Complexity Economics

How to Best Breakup The Eurozone?


(Blog written in May 2013)

The Eurozone is in an extremely fragile situation with a one-star resilience rating for the past year and a half. The system is reaching critical complexity very quickly and inexorably (current complexity is approximately 390, the critical value at which breakup is inevitable is around 426).

First of all, highly complex systems, such as today’s economy, are basically out of control – the current crisis is sufficient empirical proof – and their dynamics is beyond our comprehension. There is no way we can describe such a system using traditional mathematics. No model will work here. Secondly, politics is not only unwilling to intervene, it is incapable of any form of intervention because of the immense complexity of the problem and, if that were not enough, political agendas are imposed by finance. Governments are giving up sovereignty whether they like it or not. This compounds the problem further. It appears the system will break up.  There is talk of establishing a two-speed EU.

We have performed an analysis of a set of hypothetical scenarios, in which the system would be “split” into clusters of countries with a certain degree of affinity. We have measured the resilience of each cluster. The following groups of countries have been analyzed:


EU 15 (this is the entire system):
Complexity = 167.1, Resilience = 56%

G7 (France, Germany, Italy and UK):
Complexity = 52.7, Resilience = 66%

G7 – UK
Complexity = 38,7, Resilience = 67%

PIGS (Portugal, Ireland, Greece and Spain)
Complexity = 57.6, Resilience = 58%

MED (France, Greece, Italy, Portugal and Spain)
Complexity = 72.1, Resilience = 59%

MED – Greece and Portugal
Complexity = 41.9, Resilience = 59%

EU 15 – G7
Complexity = 116.8, Resilience = 55%

Northern Countries (UK. Sweden, Finland, Denmark, Netherlands)
Complexity = 76.1, Resilience = 66%

EU15 – G7 – Northern countries
Complexity = 86.6, Resilience = 56%

The following conclusions can be drawn:

  • The entire system (EU15) has a low resilience – 56%
  • The G7 countries as a group have a resilience of 66%, that is 10% higher than the entire system
  • The G7 group, excluding the UK (which hasn’t adopted the Euro) is slightly more resilient– 67%
  • Placing Italy in the MED group would make little sense because the resilience would be only 59%
  • The Northern countries enjoy a resilience of 66%
  • The remaineder of EU15 – the G7 and Northern countries would have a resilience of 56%, equal to that of the entire system today

The point is now this. Since trying to manage a huge, higly complex and fragile system is risky business, it is better to break it up into less complex and more resilient sub-systems. This does not guarantee that the whole will perform better. However, the fact is that today the entire system is extremely vulnerable. Before we start to fix the problem we must cast it in a form in which a fix may be attempted and with better chances of success. We therefore suggest to “break up” the EU15 into the following clusters of countries, in which each country has a resilience similar to that of the entire cluster:

  1. GROUP 1: Germany, France and Italy – the resilience of this group is 67%
  2. GROUP 2: UK, Sweden, Finland, Denmark and the Netherlands – the resilience is 66%
  3. GROUP 3: All remaining countriesresilience is 56%

The idea is not to institute different currencies in these groups. The idea is to cluster countries into more homogenous groups, so that a more specific cure can be deployed in these groups, not in single countries.

Austerity measures and other policies should be applied in a coordinated fashion and, most importantly, to “homogenous” groups of countries to be most effective. This will avoid weakening countries that can help those in trouble and will allow to treat the system in a way that takes into account its natural structural properties. Trying to fix the problem based on uncoordinated ad-hoc interventions, focusing on one country at a time and strangling its economy, is going to favor the domino effect which everyone wants to avoid so badly (really?).

Established originally in 2005 in the USA, Ontonix is a technology company headquartered in Como, Italy. The unusual technology and solutions developed by Ontonix focus on countering what most threatens safety, advanced products, critical infrastructures, or IT network security - the rapid growth of complexity. In 2007 the company received recognition by being selected as Gartner's Cool Vendor. What makes Ontonix different from all those companies and research centers who claim to manage complexity is that we have a complexity metric. This means that we MEASURE complexity. We detect anomalies in complex defense systems without using Machine Learning for one very good reason: our clients don’t have the luxury of multiple examples of failures necessary to teach software to recognize them. We identify anomalies without having seen them before. Sometimes, you must get it right the first and only time!

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