A Systemic Look at the Eurozone

domino-effect-of-euro-debt

The Brexit is now reality, the situation in Greece is still critical. The ECB cannot get inflation on track. The flawed ‘design’ of the EU and its currency is widely recognized.  However, we ought to consider a few things:

• The EU is a super-huge system, no matter how you look at it (size, population, economy)
• A system of such proportions has never been conceived before – there is very little experience in the matter
• The components are extremely heterogeneous
• Those who ‘designed’ the system did not have any system-specific Business Intelligence technology to assist them
• Those who ‘designed’ the system had no means of estimating and managing the resulting complexity – there were no tools to measure and manage complexity in those days
• When the system was designed and when it went into ‘production’ nobody had any clue as to its dynamics. Today the same may be said. The EU is running on autopilot and nobody knows how this autopilot works.

When analyzing the complexity and resilience of the Eurozone it is difficult not to speak of Greece, a somewhat forgotten subject today. The GDP of Greece accounts for a very small percentage of that of the Eurozone. And yet, the magnitude of the reaction that the Greek crisis has induced in the markets and in the media was certainly out of proportion. Or was it? The amount of market capitalization that has been lost in the past months due to the Brexit exceeds by far the Greek debt. Why is this so? The disproportionate reaction of the system is, after all, an embarrassing admission of its weakness and fragility. Is Greece the cause of this fragility? Certainly not. With all likelihood, Greece is simply one of the symptoms of a malfunctioning out-of-control system which has been ‘designed’ without taking into account the fundamental properties of its dynamics. One cannot design a system without taking into account its systemic properties. Designing a (complex) system is not about orchestrating the functioning of its components once they have been forced to fit together.

If one wants to understand system design and system operation, one should speak to an engineer, not an economist. In a regime of high complexity, turbulence and inter-dependency, one must resort to new tools, new methods of diagnosis and adopt a new mindset. The World is changing very quickly and we must not be slaves of our outdated tools.

So, is Europe, as a system, on the road to recovery? The Brexit has indeed sent strong shock waves through European stock markets. However, when the turn of Greece will come (the so-called ‘Grexit’) it is not going to be a simple ripple, which will dissipate very quickly. The UK was not part of the Euro while Greece is. The consequence of Grexit will probably be more severe and will probably last longer. One reason is because the system is more crippled today than it was a year or two ago.

The evolution of complexity of the economy of the Eurozone reflects it very eloquently. Growing complexity is a sign of evolution and growth. Any loss of complexity, unless deliberately orchestrated like weight loss in a diet, is rarely a good omen and it typically points to a shrinking system, undergoing some sort of deflation.

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First, the 2000 internet bubble, then the 2007 crisis, finally a third dip in 2014, hinting a 7-year complexity cycle. Surely, the post-2007 dip is quite severe, taking the economy back at least 10-15 years. If all goes ‘well’, there will be another dip around 2021. Things are not going in the right direction.

The evolution of resilience – the capacity to withstand shocks, contagion or destabilizing events – confirms the 7-year cycle but it also shows that the amplitude of oscillation (volatility) is increasing. Evidently, three peaks are insufficient to claim that this is indeed always the case. Cycle or not, resilience values of 50% point to a crippled system which is not well equipped to absorb shocks. The rating of the entire Eurozone as a system is approximately 52%, or a BBB.

eu_r

Like in the case of complexity, resilience too has a steady and alarming downward trend. Is The Eurozone Too Big To Fail or is it Too Fragile To Survive? The rampant linear thinking that pervades conventional Business Intelligence and Analytics may induce one to think that there are two or three possible scenarios: the Eurozone recovers, it does not, or it breaks up into two macro-regions, with a North-South polarization. The Quantitative Complexity Theory, however, suggests that there are potentially very many possible outcomes, many of which quite non intuitive. Time will show. In the meantime, it looks like the next Big One will be around 2021. And it could mark the end of the Euro experiment. This is because the system is quite crippled already today and, if the tendency continues, in 2020-2021 we will be facing an even more fragile system.

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