Resilience and the Euro – networks

The New Scientist recently had an article by Debora MacKenzie on resilience and the Euro.  She writes:

… The diversity of a network’s components and the density and strength of its connections – called its connectivity – affect the system’s resilience, or resistance to change. More connections make a system more resilient: if one component fails others can fill in. But only up to a point. Go past a certain threshold and more connectivity makes the system less resilient because a single failure can cascade to every other component.

The trick is to get the balance right. “Cascades of failure may be controlled by changing the nature and strength of the links between various parts of the networks,” says Fisher. Much current research in complex systems focuses on assessing connectivity correctly to enable that. Other work aims to detect behaviour that indicates an imminent collapse.

So turning 17 separate currencies into one eurozone was a cascading failure waiting to happen?

Yes. That is why Greek debt is a crisis, even though Greece accounts for only 2.5 per cent of the eurozone’s GDP. News of its debts caused the trust that markets placed in Greek government bonds to plummet. Its creditors are mainly in the eurozone, so a Greek default is causing markets to lose confidence in other members, such as Italy – which is too big to bail out.

Could the crisis have been avoided?

Complexity theory shows what went wrong. Yaneer Bar-Yam of the New England Complex Systems Institute in Cambridge, Massachusetts, says his still-unpublished studies show that investors profited by driving down the value of Greek government bonds, triggering the crisis. And, he suspects, they have now moved on to Italy. If instead of national bonds issued by sometimes weak economies, the eurozone had one common bond backed by powerhouses such as Germany, such an attack could not have happened.

Germany rejects eurobonds. But, says Bar-Yam, complex systems such as multicellular organisms show that “if you are going to accept common risk, you have to invest in defences that extend to the weakest member”. Either that or make sure an attack on a weak member cannot spread, a technique that ant colonies have perfected: the death of a single ant has little effect on the colony as a whole. “Biology has solved this problem several ways,” says Bar-Yam.

2 thoughts on “Resilience and the Euro – networks”

  1. “Yaneer Bar-Yam says his still-unpublished studies show that investors profited by driving down the value of Greek government bonds.” No wonder he doesn’t publish them. Now that he has found the way to drive down the value of bonds he is getting rich by applying it and shorting the bonds. I am currently driving up the value of oil to profit from my investments in electric car manufacturers. See you in Maldives, Yaneer!

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