052018 -0.621 -1.128 -1.199 -5.61Source: IMF statistics and estimates.

Net lending minus borrowing is calculated as revenue minus expenditure according to the IMF subject information. According to Table 1, all figures for GIPS countries are negative, which display a deficit and not a surplus. For example, Greece shows a negative figure of -15.598 % in 2009 and -4.575 % in 2013. Italy displays a negative figure of -5.369% in 2009 and -2.558 % in 2013. Spain and Portugal has a negative figure of -11.177% and -10.169% respectively in 2009.

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Table 2 shows the general government net debt as a percent of GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.

Greece Italy Portugal Spain2000 102.892 93.106 41.872 50.3812001 103.415 92.465 46.271 47.6282002 101.608 89.301 47.973 44.0362003 97.405 88.432 51.055 41.3672004 98.6 88.042 53.109 38.6212005 100.752 88.903 57.751 34.852006 107.273 89.329 58.558 30.6542007 106.96 86.892 63.658 26.72008 111.961 88.781 67.377 30.8012009 128.874 97.194 79.025 42.4912010 146.948 99.18 88.807 49.8052011 168.317 99.728 97.502 57.4852012 155.378 103.208 111.556 71.9312013 176.126 105.751 114.995 79.1332014 172.214 106.043 116.521 84.6642015 165.988 105.375 115.555 88.5832016 156.787 104.106 113.19 91.9182017 147.602 102.444 110.659 95.2412018 138.112 100.836 107.965 98.187Source: 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 2, 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 128.874 % in 2009 to 176.126% in 2013. Greece has recorded the highest net debt as percent of GDP from 2005 to 2014.Italy net debt has increased from 99.728% in 2011 to 106.043% % in 2014. Portugal has a net debt of 97.502% in 2011 and reached the highest figure of 116.521% in 2014. Finally, Spain general government net debt as a percent of GDP has increased in a steady way. The highest figure for Spain according to the IMF estimates is 98.187% and it was recorded in 2018.

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Table 3 shows the gross national savings as percent of GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.


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. Greece has recorded a substantial decrease of gross national savings as percent of GDP from 2003 to 2011. In 2003, the figure was 17.944 % and in 2011, the figure was 6.214%. Then, from 2012 to 2018, there was a steady increase. Portugal has showed similar patterns as Greece. On the other hand, Italy and Spain have showed a steady decrease and then increase of their gross national savings as percent of GDP from 2000 to 2018. For example, in 2000, Italy recorded a figure of 20.624% of their gross national savings as percent of GDP and in 2018 the figure was 19.058%. The position of the Greek Orthodox Church through the intervention with the government and the reserve bank is to increase gross national savings from 80% to 98% of GDP to make sure that the money could be used to help the poors, the unemployed and the prostitutes from different countries. In addition, the Orthodox Church will send surplus of gross national savings to other countries located in Africa, Asia, Europe, Middle-East, Brazil, (Favela babilonia in Rio de Janeiro), North and South Korea and the United States. The point will be to alleviate the poor’s from the financial problems and burdens of their daily routines.

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Table 4 shows the current account balance as percent of GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.

Greece Italy Portugal Spain2000 -7.792 -0.201 -10.343 -3.9612001 -7.229 0.273 -10.321 -3.9422002 -6.516 -0.433 -8.234 -3.2582003 -6.533 -0.776 -6.433 -3.5082004 -5.785 -0.332 -8.327 -5.2482005 -7.637 -0.877 -10.323 -7.3532006 -11.388 -1.496 -10.685 -8.9612007 -14.609 -1.281 -10.102 -9.9952008 -14.922 -2.85 -12.638 -9.6232009 -11.173 -1.986 -10.921 -4.8222010 -10.131 -3.524 -10.57 -4.4772011 -9.895 -3.069 -7.006 -3.7412012 -2.882 -0.529 -1.546 -1.0722013 -0.286 0.316 0.144 1.1032014 0.358 0.251 -0.083 2.1682015 0.64 0.241 -0.287 2.8082016 0.859 0.235 0.034 2.992017 1.058 0.238 0.48 3.2652018 1.431 0.087 1.063 3.594Source: 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 4, most figures in different years are negative and displaying a deficit. For example, Greece showed a current account balance deficit as percent of GDP of -14.922% and Portugal displayed a figure of -12.638% in 2008. Italy displayed a positive figure or surplus after 2013. Spain has showed a current account deficit of -9.995% in 2007 and -1.072% in 2012. 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).

