Cascading Eurozone Crisis (Page Rank Style)
The current crisis in the eurozone is putting the economic world in a state of anxiety as the world watches markets in the European Union’s economic bubble begin falling apart. Due to poor policy on many nation’s part, increasing wages and borrowing without adequate revenue and tax collection, many nations are now unable to repay their debts. As a result, when global financial downturn hit, countries such as Portugal, the Irish Republic, and later Greece and Italy, are unable to finance all the loans. The problem lies in the economic network that ties many of these countries together. As one country begins to do poorly, that country’s economic problems not only affect itself, but also those who are closely tied to her, in this case, due to holding a nation’s bonds.
Consider the current world market as a simplified network of economic markets, with each nation being modeled as a node, and each economic tie, being an edge that links the two nations together. These edges will be directed and weighted, with a higher value for a given edge for a country such as France who is deeply invested in a country such as Greece, but perhaps a weaker tie in the reverse case. In reality, just about each and every nation in the world would be interwoven in this complex network; however, for the sake of simplicity we will only consider those currently affected by the financial crisis in the eurozone.
For example, Greece has a total debt of around $485 billion. Ignoring smaller invested countries, Italy has a total of $4 billion invested in Greece, the U.S. $7.3 billion, the UK $14.6 billion, Germany $33.9 billion, and France $56.7 billion. Of course, this is only a simplistic model, and a countries actual dependence on Greece will depend on many other factors such as whether the debt is contained by the government, the individual citizens, or both. These factors will not be considered in this network scenario. Additionally, the EFSF (European Financial Stability Fund) is providing a large €110 billion bailout to Greece. Unfortunately, each of these other countries, as well as the EFSF is not an infinite source of revenue, and the effects of Greece defaulting, or even the 50% “haircut” on Greece’s debts, provide a large deficit in many of these funds.
Edges in billions of dollars (Fig. 1)
Edges in billions of dollars (Fig. 2)
Considering for example the page rank update algorithm used in class, a countries economic strength is derived from each nation that supplies it (Fig 1.) If a country such as Greece were to suddenly half the value of the edge from itself to a nation such as Italy, the total strength of Italy would decline (Fig.2 ) Additionally, Italy itself would fall into financial troubles, resulting any and all countries which are closely linked to herself, such as France, to fall into financial troubles. Updating the values of each node over time would result in revenue flowing out of the current network, sometimes into thin air! This sort of negative cascade could lead to a worldwide financial crisis such as when the US housing bubble popped and resulted in many nations falling into recession.
The current cascade of financial crisis began when the Greece bailout did not contain the crisis due to Portugal and the Irish Republic both needing bailouts as well. Since France and Italy are large holders of Greek debt, Italy began to face issues and bring the euro crisis to a worldwide scale. With Italy now in trouble, and a much larger economic power than Greece, should Italy fail, the world will feel the effects. Finally, since France was closely tied to Greece as well as now Italy, France lies in a precarious position as well. With the amount Italy owes to other countries, a massive 2 trillion Euros in debt, Greece is no longer an issue.
All this to say, if a stable equilibrium point is not reached soon, the economic conditions of the eurozone and the world may spiral downwards again, much worse than previously expected. But if Europe can rebound and instead travel towards a higher more stable equilibrium point, the crisis may be averted. The world waits in expectancy as eyes now turn to political changes in Italy, France’s prevention tactics, and the effects of the G20 in containing this crisis.
Sources: http://www.nytimes.com/2011/11/14/business/global/france-keeps-a-watchful-eye-on-italys-financial-turmoil.html?_r=1&scp=1&sq=france%20italy&st=cse http://www.bbc.co.uk/news/business-13798000 http://www.bbc.co.uk/news/business-15429057 http://www.bbc.co.uk/news/uk-15570588 http://www.bbc.co.uk/news/world-europe-15472679