The idea of Japan joining the EU, why not.

"Japan will join the EU!", I would like to shout on the 1st April. 

Added on 31st March 2026

There is a possibility that the great circle distance of the sea route between the European Union (EU) and Japan will be significantly shortened under this global warming. The new arctic sea route is emerging due to the ice meltdown. Although there are still various challenges to explore this route, it is demanded all the more than before now. 

The recent Middle Eastern incidence and the unstable political situation in South Asia may alert Japan and Europe to explore the alternative trade route. North American countries are focusing on the possibly high market potential in this Arctic route. On the top of the trade route between the EU and Japan, this area is essential for shipping the natural energy resources such as petrol oil and natural gas in this region. It is the common geopolitical interest for both the EU and Japan to secure the exploration of this trade route is necessary rather than expectation nowadays. 

Furthermore, we must not forget that the legal code of Japan has been based on the legal positivism of the continental Europe since the 19th century! The legal code of Japan is one of the examples backing up the proverb saying "All roads lead to Rome". Yes, the continental European legal code is originated from that of the Roman law. 

Japan also kept the exclusive trade tie with the Netherlands from the 17th to the 19th century. When Americans landed on Japan in the 19th century, Dutch was used as the intermediary language between American and Japanese individuals at their first encounters.  It might sound plausible Japan could closer to the EU than the USA in terms of this regard especially since the first arrival of Jesuits in the 17th century, 

Added on 1st April 2026

Of course, I know there are non-negligible drawbacks in this case scenario. First of all, the EU is heavily bureaucratic which frustrates individual habitants in their daily life as well as their economic and scientific activities. Secondly, their macroeconomic policy still faces the challenge which even the first governor of the European Central Bank (ECB) has pointed out. They have not fixed the problem of the fiscal policy under the European common monetary (EMU) policy while the characteristics of fiscal policy agents in the member states are still not harmonised enough. The aforementioned heavy frustrating bureaucracy tends to keep this kind of required reforms being slower than expected.

Originally written on 4-5th February 2023 

The followings are considered to be the conditions to join the European Union (EU) or any other possible economic and political union of countries/states. 

- Microeconomics:
  1. The high cross border trade (export and import) frequency
  2. The labour and capital mobility across the border

- Macroeconomics:
  3. The synchronised business cycle (boom and recession) among the member states
  4. The balanced fiscal policy neither disrupting the fiscal and monetary policy conducts nor depreciating the economic credibility of the entire union.

- The other aspects:
  5. Cultural and historic tie among the member states
  6. Geopolitical diplomatic interest

Japan fulfils these conditions except for the forth one because of the massive national debt of Japan. The second and third conditions might be questionable but they are not insignificant at all.

Remember that the foreign tourism is accounted as export&import!  The EU members and Japan trade not only physical items but also tourists a lot with each other. 

Also remember that Japan had had the international trade with Europeans more than the others since 17th century till the end of Shogunate era! In particular, during Tokugawa dynasty, lasting for approximately 300 years, the Netherlands was only the country which was permitted to trade with Japan implementing the national isolation. Before then, Spanish and Portuguese were the major diplomatic partners until they were banned from it. 

Both the EU and Japan very often share the remarkable foreign diplomatic and geopolitical interest. For example, both frequently suffer from Russian aggressions and the geopolitical interests of containing Russia. Both the EU and Japan are required to maintain their sea-lane for both economic and political stabilities so that they had better share their sea-lane and its security.

Thus, I have actually posted on a social network page of European Federalist to request Japan to join the EU to fill the membership position of the United Kingdom of Great Britain and Northern Ireland (UK). 

PS. This is just a simulation which is not feasible in real so that please do not take this issue seriously.