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Table 5 shows the total investment as percent of GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.


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, Greece, in 2013, total investment decreased to 13.198% from 26.721% in 2007. In 2013, Portugal has a decrease of 14.494%. In 2001, Portugal total investment as percent of GDP was 27.716%. Spain has showed a steady increase and then decrease of the total investment as percent of GDP. Again, the position of the Greek Orthodox Church through the intervention with the government and the reserve bank is to increase investments from 80% to 98% of GDP. The aim will be to have plenty of jobs for everyone, so the immigrant Greek, Spanish, Italian and Portuguese return back to their country of origin. It is unfair to see educated persons to be forced to immigrate because there are no job opportunities or the jobs are limited to a specific party or organisation. The Orthodox Church, primarily, and then the politicians should care of expanding the capacity of the economy by investing in infrastructure and allowing foreign direct investments. For example, in Greece there are no investment banks, European and American businesses. If this happen, then, the accumulated money from the return of investment should be used to help the low and middle – classes, the poors, the unemployed and the prostitutes from different countries.

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Table 6 shows the general government structural balance in terms of percent of potential GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.

Greece Italy Portugal Spain2000 -2.072 -3.237 -4.176 -1.1132001 -3.146 -5.013 -4.993 -1.7512002 -3.560 -5.113 -5.223 -1.1202003 -6.110 -5.481 -5.516 -0.9762004 -8.404 -5.184 -5.795 -0.9752005 -6.708 -5.367 -6.109 -1.5892006 -8.730 -4.248 -3.797 -1.2692007 -10.846 -3.462 -4.156 -1.1252008 -14.278 -3.801 -5.374 -5.3042009 -19.113 -4.131 -9.172 -9.2762010 -12.301 -3.607 -9.031 -8.1002011 -8.297 -3.505 -6.568 -8.1292012 -2.581 -1.302 -3.972 -6.2512013 0.578 -0.213 -3.433 -4.9362014 1.084 -0.015 -1.935 -4.3442015 0.915 -0.014 -1.319 -3.4802016 1.159 -0.007 -1.414 -2.8272017 0.527 0.008 -1.450 -2.1182018 -0.371 0.002 -1.395 -1.437Source: IMF statistics and estimates.

General government structural budget balance is structured irrelevant from the business cycle. It includes information concerning government revenues, expenditures, interest payments, and past debt accumulation. The purpose is to separate cyclical from non-cyclical influences as a result of the divergence between actual and potential output, which is known as output gap. Table 6 shows that most of the GIPS countries have a general government structural balance deficit. They have recorded negative figures due to the increases of the government expenditures and accumulated deficits throughout the years. For example, Greece in 2007 has a structural budget deficit of - 10.846% and in 2009, the deficit was -19.113%. Portugal has a deficit of -9.031% in 2010 and -1.319% in 2015. The government should take great care that the expenditures do not exceed revenues as a large deficit will affect negatively the confidence of the creditors and the investors. The Orthodox Church could play a significant role at this stage to eliminate debts by explaining to the politicians and to the households the Gospel and the application of the 10 commandments.

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Table 7 shows the output gap in terms of percent of potential GDP of Greece, Italy, Portugal and Spain for the period 2000 to 2018.

