Sunday, 7 July 2013

The Collapse of the Euro: Conspiracy or Bad Design?

Our previous blogs show how the Eurozone is in a state of steady decline. The magnitude of the contraction of the EU economy may be appreciated in the plot below, where the reduction in complexity is evident. We have chosen complexity to combine the 24 macro-economic parameters of the 27 EU economies (a total of 648 parameters) into a single meta-KPI. Since complexity reflects potential, activity and functionality, a shrinking economy is also less complex.

The problem, however, is that the EU is not taking any action. If one simply looks at how complexity has been dropping one notices a surprisingly smooth curve. No discontinuities, no jumps, just a nice and smooth decline. The almost "textbook" character of the shape of the curve after Q1 2009 denotes zero intervention - the system is just running on its own inertia, governed by the laws of physics.

The point now is this: is this an architectured and piloted crisis or a natural and inevitable consequence of bad design? The first would point to conspiracy, the latter to incompetence. But how do you figure out which theory is best when so many theories can be made to fit a complex scenario? In science, following the indications of Ockham it is pretty easy - the simplest theory (but not too simple) is taken as the theory. But economics is not a science and so it's difficult to speak of a theory - all you can do is build is conjectures. Besides, the current situation has a strong social facet too, which makes it even more difficult to build a theory and actually test it. And if you can't test it empirically then it is not a theory. So all we can do is come up with conjectures. However, the point still remains. Is this crisis an example of the Chicago Boys-style induced Friedmanian de-regulatory shock, in which you deliberately create a crisis and then manage it to your benefit by acquiring at discounted rates the remains of economies which you yourself have ruined? Or is it something worse: incompetence in architecturing and forcing an unnatural union of heterogeneous cultures, economies, life-styles, into a single super-huge Too Big To Fail system? The problem with Too Big To Fail systems is that in virtue of their enormous complexity not only are they very difficult to manage and steer, they are inherently very fragile and, consequently, they must fail. In other words, we're talking of systems that are:

Too Big To Fail = Too Complex To Survive

Today, the is EU, not just the Euro, is pretty much like that. This is something our leaders didn't know and are only realizing now that there are few degrees of freedom left. And not much time. But to what extent did our leaders make an immense mistake?

A short digression: the pop-science "definition" of resilience says that a highly complex system is resilient because of its modularity, diversity, variety and redundancy. Well, isn't Europe just like that? Diversified, modular and redundant? And yet the resilience of the EU is rated at "Very Low". Something is not quite right.
Back to the point. The unprecedented transfer of wealth from the middle class and poor to the super wealthy does certainly look a bit like a fiendish conspiracy. But on the other hand, such a global conspiracy requires a superb planning capacity, vision and intelligence and these happen to be lacking nowadays. Our bet? It's our leaders that lack superb planning capacity, vision and intelligence and the oligarchs are naturally taking advantage of the situation. In essence, examining the dynamics one can conclude that the:

EU is An Out-of-Control System

You just cannot architecture super-complex systems without being able to measure and manage complexity. The hallmark of super-complex systems is their high complexity! Imagine being a physician who advises his patients on how to lower his cholesterol without being able to actually measure cholesterol levels.