 

 

 

 

 

Antwerp city hall and Historisch centrum , Belgium

 

Sketched Antwerp city hall and Historisch centrum , Belgium last Sunday

The European Monetary Union is inevitable, but has to be fundamentally revised

Published on 23/07/2011 09:18 British Summer Time

1. Introduction

This Eurozone crisis has been predicted by many economists. These economists put emphasis on the impact of the money supply volume on the stability of economic environments such as the price inflation rate, the unemployment rate, the gross domestic product (GDP), and the speculative trend on financial market. They argued that, when the monetary policy is unified, the common fiscal policy is also required to be established, all the member countries of this monetary union are supposed to have the financial regulation for all these countries, and the labour mobility needs to be flexible for workers in these member countries to move across these countries in order to stabilise the economic environments. In addition, the econometric analysis of the Eurozone average inflation rate indicated that the European Monetary Union (EMU) is beneficial to majority of the member countries owning to the harmonised inflation rate, but it still requires something to control the different inflation rate of each individual member country. The reason of German refusal of issuing Eurobond is assumed to be because of uncooperative attitudes of Greece. Mr. Trichet, the governor of the European Central Bank (ECB) also suggests that the EMU has to fundamentally change its overall structure before allowing any countries to keep incurring their debt. Overall, the solution of the currently ongoing Eurozone crisis is the fundamental improvement on the EMU fiscal, financial, and labour market structure, and getting rid of the common currency will never be a solution.


2. The problem caused by the monetary policy transformation

The disadvantage of abandoning the national monetary policy (to join the common monetary union) is that this country becomes no longer able to set her own interest rate and the volume of her own money supply. Greece used to be heavily relying on her own unique monetary policy, based on the money supply which was remarkably higher than the average of European countries, in order to finance her government expenditure which could not be sufficiently financed by her unsophisticated fiscal policy. However, after Greece joined the EMU, she could no longer use her high money supply. Greece may rely on the tax revenue burdened on her export revenue such as her tourist industry and the growth of her private sectors stimulated by the economic growth of the entire Eurozone economy. Nonetheless, unless she tightens her fiscal policy, when the entire Eurozone economy falls into recession and/or the demand of Greek tourist industry declines, Greece starts struggling to obtain her public finance resource. This problem has been seen in many Southern European Nations such as Italy, Spain, and Portugal. But, Greece seems to be more problematic than these Southern nations. Spanish government shows a strong commitment on tightening Spanish fiscal policy under the European central government’s induction. Italy still has her strong initiative in European economy thanks to her famous industries such as finance, manufacturing, and tourism. Portugal seems to be similar to Greece, but the quantitative data analysis shown in the next chapter indicates Portuguese suffers much less than Greece.




3. The econometric analysis of the Eurozone average inflation rate

This graph (Qualitative method) above shows the different inflation of the Eurozone countries (IMF, 2011). Majority of the Eurozone countries have a synchronised inflation rate trend from 2002 to 2010. The econometric analysis of the Eurozone average inflation rate, whose results are shown by the following figures, indicated that the price inflation of the individual countries joining the European Monetary Union (EMU) is influenced by the price inflation of the other different EMU countries.




This equation is the inflation rate of all individual Eurozone countries (〖Inflation〗_(i,t)) regressed on the inflation rate in the last year 〖Inflation〗_(i,t-1). As the coefficient of 〖Inflation〗_(i,t-1) is less than 1, this variable is stable enough to converge into a particular point in the long run as follows:




So, this proves that the Eurozone inflation rate is converging into 2% which is what the ECB targets to make! The following regression analysis proves that the GDP grows furthermore when the inflation rate becomes closer to 2%:




This result shows the natural log of the GDP in the Eurozone economy, ln⁡(〖GDP〗_(i,t) ) (Footnote 1.) , is significantly negatively correlated with the inflation rate deviating from 2% which is shown as the absolute number of the inflation rate minus 2, |〖Inf〗_(i,t)-2|. The following auxiliary regression shows both the GDP and the inflation are co-integrated each other:



〖 u〗_(i,t) is the residuals from the previous regression. As the lagged residuals 〖 u〗_(i,t-1) is negatively correlated with change in the residuals 〖∆u〗_(i,t), the variables used in the previous regression, ln⁡(〖GDP〗_(i,t) ) and |〖Inf〗_(i,t)-2|, are stable and co-integrated with the EU inflation rate, which means the movement of these variable affects on the other’s. However, the stability test for Greece and Ireland showed a relatively pessimistic result as follows:

