The Limits of Analysis

Euro crisis is race against time | Hugo Dixon.

This is an excellent analysis of the present state of the Eurocrisis, and Mr. Dixon even forecasts that the eurozone will probably pull through another bad year.

I am not so sanguine about Europe’s prospects. German electioneering has begun with Peer Steinbrueck being elected to lead the Social Democrats against Merkel’s conservative coalition. German elections will take place in just about one year, which coincidentally is how long the eurozone is predicted to keep lurching along.

A distinct pattern has developed during the crisis. Governments have fallen at a rapid clip. The Dutch elections last month were the first time that a government in power survived since the onset of the crisis in 2009.

What the politicians in every country are trying to do is remain in power. This is the Merkel’s plan, too, and it is no coincidence that current measures appear to keep the lid on things for another year or so.

This is where we reach the limits of analysis. Any commentator on the Eurocrisis must realize that the eurozone has become critically unstable, just like a snow packed mountain before an avalanche.

When I read about how avalanches were like market crashes, it was stated more succinctly, but let me give it a shot. Imagine a mountain covered in snow. There is another snowstorm and another. Pretty soon, the snow pack on the mountain reaches a critical point. One more snowflake will trigger the avalanche, but we cannot blame this last snowflake.

Several snowfalls have contributed to this disaster. The last snowflake just came along at the wrong place at the wrong time. Of course, maybe we just experienced the last snowfall of the season and the summer melt removes the danger of the avalanche. It is not inevitable that our hypothetical snowflake falls.

The Eurocrisis has now reached a critical stage. The next snowflake could trigger a disaster, but right now it appears that it will not snow.

This is a dangerous view. As with many complex systems wrought by man, the eurozone is to complex for us to understand. As Rumsfeld would say, there are things that we don’t know we don’t know. Look at two surprises from the last few months. Did anyone predict a resurgence of either Catalan separatism or Greek fascism?

The question is what other nasty surprises are lurking beneath the exteriors of these countries. Any one of these could trigger the avalanche. Perhaps, a TBTF bank will be caught lying about its true market condition creating a panic. Maybe a government will be caught in a similar lie. There could be a political crisis, like a coup.

When a system is this unstable, it can come crashing down in an instant, and no one will see it coming.  The best that we can do with analysis is recognize when the system is unstable, not predict when it will die.



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