Greece Italy Portugal Spain2000 -2.790 2.171 2.556 1.6712001 -2.183 2.415 2.201 1.7362002 -2.101 1.502 1.114 0.9392003 0.668 0.302 -1.063 0.6042004 2.430 0.742 -0.610 0.6722005 2.712 0.888 -0.536 1.2102006 6.939 2.278 0.101 2.4932007 10.042 3.076 1.862 3.3062008 9.932 1.615 1.305 2.2272009 7.306 -3.692 -1.519 -2.2692010 3.294 -1.935 -0.307 -2.4892011 -2.584 -1.805 -1.600 -2.2302012 -7.731 -3.396 -3.900 -3.5642013 -10.650 -4.786 -4.500 -4.1652014 -9.490 -4.034 -3.800 -3.5762015 N/A -3.202 N/A N/A2016 N/A -2.102 N/A N/A2017 N/A -1.105 N/A N/A2018 N/A -0.398 N/A N/ASource: IMF statistics and estimates.

According to the IMF subject information, output gap for advanced economies is calculated as the actual GDP less the potential GDP divided by the potential GDP and expressed as a percentage. Divergence or difference between actual and potential output is known as output gap. Potential output is the maximum output that an economy could produce and it is used as a measure of growth in the economy. The output gap is used in combination with the general government structural budget balance to separate cyclical from non-cyclical components. It is also used as a tool to measure inflationary or deflationary gaps. For example, according to Hardwick (1996), deflationary gap is the amount by which aggregate demand must be increased to push the equilibrium level of income through the multiplier to the full employment level. In other words, if current national income is below full employment national income, a deflationary gap will arise.

Table 7, shows that Greece has a positive output gap of 10.042% in 2007. For the same year, Greece had a structural budget deficit of - 10.846%. In 2013, the output gap of Greece was – 10.650 %, which means that resources are not managed in an efficient way. This implies that the actual output or GDP was less than the potential or efficient output. In fact, the negative figure of the output gap was associated with a deflationary gap. For example, in 2013, Greece had a negative output of -10.650% and a negative inflation or deflation of -1.753%. Italy, Portugal and Spain have recorded a slight positive or negative output gap figures. Positive output gap results to increase inflation as the costs of raw materials and labour increases. For example, in 2007, Greece has recorded a positive output gap of 10.042% and the end of period inflation measured as percent change has increased to 3.883% from 2.909% in 2006.

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The output gap of Greece in 2007 was an inflationary gap or growth of aggregate demand.

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. Negative output implies that the actual output or GDP was less than the potential or efficient output. Italy, Portugal and Spain have recorded a slight positive or negative output gap figures. Positive output gap results to increase inflation as the costs of raw materials and labour increases. Most of the GIPS countries have a general government structural balance deficit. They have recorded negative figures due to the increases of the government expenditures and accumulated deficits throughout the years. 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.

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. 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 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 politicians to make unnecessary expenditures.

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2. Integration of the Christian Orthodox approach, equilibrium price and equitable redistribution of income in a macroeconomic level.

The aim will be to find a reasonable affordable price that the poors, the beggars and the prostitutes could buy without a great difficulty by keeping themselves healthy, blessed and peaceful. As an example, we will use the fourth approach mentioned in the introduction section, which is a policy that redistributes income from the better – off to the worse – off. This approach, which is illustrated in Table 8 focuses on changing the distribution of income by increasing top tax rates and lowering tax rates at the bottom level of the income scale. The increased benefits through taxation are used to help the unemployed persons. Redistribution of income policy could include:

1. Increase the personal allowance.2. Decrease the lower rate of tax from 10% to 8%.3. Decrease the basic rate of tax from 22% to 20%.4. Increase the top tax rate from 40% to 41%.5. Reduce the tax threshold on the basic rate.6. Increase income support by 5%.

Table 8 shows the framework of the policy that redistributes income from better – off to the worse – off. The results of the model were obtained from biz/ed virtual economic model and the website is www.bized.co.uk.