Greek inflation on the inflation of the entire Eurozone countries



This analysis suggests that, , not only the percentage of the entire Eurozone inflation's contingency on Greek inflation rate is 47% in average, which is high,(Amended part) but also change Greek inflation is highly contingent to the entire Eurozone (Footnote 2.). Therefore, it is not only Greece suffers more than the other Eurozone countries and but also Greek economy is highly responsible on the entire Eurozone economy. This aspect may suggest both Greece and the entire Eurozone need to cooperate each other very seriously because Greece should not leave the EMU because her business cycle is already tied up with the EMU.

Irish inflation on the inflation of the entire Eurozone countries



On the other hand, Irish inflation rate is neither stable nor co-integrated with the entire Eurozone one. Therefore, Greece seems to suffer from the volatility of the inflation far more than the other Eurozone members so that she needs either the intervention by the European central government or the fiscal restructuration, or both, to calm down her inflation rate. Unlike Greece, Ireland may be benefitted when she leaves the EMU. Irish business cycle is not correlated with the Eurozone economy. But, if Ireland still wants to keep the membership, the Eurozone eventually needs to have a strong fiscal stimulus enough to enable Irish business cycle to harmonise with the entire Eurozone business cycle.

4. German refusal of participating into the Eurobond programme

The concern of Germany on Greece is that Greek catastrophic crisis will be permanent unless Greece tries to reform her fiscal policy fundamentally and cooperates with the EU central governmental policy rather than her own selfish and irrational nationalism. When a person purchases equity, s/he expects its value to be either stable in the long term or predicted to grow significantly. The value of Greek national debt seems to be neither stable in the long term nor predicted to increase its value in the short term. Even if German government is altruistic enough to sustain Greek public finance by purchasing Greek debt in order to rescue the entire Eurozone, there is a risk for Germany to be drawn into the recession or even to be bankrupt.
The Eurobond programme suggests the Eurozone countries to share both the risk and the benefit of issuing the government debts among the entire Eurozone countries rather than burdening the responsibility on each individual country for incurring the government debt. For example, as shown in the graph below, when Germany experiences the economic growth relatively higher than any other nations whilst France falls into the recession, it needs to tune the aggregate demand of both nations.


As there is no national monetary policy available for both France and Germany, one of the optimum solutions would be increasing the tax revenue of Germany to transfer it to subsidise France. The econometric analysis shown in the previous chapter indicates that French and German economies are highly contingent to each other so that French downturn has to be diverted by German contribution to save Germany herself. This is the idea of sharing the risk and benefit of the national debt and its usage under the collective responsibility among the countries.
Nonetheless, this mechanism may work efficiently and effectively because French fiscal policy does not have a problem like Greek. France and Germany have much more similar labour market situation than Greece. In addition, France and Germany are geographically closer each other than Greece. So, the labour mobility is much more flexible between France and Germany than between Greece and them. Furthermore, France and Germany balance their budget without relying on the excess money supply unlike Greece. If this case scenario were Greek instead of France, German tax revenue transfer to subsidise Greece is ineffective and inefficient.
The intervention from the European central government into Greek fiscal policy under the strict guideline of the central government is also emerged. Greece is still resisting against this intervention due to the sentimental irrational populist nationalism. The European central government regards that, in order to make this money transfer to Greece more effective and efficient, Greek fiscal reform lead by the further privatisation of the entire Greek economy are inevitably required. Greek labour market is rigid because of Greek economy’s reliance on the huge public sector, which disrupts the flexibility of the labour mobility. On the top of the inflexible labour mobility, Greek public sectors are not rational enough to balance their budget. They are not used to the market competition and the thread of bankruptcy because they are always protected by the nation unlike the private sectors. By contrast, the private sectors are much more used to balancing their budget under the market competition. As long as Greek public sectors struggle to rationalise their budget to be balanced by their own effort, the enforced privatisation seems to be only the antidote of the fiscal imbalance.
All in all, the responsibility of Greek fiscal policy should be burdened more on European central government to discourage Greek irrational populist nationalism which is notoriously uncooperative to solve this currently ongoing problem for both Greece herself and the entire Eurozone economy. In order to discourage this pathetic nationalism, the privatisation to minimise Greek national government authority can be a key solution before substituting the power of Greek nationalism with the European economic cooperation.


