Eurozone in crisis: Debt, deficits & structural analyses – Free EXCLUSIVE report download


This graphic, from BBC, is part of an interesting piece: Eurozone in crisis

image showing national debt as a percentage. The UK is 68.1, Germany 73.2, Greece 115.1, Spain 53.2, France 77.6 and Ireland 64.

But, at Ontonix, we don’t rely solely upon [even the most reputable] news sources!

Although their qualitative analysis of the data is always interesting when it comes to measuring the “structural fragility” – based upon the same data sources – WE are the only firm able to provide a quantitative analysis to determine (amongst other things):

How fragile is the EU economy?

Using Eurostat quarterly data Ontonix have measured the structural fragility of  combined economies of the 27 member states. It is 49% (0% meaning a fully resilient system while 100% fragility corresponds to a system on the verge of collapse)…To view and download the

Q4 2009 EU Structural Fragility Report

An analysis of Q1 2010 will be available next month. With recent events and some of the information that has emerged about figures from Greece and Hungary (how many more?), that should make for some VERY interesting reading.

The structural fragility of a corporation, a market or an economy may be quantified by measuring its current complexity and the corresponding critical complexity. At critical complexity all dynamic systems become unstable and are characterized by a marked capacity to lead to unexpected and surprising behaviour. Therefore, the further a system functions from its critical complexity the more predictable and  resilient it is. Based on this logic the fragility of the combined economy of the 27 EU member countries has been analyzed in the period Q1 2005 – Q4 2009 and the fragility in Q4 2009 has been measured. For the scope, the following macroeconomic parameters have been used for each of the  countries:

•    External balance of goods and services
•    External balance – Goods
•    External balance – Services
•    Gross value added (at basic prices)
•    Gross domestic product at market prices
•    Gross operating surplus and gross mixed income
•    Compensation of employees
•    Taxes less subsidies on products
•    Taxes on production and imports less subsidies
•    Final consumption expenditure
•    Individual consumption expenditure of general government
•    Final consumption expenditure of households
•    Household and NPISH final consumption expenditure
•    Final consumption expenditure of NPISH
•    Collective consumption expenditure of general government
•    Domestic demand
•    Final consumption expenditure of general government
•    Gross capital formation
•    Gross fixed capital formation
•    Changes in inventories
•    Changes in inventories and acquisitions less disposals of valuables
•    Acquisitions less disposals of valuables
•    Exports of goods and services
•    Imports of goods and services

This leads to a total of 648 parameters. Quarterly data has been obtained from the Eurostat website.

Complexity-based fragility ratings focus entirely on structural aspects not on financial performance. A corporation may in fact perform very well and yet be fragile from a structural standpoint.

The current economic crisis has exposed the need to take a close look at systemic and holistic properties of markets and economies. A complexity-based systems approach exposes properties of  the dynamics of an economy that conventional techniques cannot. In fact, the meltdown of the economy on a global scale is proof of the limitations of contemporary econometrics.
Structural fragility of an economy is stratified into five levels:

(1) Very High: The economy has a weak structure. Exposure is very high. It is very difficult to make forecasts and define realistic goals.
(2) High: The structure of the economy is fragile and difficult to steer. Exposure is high. It is difficult to make forecasts.
(3) Medium: The economy has a moderately resilient structure. Exposure is limited and forecasts may be attempted.
(4) Low: The structure of the economy is robust. Exposure is low and it is possible to make realistic forecasts.
(5) Very Low: The structure of the economy is resilient and controllable.  Exposure is low.

The evolution of complexity of the combined 27 EU economies over the mentioned five-year period is illustrated below:

The constant rise of complexity since Q1 2005 indicates that from a global perspective the crisis in the EU has been maturing at a sustained rate. Complexity has peaked in Q4 2007 (see arrow) one quarter after the subprime bubble.  In Q1 2009 a sustained reduction in complexity commences, leading to pre-crisis levels in Q4 of 2009. In Q4 2009, the structural fragility of the system of 27 countries is  49% (0% means a resilient system, a 100% implies a system on the verge of collapse). This is equivalent to a medium fragility as illustrated below.

Even though complexity has reached pre-crisis levels, the structure of the combined economy is moderately resilient. Because of a globally turbulent economy, this fragility increases substantially the risk of financial contagion, domino effects and fast shock propagation.

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