Variables MeasurementReduced rate of income tax (percent) 8%Basic rate of income tax (percent) 20%Higher rate of income tax (percent) 41%VAT on books and newspapers (percent) 5%VAT on food (percent) 5%Duty on tobacco per pkt 20 (cents) Increase by 50 centsDuty on a pint of beer (cents) Increase by 50 centsExtra duty on a bottle of wine Increase by 50 centsExtra duty on petrol per litre (cents) Increase by 50 centsBase rate of interest Cut by ¼ pointDepartment of health Increase by 2 %Department of education and employment

Increase by 2%

The ministry of defence Halve it!Source: author’s estimation based on the biz/ed software.

According to Table 8, we have tried to design an equitable redistribution strategy of income to the poors, the beggars and the prostitutes at a macroeconomic level by changing the levels of income taxes, VAT, indirect taxes, government expenditures and base interest rate. By running the model we have obtained results that are based on the UK economy. Unfortunately, the software does not provide options to enter the data that are relevant to the Euro countries. In spite of that, it is very useful tool to understand how to design a macroeconomic policy. I will show as an example the UK total government debt as a percentage of GDP before and after selecting the policy that redistributes income from better – off to the worse – off.

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http://www.bized.co.uk/

Table 9 and Figure 2 show the total government debt as a percentage of GDP.

Year Before After Difference2003 37.20 39.21 2.012004 36.50 40.30 3.802005 35.70 40.39 4.692006 34.90 39.02 4.122007 34.00 36.03 2.032008 33.20 31.98 -1.222009 32.40 27.52 -4.88Source: author’s estimation based on the biz/ed software.

Table 9 shows that after the implementation of the redistribution policy, the total government debt as percentage of GDP has increased and decreased in 2008 and 2009.

Figure 2 shows the total government debt as a percentage of GDP.

Government Debt

051015202530354045

2003 2004 2005 2006 2007 2008 2009

Years

Per

cen

t o

f G

DP

Year

Before

After

Source: author’s estimation based on the biz/ed software.

Figure 2 shows the increase and decrease of debt as a percentage of GDP.

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Another approach is to link the Orthodox Church with government spending and the IS – LM model, which shows the relationship between interest rates and real output. The intersection of LM and IS curves is the equilibrium point. IS stands for investment and saving and is used for fiscal policy. LM stands for liquidity preference and money supply and is used for monetary policy. The horizontal axis represents real gross domestic product and is denoted by (Y). The vertical axis shows the real interest rates and is denoted by, (i). The downward slope of the IS curve means that lower interest rates would result in increase of real GDP and investment. On the other hand, The LM curve is an upward curve and shows the relationship between interest rates and real income for which money supply equals money demand. The following figure shows the IS –LM model.

Figure 3 shows the IS –LM model

Interest rates (i) LM

i2

i1

IS1 IS2 0 Y1 Y2 Y

Source: author’s illustration.

According to Figure 3, when government spending, is increased, then, aggregate GDP represented by Y is increased through the IS curve. The increase in government spending will shift the IS curve to the right. A decrease in government spending, increase in taxes or a contractionary fiscal policy will shift the IS curve to the left. An increase of interest rates will decrease government spending and planned investments. On the other hand, if the money supply increases, then the LM curve shift to the right, lower interest rates, increase investments and raise national income.

Then, we are trying to integrate the Orthodox approach with the components of the Keynesian aggregate expenditures model in an effort to serve the poors and financially vulnerable. The main components of the Keynesian aggregate expenditures model are planned consumption, planned investment, planned government spending, and planned net exports. The expenditures multiplier is defined as follows:

Y = C + MPC(Y) + I + G + (X-M) (1)

Where:

Y represents both gross domestic income, GDI and GDP, which are equal at equilibrium.C is the level of consumption.

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MPC is the marginal propensity to consume and it is calculated by dividing increases of consumption expenditures by increases of aggregate incomes.I is the investment expenditures. G is the government spending.X-M is net exports defined as exports minus imports.

The equilibrium level is achieved by rearranging and solving equation (1) for Y.