5. The ECB’s point of view and warning from Mr. Trichet

Focusing on the ECB’s point of view on the current Eurozone financial havoc, the ECB executives are suffering from the dilemma between putting priority on saving the Eurozone economy and focusing on calming the inflation by suggesting the fiscal policy of all Eurozone countries to be tightened. In particular, Mr. Trichet, the governor of the ECB, always rejects the optimism on the Eurobond programme without fundamentally reconstructing the fiscal structure in the entire Eurozone. Mr. Trichet has been always suspicious about the stability of the Eurozone economy since the ECB was established. His suspicion is related to the fiscal problem mentioned in the previous chapter.
The ECB has been purchasing a large volume of the national debt of the Eurozone countries by its quantitative easing. In order to keep the value of these bonds to invest to rescue these governments, the ECB has. The ECB cannot survive without an economic activity of these nations so that the ECB needs to save the national governments of the Eurozone. Otherwise, the value of Euro becomes zero so that the ECB itself disappears. However, the expected result still cannot be seen, and the aggregate government bonds incurred has never stopped expanding. This mechanism still enables the Euro exist, but it depreciates the value of Euro further. This phenomenon causes the inflation to hike up, and then the nominal interest rate eventually needs to rise. Overall, rescuing the Eurozone countries damages the private sectors and individual citizens by a high interest rate, and it creates further government deficit which requires the further ECB’s quantitative easing, which again induces a further inflation. Mr. Trichet has already warned this spiral would occur and urged to divert from it since the beginning of the Eurozone crisis (Footnote 3.). Thus, he rejects all the optimism of perpetuating this situation.
The ECB also struggles with negotiating with the private sectors. Although the previous chapter stated the positive aspect of the private sectors in terms of the fiscal policy, the private sectors cause problem in the monetary policy set by the ECB (Footnote 4.). The private sectors are willing to raise their profit and the wage for their executives, and detest the high interest rate. These characteristics of the private sectors perpetuate the inflation which discourages an economic growth of both countries and private sectors themselves in the long term. Generally speaking, the private sectors are uncooperative to the European economic stabilisation. Although the stabilised European economy which the ECB expects to establish benefits to the private sectors in the long term, these private sectors are less interested in it than the ECB.
This aspect infers a danger for European economy which is now also fund by the private sectors. This could be the reason why Mr. Trichet is modest about the private sector contribution to rescuing the Eurozone national economies .

6. Conclusion
In conclusion, there is no optimistic prospect on this current Eurozone economic situation. In order to solve these structural instabilities, the Eurozone may need a fundamental radical revolutionary act on altering both economic and political entire structure. But, they cannot stop the European economic integration because the almost all Eurozone economies are highly correlated with each other as proven by the econometric analysis. It seriously needs an IMF of Europe, which the ECB is trying to act like. The ECB should have a much stronger authority to instruct the fiscal policy of national governments in the Eurozone as same as the IMF does to the national governments in the globe. In addition, if the priority is saving the European economy, the heavy reliance on the private sectors contribution is very risky. Hence, the ECB policy based on Trichetian Monetarism, which is tough against the irrational egos of both the national government fiscal policy and the private sectors’ short-termism, seems to be only the reliable tool, and the economic agents had better listen to it.


-------------------------------------------------------------------------------
Footnotes:

1. When a variable is positively skewed, it needs to be logged or transformed into the root (E.g. square root and cube root) in order to offer a reliable, unbiased, and consistent statistical analysis.

