Will the Euro Survive? Will the EU Survive?

Following  the bailout of Greece earlier this year today (22/11/2010) it is Ireland’s turn. The Europeans are facing the bitter truth that certain lifestyles are not sustainable. While this is certainly the case, it is also true that the richer nations won’t be willing to subsidise the poorer nations for ever. This places not only the Euro under pressure, it also suggests that a couple of bailouts more will question seriously the European Union itself. The Daily Telegraph sustains in a recent article that the Euro will not survive five years (read here).


Along similar lines are the comments of Joseph Stiglitz (see his article).



Using Eurostat’s macroeconomic data – the same data which we use to analyse the entire EU economy, publishing our quarterly Structural Fragility Reports – we have conducted an analysis of the so-called PIGS (Portugal, Ireland, Greece and Spain) as well as that of the big four economies (Germany, France, Italy and the UK. The idea is to confront these two systems and to analyse their resilience. Here is what we found.


First of all the PIGS. Below the Complexity & Risk Map of the four economies is illustrated, indicating, first of all, an alarming one-star complexity rating. This points to very low resilience (robustness), hence very high fragility. This means the structure of the combined economies is close to  dissolving. The map has a density of 23% pointing to a fairly high risk of contagion. The system functions close to its critical complexity – the current complexity of this system of four countries is 48.4 while the critical complexity (maximum complexity sustainable with the current structure of the economy) is 53. This means there is very little margin for error. Moreover, for systems functioning so close to their critical complexity it is extremely difficult to make credible forecasts.


The Complexity Profile reported below illustrates in what measure each of the four countries contributes to the overall headache of the EU (and the BCE). Spain, being the biggest economy, has the largest footprint in the PIGS economy and contributes to 27% of the problem (complexity). Follows Greece (23%) while Ireland and Portugal contribute each around 19%. Based on the Complexity Profile, it is clearly Spain that will need to be bailed out (if at all necessary) because it can do the most damage in case of default. The problem is that the EU may not have enough resources to bail out such a large economy.




The Complexity & Risk Map of the Big 4 EU economies is reported below. The complexity rating is a more favourable two stars. This points to higher resilience than that of the PIGS but fragility is nevertheless high. The risk of contagion is also high, as the four economies are tightly coupled (the map density is 26%). The distance to critical complexity is larger when compared to that of the PIGS but the situation is far from optimal. Unless the system reaches a three-star rating fragility will remain high.



The Complexity Profile, shown below, indicates that first France (32%) and the UK (26%) are the two main contributors to high fragility of the Big 4. Germany and Italy on the other hand are the two countries that are helping keep resilience away from alarmingly low levels.



And now guess this: what is the rating of the system PIGS + BIG 4? It is one star! Resilience is a mere 48%! We are all on the same boat.


What can be done? Fragility (low resilience) stems from excessive complexity, i.e. working too close to critical complexity – it is more or less like living with extremely high levels of cholesterol or sugar in your blood and not doing anything about it. Either you change diet or you exercise more, better if it is both. In the case of the economy it is imperative to dump the excessive complexity. What does this mean in practice?




Simplify the banking system, the international financial system, financial products, corporate business models, laws, regulations, life styles. And reduce speculation. What we face otherwise is an unsustainable economy without which there is no sustainable society.



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