(2)

The expenditures multiplier KE = 1 / 1 – MPC is important as changes in planned investment, government spending or net exports could produce very large or multiplied changes in the GDP. In addition, a cyclical investment sector based on the level of confidence could produce a highly cyclical economy. If the MPC is 5% or 0.05, then KE = 1 / 1 -0.05 = 1.05. If we have 2 billions Euro increase in investment expenditures or government spending or net exports, then, the economy will be affected as follows:

(3)

Let’s calculate the total output and the multiplier of the interactions of two individuals in the economy that are producing different products. The first one is a poor person selling flowers and the second one is a prostitute selling the ingredients to the first one. We assume that the marginal propensity to consumer, (MPC) is 5% or 0.05 and the initial amount that the first person gives to the second person to buy the ingredients is 50 Euro. If we have 3 transactions, then the total output is calculated as follows:

Total output = 50 + 0.05 x 50 + 0.052 x 50 + 0.053 x 50

Total output = 50 *(1 + 0.05 + 0.052 + 0.053)

Total output = (4)

The multiplier is (5)

The multiplier is a function of the marginal propensity to consume. If the individual spend an extra Euro in the economy through continuous incremental transactions, then, the question is how much will be the increase of total output. In other words, total output is an aggregate figure of a multiplied effect of incremental transactions. The Orthodox Church has to make sure with the intervention of the government that the households are using the correct percentage of the marginal propensity to consume based on their incomes. To achieve the above, the Orthodox Church has to link them with a spiritual father to teach them how to manipulate their thoughts towards successful spiritual and marginal propensity to save decisions based on limited needs and consumptions.

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Towards this direction, the government will help the households by reducing expenditure. Consumers will start to spend and consume less, investments will decrease and aggregate demand will shift to the left. It is worth to mention, that this will happen ONLY after establishing full capacity and full employment. In other words, initially, the Greek Orthodox Church through the intervention with the government and the reserve bank will increase investments and gross national savings from 80% to 98% of GDP. The purpose is to make sure that there are sufficient jobs, reserves and money to help the low and middle – classes, the poors, the unemployed and the prostitutes from different countries. Then, the government will start to reduce expenditures to help the households to align with the principles of the Orthodox Church. At the same time, it will increase revenues from the accumulated national savings and the return of investments that the government did in the past. As there will be decrease of investments at this stage, the government will increase substantially the base and interbank interest rates of national and personal savings. The aim will be to help the households that have accumulated wealth and are not working to cover their daily expenses. This will not be at the expense of increased inflation or aggregate demand as the Orthodox approach will have already teach them how to eliminate their consumption habits through the manipulation of thoughts.

Let’s return to the multiplier effect. The multiplied rise in incomes and employment is in equilibrium in a free market economy when total injections, (J), equal total withdrawals, (W). When injections do not equal withdrawals, then, there is disequilibrium in the economy. Withdrawals consist of net saving, net taxes and import expenditure. On the other hand, injections comprises investment, government expenditure and export expenditure. The rise of injections will lead to a rise of the GDP and the value of the multiplier will increase. If injections are less than withdrawals, then national income and inflation will fall. Unemployment will rise and growth will be negative.

Table 10 shows an example of a virtual European economy. The national income, (Y), the consumptions, (C), the injections, (J) the withdrawals, (W) and the aggregate expenditures, (E) are measured in billions Euros.

National income, (Y)

50 70 90 110 130 150 170 190 210

Consumptions, (C)

50 60 70 80 90 100 110 120 130

Injections, (J) 30 30 30 30 30 30 30 30 30Withdrawals, (W)

0 10 20 30 40 50 60 70 80

Aggregate expenditures, (E)

80 90 100 110 120 130 140 150 160

Source: author’s calculation based on a virtual European economy measured in billions Euros.