2.


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My Additional Comment added on 4th of August 2011:

Well, as I mentioned in my essay, it depends on the hamonisation of the business cycles in these candidate nations (I referred to the price inflation rate as an indicator of the business cycle). When the business cycle is harmonised (Synchronised), the monetary union becomes necessary or inevitable, such as the Greek and the other Eurozone countries' case. Otherwise, such as Irish case, it should not join the monetary union or it has to have a great intervention to artificially harmonise the cycles.

Some African nations might be benefited because they trade each other often, and their economy is not self-sustainable i.e. needs to be corroborated each other. But, they indeed need to have a common fiscal policy to modernise and tighten the fiscal policy of all these nations.

South American nations should not have the monetary union yet. These individual South American countries are too big by means of the land mass relative to their population density (I.e. The cost of the inter-country trade inside South America is higher than the benefit from it). Furthermore, these countries do not trade each other often compared to the other blocks of countries in this world such as Europe, North America, Africa, and Asia (According to the statistics shown in Economics of Monetary Union (Paul De Grauwe)).

The trade frequency of among Asian nations is the highest of all the international trade made in this world. So, as Lee Kuan Yew, the first Singaporean prime minister, said forming Asian trade community could benefit Asian nations. However, other than economic factors, the political factors exist as the obstacles which disrupt forming this trade community.

Only the person concerning the EMU whom I can truely respect and trust is Mr. Trichet and his ECB. I claim that not only the EMU national fiscal policies but also all the private enterprises in the Eurozone economy should be instructed by the ECB based on Trichetian Monetarism...!

Long life

 The life expectancy of human individuals in the world has significantly extended so these individuals will eventually tend to live up to 100 years old or beyond unless there is any unexpected accident threatening their life happening before then. At the same time, more individuals nowadays tend to complain about their lack of opportunities for increasing their income gain, improving their career path, and offering a reasonably satisfactory future for the next generation. Mediocrity, misery, and hopelessness are haunting their life even longer than the past. Have these individuals become happier with their longer life expectancy? Let's consider it. 

Focusing on the retiring age, many countries used to set it as 60 years old while some countries have extended it to 65 or even 70. Up to the middle of the last century, many workers died off before turning to be 70 years old, so they claimed to spare their leisure time left before their death after their retirement. By contrast, their time left left after their retirement is almost 3 decades which are way too long to spare for their joblessness. The pension scheme is no longe sustainable to prop up the budget for looking after these jobless elder individuals. The budget incapability is derived from not only the increasing elderly population but also the shrinking fertility rate of the newer generations. 

The technological development is so superb nowadays that many firms and a few fortunate elite individuals enjoy their microeconomic advantages. At the same time, the entire world economy is shifting toward the capital intensive rather than the labour intensive which implies that the labour demand i.e., employment is shrinking. Furthermore, the opportunity of improving their income and career path requires more demanding skill-sets and merit for firms to hire them with a reasonable wage. Recently, the certain degree of the equality of outcome for individuals is more essential to accomplish the equality of opportunity than it used to be.  However, the socioeconomic policies of the current world are still neither competent nor generous enough to offer such an opportunity for majority individuals. 

The fertility rate is dropping down in majority of developed countries. Even though these residents enjoy their surrounding physical resources of their national economy, the distribution of their access is restricted. The main cause is that the inequality of their disposable income and their social mobility opportunity is expanding due to the shrinking macroeconomic market multiplier. Therefore, their desperation for their future prevents them from bearing their offspring, and they struggle to escape from their own mediocrity and desperation. 

In addition to the physical life expectancy expansion, the psychological feeling of life has become longer for the majority world citizens lacking the opportunity to access the lucrative lifestyle. These individual citizens may find their life is indeed longer than the minority elites enjoying their lucrative lifestyle. They feel like spending longer time to pass when human individuals spend their time spend as boring, miserable, and/or painful than when they spend it exciting, attractive, and/or pleasantly instead. Therefore, the tittle is simply "Long life" to think of what the "long" of the "long" life implies. 

