When I traveled last year to Berlin, I met a Japanese tourist at the Berlin wall. When I told him that I was Greek he got excited and asked me what I believed has caused the Greek crisis. I was ashamed to admit that even though I am an economist, at that time I could not provide a proper explanation. No theory or analysis of the crisis had left me with the feeling of fulfillment.
Of course it is well known that Greece increased its debt in the last 30 years and used the borrowed capital in non-productive investments. It is also well known that Greece increased its public sector officers to an extent unbearable for the government budget. Moreover Greece accepted retirement at an early age, when continuing to work was still possible. As a final hit, Greece was forced to include the debts of bankrupt public interest companies in the national debt, since the government guaranteed their loans.
These reasons can be read in any international financial newspaper and they are also valid. But still they are not complete. Why did this crisis happen only in Greece? Are other countries following different practices? After delving deeper into these obvious reasons I ended up understanding why this crisis is just the beginning and why it started in Greece.
So what has truly caused the Greek crisis?
The first part of my answer lies in the Greek culture. It is a combination of selfish behavior, lack of respect and as a result, over-regulation. This might sound absurd for a country where rules are not followed, but in turn it explains why so many of them exist. The selfish behavior of the inhabitants of Greece led to the disrespect of their fellow people in society and consequently to a complicated system of rules. Selfishness in Greece has become a widespread disease, as shown by the following habits among others:
- Voting politicians in view of a personal gain as opposed to voting by approving their managing abilities.
- Doing business with excess profit, such as selling land with excess gain, over-charging for the location of rented commercial space (in Greek: aeras) and overcharging tourists.
- Paying less taxes than commanded by the government, paying vendors later than agreed and asking for a better price if no invoice is given.
- Bypassing competition when a relative or a friend is in charge of the decision, especially during military service, employment applications and state matters.
- Smoking in public places, thus ignoring the inconvenience of others.
- Driving recklessly, ignoring the fact that the road is shared and not owned.
All the above are examples of excess selfishness in Greece, which is translated as basing one's happiness on the potential or actual unhappiness of the others. The immediate response of the society to this behavior is the application of rules. This lead to the creation of a complicated system of rules, which impedes the innovation of socially responsible people. Thus Greeks are famous for succeeding out of their home country, but notorious for failing inside the box called Hellas. Unclear rules, overlapping laws, old regulations, selective application of penalties, all of them form the hell that Greek and foreign companies are forced to face while doing business in Hellas. It is thus no wonder why a court in Greece requires up to 15 years to reach a final decision.
Even though regulation can be used successfully as an immediate measure to selfishness, it should always be followed by a behavioral change through education, which will ensure the persistence of a behavior accepted by the society. An acceptable behavior does not need to be regulated. Misbehavior is a habit and habits are changed by substituting them with new habits, which benefit the individual while they are tolerated or even admired by the others. However the Greek society has yet failed to educate itself in altruistic behavior as a contrast and countermeasure to selfishness. Altruism has not yet become part of the culture in Greece. Selfishness and its temporary countermeasure, regulation, still prevail.
And along with them:
- The lack of respect.
- The lack of love for foreign people and groups.
- The benefit on the expense of the others and consequently:
- The jealousy of the success of the others, as this is believed to have been based on the expense of the rest.
In Greece we need to learn that only one behavior can be sustainable: To create a win-win situation where the benefit of the one is not based on the expense of the other, but rather on the benefit or at least on the indifference of the other. This kind of behavior never leads to regulation, precisely said, this behavior can not lead to regulation. This behavior is based on respect. We need to learn to respect.
Now it should be clear why Greece fails to provide the grounds for sustainable and profitable investments. Selfishness is connected to over-regulation and over-regulation along with selfish practices are connected to low investment success rates. A problem of the society becomes a problem of the economy. The culture in Greece has created a non-competitive environment where winning at the expense of the others is prevalent and innovation is stopped by regulation.
While the first part of the answer describes a cultural problem of the Greek society, the second part of the answer describes a loophole of capitalism as a macroeconomic system.
Even though capitalism is based on capital gains and interest, only the pursuit of capital gains is a sustainable practice of investment. Investing or lending on interest is not sustainable if the interest charged is higher than the profit earned by using the borrowed amount. This cannot lead to repayment of the capital as the capital gain is not sufficient to cover the annual interest payment, let alone repay the capital itself. Thus an interest rate higher than the resulting return of investment will eventually cause a form of addiction to credit, constantly calling for an increase of the credit amount. Hence interest can only be justified if it is variable, based on the resulting profit. However in financial terms this is not called interest anymore, but capital gain. Thus borrowing is not a sustainable practice and to my opinion it is one of the biggest loopholes of capitalism as a system.
From a social aspect, borrowing money with interest is a means of financially stronger entities to create profit out of the necessity of financially weaker entities. Thus it is socially unethical. On contrary, lending money without interest but with trust can only be the result of support and compassion towards the weaker, because this form of lending implies for the financially stronger: "I trust what you are doing and I admire your effort to rise, thus I support you because I trust you". Lending money with high interest means for the financially stronger: "I don't trust what you are doing and I am not really interested in your goal. I give you money merely because I want to profit. My gain is at your expense and your gain is at my expense of fear that I will not be repaid". In Islam those who charge "riba", which is interest or any other surplus value without counterpart effort, are committing a sin. Life in sin is pleasant, but a sinner's pleasure needs to be repaid with a suffering greater than the pleasure, because it also bears the memory of the lost pleasure.
So now it should be clear that lending with an interest rate higher than the capital gain is financially unsustainable, socially unethical and religiously sinful. It can and will only lead to a temporary pleasure and a long term suffering, just as this is true with every addiction.