According to Table 10, the equilibrium level is where injections = withdrawals. The equilibrium level of national income is where national income = aggregate expenditures. In this example, the equilibrium level of national income is 110 billions Euros and 30 billions Euros for injections and withdrawals. The marginal propensity to consume is changes in consumptions divided by changes in incomes. Thus,

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(6)

The expenditures multiplier is (7)

If the aggregate expenditures is raised by 10 billions Euros and the expenditures multiplier is 2, then the rise in national income will be 20 billions Euros. If the full employment national income is 30 billions Euros, then current national income is below full employment national income, and a deflationary gap will arise. The following graph shows consumptions, (C), injections, (J), withdrawals, (W) and aggregate expenditures, (E), plotted against national income, (Y).

Graph 1 shows consumptions, (C), injections, (J), withdrawals, (W) and aggregate expenditures, (E), plotted against national income, (Y).

C, J, W, E Y

E C

W

30 J

0 0 Y Source: author’s illustration based on Table 10 of a virtual European economy measured in billions Euros.

The multiplier effect in macroeconomic theory is similar with the repeated incremental spiritual and accelerator effort that the person does within the Greek

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Orthodox Church, but with different variables. The circular flow of the spiritual effort of an individual shown, in Figure 4, 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 Holy Trinity, Theotokos, repentance, confession and 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, humility, and manipulation of thoughts through the intervention of the spiritual father help us to balance the equilibrium state of the mind. In this spiritual model disequilibrium is achieved if spiritual injections = withdrawals or the accumulation of a sinful life. Equilibrium is achieved through the intervention of the spiritual father, the strong faith that the individual has towards the Holy Trinity and the fact that he /she receives help from the Divine grace. Without the help of Virgin Mary and the Holy Trinity a state of sinful disequilibrium will persist. As individuals are taking decision, there should be a balance between spiritual and marginal propensity to consume and save 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 individuals 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 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 and mainly the spiritual ones. As we said earlier, the ultimate objective is the salvation of the soul, so this principle should outweigh our economic 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.

Figure 4 shows the circular flow of the individual’s spiritual effort.

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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 economic theories 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 pillars of wisdom, which focus on the fear in a positive way and the respect that we should have towards the Holy Trinity, the Theotokos, the saints, the hermits, the apostles, the martyrs, the Archangels, 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 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. Negative output implies that the actual output or GDP was less than the potential or efficient output. Italy, Portugal and Spain have recorded a slight positive or negative output gap figures. Positive output gap results to increase inflation as the costs of raw materials and labour increases. Most of the GIPS countries have a general government structural balance deficit. They have recorded negative figures due to the increases of the government expenditures and accumulated deficits throughout the years. 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.

According to the Gospel of the Evangelist Matthew, chapter lines 16 -24, in the

New Testament nobody at the same time can be very rich and at the same time very faithful to the Holy Trinity. The reason is that the excess of money creates unlimited needs, excess material consumption and greed that distract the individual from his/her spiritual integrity. We are not discussing about this case in this article, but how to eliminate the gap between the better – off and the worse – off. According to the Gospel of Matthew, no one can serve two masters at the same time, namely the Holy Trinity and the mammon or money. He/she will hate the one and love the other. It should be crystal clear that the involvement of the Orthodox Church with the government and the central reserve bank is to facilitate the redistribution of income and supervision that there are enough resources to cover the needs of the poor’s, the unemployed, the prostitutes, the lower and middle classes. It is worth to mention this point as the Orthodox Church is going to deal with very large amount of money estimated to trillions of Euros in an aggregate level. The point is not to gather treasures in earth but in heaven through the interaction with the Orthodox principles.

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 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 politicians to make unnecessary expenditures.

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References

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

Hardwick, P., Khan, B, Langmead,J.,(1996), “An Introduction to Modern Economics”. 4th edition. Produced by Longman Singapore Publishers.

Mishkin, F., (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.

Sloman J., (2004), “ Essentials of Economics”. Third edition. FT Prentice Hall.

www.bized.co.uk. is a virtual economic model.

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http://www.bized.co.uk/

Measuring indebtedness of GIPS countries

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