Economic policies should exist to make the majority individuals happy while ensuring that even the least fortunate members of their society enjoy the basic civil cultural standard of living. It is not a matter of different economic policy perspectives. Regardless of supporting the market economy or the collectivist economy, the objective taking the whole environments where individuals cooperate to cohabit in a civic society into consideration must exist. Otherwise, there is no raison d'etre of the study of economics. 

In addition, everyone must be proactive enough to adjust themselves to the new paradigm of this world without being restrained by the obsolete norms and values. Many individuals still believe in or are forced to adapt to these obsolete norms and values having existed in the early past of the last century. Neither company nor government will guarantee their job and income security due to the aforementioned factors. So, they must not be reactive to what their belonging institutes such as companies and government direct them. Instead, they has better continuously look for a better opportunity for a new employment, going back to schooling, or sparing some free time to re-think of their own life philosophy. 

In liberal-democratic countries, the majority individual citizens still have their own responsibility of electing their own governmental party allowing the elite bureaucrats ignoring these previously mentioned factors. Perhaps, they are still enlightened enough to understand their own life situation well. It is often important to be more egoistic to protect themselves to realise such factors. When a person cannot make her/himself happy, this person cannot deserve the others well.  They key is the positive energy flow of one person energising her/him to enable her/him to entertain and help the others.

The government and the corporations taking the initiative in the market economy take an advantage of it by forsaking the majority citizens. Thus, these individual citizens are ought to be angry and more selfish to insist on their needs and wants without being restraint by the altruistic norms and values. In addition, they should be egoistic also to be honest for themselves without compromising their own desires and dreams even if the others disagree or become excessively being worried about this attitude. Hence, the most ostensible, practical, and simple answer to solve this problem is to "Live your own life" regardless of its physical or psychological length of life.

Re-evaluating Charles De Gaulle

 

The first president of the fifth republic of France Charles De Gaulle is indeed a remarkable figure having led France to maintaining her stead economic and political position as an autonomous modern developed nation as well as a key European Union (EU) member state with her significant influence on the entire union. Yet, his policies were often controversial and received some negative feedbacks from various political factions including socialists, those supporting more Anglo-Saxon style free market socioeconomic policies, and the former French colonial states. At the same time, not only French citizens but also EU citizens would not be able to keep having their influence over the world politics without the current French political power having been grown since De Gaulle administration. While France is currently on the verge of determinig her future pathway. 

After enormous fatigues and scars of wars and the loss of French colonies after the World War II (WW2), France has lost her influence and power as a sovereign state in the world. The United State of America (USA) rose up as the newly arising super power together with her strong ideology of liberal democracy and capitalism. At the same time, the United Soviet Socialist Republic (USSR) also strengthened their influence and power over the world politics with their hardcore socialist ideological principle. France selected the alternative of being France as a unique state prevented from becoming a loyal satellite state of neither the USA nor the USSR.  Thus, France needed her own strength of being as independent influential modern state as well as leading the newly formed union of European nations, the EU, in the world politics. Charles De Gaulle thus determined to implement a unique controversial policies attempting to deserve the majority French and EU citizens. 

 

- Controversial interventionist economic policy

Firstly, De Gaulle administration decided to keep the market economy itself whereas it adopted the state's positive intervention to it as well as a high proportion of the state's owned public sector firms. In another word, France selected a pragmatic choice not ideologically being tied to a particular socioeconomic policy like a staunch dogmatic socialism or an Anglo-Saxon style wild capitalism.

There are some negative effects of the contemporary French economic policy. A government may have mistake of judging how the business cycle moves to determine the degree and the characteristics of their intervention. A huge market share of the state ownership of various industrial categories such as manufacturing industries and financial industries hinders a spontaneous economic growth based on the active and fair competition. 