And this is what happened to Greece: The public debt in 1981 was 1,97 billion Euros (29,7% of GDP) whereas in 1989 it was 27 billion Euros (65,7% of GDP). The interest rate agreed was higher than the profits of the government resulting from the amount received, which is obvious from the continuous growth of the public debt to GDP ratio ever since (170,6% in 2011). Of course the failure of the investment could not have been known in the beginning, as it is true for every loan. This is why borrowing on interest can not be a sustainable practice as a whole.
Given the background above the Greek crisis can be fully explained and understood:
We agreed to use loans based on interest. Thus we accepted to use an unsustainable practice of capitalism, which created an addiction and lead to suffering after the pleasure faded away. Culturally we based our happiness on the unhappiness of the others using selfish practices in public and private life, leading to the over-regulation of the country. Over-regulation created an unfriendly environment for investments and was not substituted by education thus permitting this practice to continue until today. Therefore investment based on credit in Greece was and continues to be unsustainable and leading to a financial addiction of the weaker country of Greece to stronger countries or unions. Thus further use of credit in Greece will eventually lead to the loss of its sovereignty.
And there is nothing more than this answer. It explains why the crisis first hit Greece, but it also explains why the crisis is bound to hit other nations, if their governments fail to sustain a public surplus higher than the interest rate paid. At present this is just an illusion since all the EU member states run on public deficits with the Euro area at 3.3% deficit in 2012 and the OECD total at 5.5% deficit in 2012. Therefore, following the example of Greece, nations using capitalism are on a course which leads to the loss of their sovereignty towards financially stronger institutions. Socially this bears the risk of revolutions, thus it is to be avoided at any cost.
As a global society, if we want to overcome capitalism crises in the future we need to substitute interest with capital gains, both for future loans and for the current ones. Even if this sounds difficult to be accepted, we cannot expect a sustainable solution by following an unsustainable practice. This is also a prerequisite for the solution of the Greek crisis.
So is there really a solution for the crisis in Greece?
Of course, as there is no problem without a known or unknown solution.
Is the solution more ECB and IMF loans?
For the beginning yes, but this is not sustainable.
Is the solution further credit defaults?
For the beginning yes, but this is not sustainable.
Is the solution more taxes and regulations?
For the beginning yes, but this is not sustainable.
Is the solution to dismiss more public servants?
For the beginning yes, but this is not sustainable.
Why is none of the above solutions sustainable? Simply because none of the above solutions bases the happiness of one party on the happiness of the others.
Of course there is a sustainable solution and there are many approaches to it, but I will present just one here. By reading this one and examining any other proposed approach we need to keep in mind that the practices, which caused the crisis on first place can not be used to provide a sustainable solution. Thus the solution proposed should not be on the expense of the others. Also the solution proposed should not use credit on interest.
The approach proposed here for overcoming the crisis in Greece is based on the establishment of a free economic zone. This approach has been successfully implemented in many countries ever since the Greek antiquity. The first known free economic zone was the port of Delos in ancient Greece. Ever since, hundreds of free economic zones evolved in history including Venice during the Middle Ages and Renaissance, the Hanseatic cities of Hamburg and Bremen between the 13th and the 17th centuries and the modern cities of Hong Kong, Dubai and Singapore. Even though Greece had the first known free economic zone, today it has none, which creates a clear opportunity.
The basic concepts of a free economic zone are the following:
- A small number of clear rules, easy to be understood, learned and interpreted.
- Rapid processes in the public sector, judicial system, clearances and approvals.
- Lack of import and export regulations or customs.
- Easy immigration processes based on a person's capabilities rather than the country of origin.
- Low income tax.
These concepts provide the grounds to attract capable, wealthy, international and innovative people.
A free economic zone can boost economic activity, can provide employment to capable people, can invert population outflow to population inflow and by increasing the country's GDP it can contribute to a lower debt/GDP ratio. The interest rates will naturally fall, based on trust of an economic revival.
Whereas these changes might be painful on a national level they would be easier to be implemented and accepted in a small part of the country, maybe an island, that has no interest to the rest of the nation. This is also the example given by the free economic zones of Hong Kong and Singapore, which were both farmer villages before becoming free economic zones.
Finally, a free economic zone will give a working example to a tired population which distrusts its government. It will show an open pathway of growth to a society, which clearly sees a dead-end in the currently applied measures. It will substitute desperation with hope. And really this will be the most important contribution of a free economic zone in Greece.
And this force is needed in order to rethink the rules of the game, in order to change basic habits and mentalities. Without hope, there is no change on a national level, just as this is true on a personal level.
We have no excuses. Even the solution makers are uncertain in their own solutions. Three years after the start of the crisis in 2010 the debt/GDP ratio has risen from 148% in 2010 to 157% in 2012, even though a painful haircut of the debt has already been applied.
We are giving painkillers to a disease. It is our responsibility to understand the disease first and then cure it instead of just curing the pain. Through the dark tunnel comes the light, but only if we continue walking to the front inside the darkness. And to continue walking to the front we need to believe that the light exists at the end, even if it is far away. We need hope.
And this is the answer to the question you asked me my friend one year before in Berlin. There was no satisfactory answer based on the theory I learned in the university, thus I had to seek outside the borders of capitalism and the current culture of Greece in order to provide an answer which would satisfy me first.
Finally, if you want to keep one thing as a deep lesson from this crisis of capitalism, then just remember the following:
- We cannot base our happiness on the unhappiness of the others. Likewise we cannot base our unhappiness on the happiness of the others. And we cannot give or accept loans with interest rate other than the capital gains. Not without committing a sin. Not without the absolute certainty that our beloved building will one day collapse.
- Angelos Ioannis
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