Order and Disorder

Order and Disorder. Photo Credit Wikimedia Commons

Recently, we have heard that there are some economic matters considered irreversible. People think that this concept means something that cannot happen. This is very far from reality. An irreversible process is not a process without comeback. Irreversibility is a thermodynamic concept that implies that a change of state is done with an additional loss of energy. You can reach the previous state again (there is comeback) but it would imply a loss of energy much higher than the gained energy in the initial change.

Nowadays, it is said that the incorporation of a country to the Euro zone is irreversible. This is totally true. But in economic terms, it would not mean that a country cannot abandon Euro zone, but, if it does it, it would imply a huge economic loss that would not be able to be used in order to produce goods and services.

We have heard too, that an exit of a country from the Euro has not a negative effect on the rest of the Euro zone. This is not true, because the process would be irreversible for both sides. The aim of joining several economies is to make the international trade more efficient. This efficiency would be destroyed in both sides. The global economic system would search for a new equilibrium state that could be hazardous for the Euro zone. For instance, many exports from the Euro zone to a country could be abandoned and substituted by other countries out of the EU. Europeans could decide to spend their holidays in the country with a cheaper currency instead of other ones due to the savings provided by the exchange of the new currency. This effect can be easily analyzed, evaluated and its effect would be very limited but what is totally unknown is how markets could react to that fact. It is probably that speculators would try to attack other countries. This would imply new correction actions of the European Central Bank that would imply economic resources dedicated to affairs very far from production. The magnitude of a new attack to the Euro from speculators is totally unpredictable, and then, the resources applied to defend the Euro would be unpredictable too.

Economists use often the term contagion to explain this fact. However, from a systemic viewpoint this word is not very fortunate and it is not the best way to analyze that scenario. The system is fully linked. It is not linked as in a chain or a set of tiles of domino, although speculators can attack different countries in a serial way.

The Euro represents a status of maximum entropy. Theoretically, capital can move freely from any point of the system to another one without a change of value because it is not required an exchange of currencies that implies barriers due to the additional cost of exchange. Of course, there are barriers in this system but the conceptual scheme is this one. The process of Euro construction is considered irreversible because the system passed from a state with a certain amount of entropy (with different currencies) to the state with the maximum entropy. An increase of entropy can be done easily; a reduction of entropy requires spending a lot of resources without providing production that would go out from the system to the environment. Many money would be moved from the Euro zone to external countries through markets in order to be able to separate a country from the Euro zone. As the system is in its maximum entropy state, any new change of state would imply a reduction of entropy and then a huge loss. That is why it is totally right to say that entering the Euro is an irreversible process.

At this point, someone could ask itself the following: if the Euro represents a maximum entropy state why does the system seem to be so unstable?

Well, the system is not in equilibrium because it is not isolated from the environment. The Euro zone is not a closed system. It is interchanging goods, services and capital with the environment due to the globalization of the economy. The instability of the global economy is what produces the instability of the Euro zone. When the environment was more stable, the Euro zone was working much better.

And why does some countries seem to suffer more than other ones that instability? I have pointed out something before. The Euro represents a state of maximum entropy; however, it is only a theoretical concept because political organization establishes barriers among the different parts of the system. Although capital can move freely all over the Euro zone, it would move finally towards where there is a maximum yield. Different countries have different taxes, different productive models, different customs of people, and so on. EU was founded with the aim to provide a uniform place where European people could live in peace and prosperity and the system tends to uniformity in a natural way, however, this process of building is very slow, and the Euro was only another step in this roadmap. Countries that decided to move their policies far from the commoner European directives are creating barriers. It implies an additional cost itself due to the extra cost associated to any reduction of entropy. Countries creating political and economic barriers are resposible of all the extra expenditure inside the Euro zone for all countries.

Recent history has shown that the process of construction of the EU is very productive in a stable economic global scenario. However, it turns into a very hard one when the economic and geopolitical environment is unstable.

The question that arises here is. If the Euro requires more uniformity of the countries, how we can get this in a faster way. This requires political will, and understanding which one is the best way to get uniformity. German reunification was not done due to the Eastern German thought that they had to be like the Western German, but because the Western German thought that the Eastern ones were like them. Any economic unification process has always been done from the leadership of the strongest part thinking in the common good, instead of the demands of the weakest part. Economic strength is not related only to the amount of money that a country owns but it can be more related to its future productive capability.

However, the political equilibrium inside the European institutions is very complex. In Europe, things are not done through a clear leadership, and fastness is boosted by a clear leadership. There are a lot of sociocultural and historical barriers that avoid the establishment of a strong leadership. Things only can be done through the slow increasing of trust and the improvement of the understanding among the different European people.