Sunday, 7 July 2013

What is the Real Cause of Europe's Troubles?

In nature, as well as in the case of country, the evolution of its socio-economic development tends to become more complex over time and is characterized by the presence of discontinuities. As we know, complexity growth is fueled by two factors: new structure and/or increasing uncertainty. The key issue is to understand if the growth of complexity is due to uncertainty or structure and in what proportion. A growing complexity, providing that it happens at a safe distance from critical complexity, points to an evolving and growing economy.  In other words, growth means complexity increases. However, because of the laws of physics, this implies also the production of entropy. A more efficient system will produce less entropy per unit of newly created complexity.

As illustrated in previous blogs, the Uncertainty/Complexity ratio is a good reflection of the "degree of efficiency" of a nation. The evolution of this ratio - (normalized to a value of 1 in 1986) is illustrated in the figure below. The ratio has been computed based on data provided by the World Bank and may be regarded as a meta-KPI (this is because it is computed based on nearly 1500 macro-economic indicators) . 

It is evident that out of the five regions that have been analyzed (EU, USA, Brazil, China and India) it is in the EU that uncertainty (entropy) is produced at a significantly higher rate than anywhere else. In other words, for every unit of complexity, the EU produces more entropy ("waste", uncertainty) than the other regions. Pumping large amounts of uncertainty into a system automatically makes it less predictable and more exposed to unexpected and extreme events.

The diversity, cultural heterogeneity and constraints, which have emerged during the economic and social evolution of the industrialized countries in Europe, are one of the causes behind the massive uncertainty which reigns in the EU. The ex-Comecon countries, which have joined the EU following the fall of the Berlin Wall, could have contributed to the growth of global uncertainty. However, the key element in the picture is that Euro zone is not “one country”. Indeed, it is an aggregation of countries each having a history, culture, lifestyle and a language. Moreover, the European Union functions based on a weak set of rules, which are not adequate to the current economic pressures, not to mention a heavy, slow and old-style institutions and bureaucracy.  The result is that the Euro zone is becoming more and more fragile as we have already indicated in one of our previous blogs.

One cannot ignore the real and tangible benefits that the Union has brought to the individual countries. The transition from a variety of currencies to a single currency had a very relevant impact on the uncertainty.  The Euro has introduced a discontinuity in the trend of the uncertainty/complexity ratio, improving the sustainability of each individual country (see dotted line, illustrating an estimated trend in the ratio). Without the Euro, Europe would have "produced" far more inefficiency which could have suffocated the continent's economy sooner than the 2008 meltdown.

Unfortunately, the advent of the financial crisis has exposed the limits of the underlying assumptions of the European Union. The crisis pointed out that the defining rules, on which the European Union has been formed, prove insufficient when it comes to competing in new regime of financial and economic turbulence. The inefficiency of the EU as a single entity does not allow it to compete with other World regions.

If the EU wishes to overcome the impasse, a significant effort and new rules are required in order to turn the European Union into a more lively, agile and efficient system, going beyond the concept of a single currency and leveraging the value of its diversity and potentialities. Therefore it is imperative to start adopting a new logic. In order to reduce the uncertainty an inefficient system produces, and in order to survive and compete in this era of turbulence, the EU has to become "one nation". Without a strong union, the likelihood of survival of each individual country is extremely low.