Nevertheless, for the contemporary France, it was inevitable to install such an economic policy to enable French own national brand by protecting it from losing to a competition with their strong competitors such as the USA, Japan. and neighbouring West-Germany. It is equivalent to the development dictatorship adopted to some contemporary emerging developing nations such as Singapore and South Korea. Although France was already a developed Western nation, she was under a constant threat of losing her initiative in the world economy. Therefore, France was required to have a strong intervention lead by one rational public authority gathering a group of educated and experienced elites to conduct her national economic policy planning as same as these emerging developing nations.

 

- Independent Nuclear Research and Development (R&D)

As the contemporary period, those satellite nations of both the USA and the USSR implemented the joint R&D of their nuclear technology with their suzerain either the USA or the USSR. The USA was the first nation invented the nuclear power generation and weapon, and the USSR followed to invent their own ones (although some have argued it could be their self-proclaimed). 

Charles De Gaulle has insisted on proceeding the own nuclear technological R&D led by French government and higher educational institutes because he had predicted that owning France's own nuclear technology will be the key to take the initiative in the world politics. Furthermore, nuclear power generation provides both France and the entire EU with the far more efficient alternative electricity generation to the conventional electric power generations. This initiative has encouraged France to take a lead of the EU as the main supplier of the electricity. 

Regarding this nuclear R&D, there has also been strong negative feedback especially from the anti-nuclear advocates and the former French colonials. De Gaulle administration tested their nuclear bombs in their former colonial lands which hugely disappointed the indigenous citizens there. Moreover, their own R&D with their own effort certainly involved the victims of the radioactive pollution of the nuclear accidents.  There is an inevitably high risk of nuclear contamination permanently harming the health of these individuals while testing and repairing their nuclear apparatus and clearing the radioactive mess. 

On the other hand, in terms of the health hazard risk per electric power generation, with comparison to the conventional fossil fuel based thermal power generation, the nuclear power generation is relatively far less harmful for individuals. For example, the ratio of individuals' health hazard risk per electric power generation is way higher for the counterpart fuelled with fossil fuels. In addition, France would have had to import a massive amount of fossil fuels from abroad which would perpetuate France's dependency on the other nations. 

By contrast, France has prevented herself from being reliant on and easily manipulated by foreign nations after securing her own self-reliant electric power generation source. All in all, even with high financial, environmental, and ethical cost, the benefit paid off for France is substantially higher. In another word, the fundamental political decision of De Gaulle administration accomplished "The greatest sum of pleasures with the lowest sum of pains as the principle of moral and legislation". 

Having observed these examples of De Gaulle administration, the achievements and the assets of De Gaulle administration are undoubtedly remarkable despite controversies.  The EU needs France for various French advantages including the economic and political initiative backed up by her own nuclear technology available to offer for the EU.  Also, France needs the EU membership with a huge initiative to use the EU as her leverage of expanding her economic and political influences as a key member with a high initiative there. De Gaulle administration initially paved this pathway to enable both France and he EU to secure their initiative. Hence. under such a current political havoc, it may be productive to recall and re-evaluate Charles De Gaulle and his achievement.

 

The correlation betweeen currency value based on JPY vs the great circle distance from Kiev, Ukraine

 

 

I have been surprised at how much depreciated Japanese Yen (JPY) against the other currencies has been already.  However, I have realised that the appreciation of each currency by means of JPY is different.  I have guessed that the appreciation rate is lower as the region using this currency is closer to Ukraine where the conflict with Russia is ongoing.  Therefore, I have regressed these FX rate based on JPY with the natural log of their great circle distance from Kiev minus 6.6, and the coefficient is as predicted as shown this graph.

Data from Mizuho Bank: https://uranaisearchastrology.files.wordpress.com/2022/04/2021-2204_fx_mizuho_dist.xlsx

FinTech and Public Cloud

I have been really surprised at one of the latest speeches of Bank of England (BoE). Both the BoE staff and the interviewers frequently focused on the rising influence of the public cloud far more than the currently ongoing negative impacts of COVID-19 pandemic and the anticipated future economic outlook.  Their main current concern is that many of private financial institutes rely on using the public cloud services, and their reliance is furthermore growing nowadays.  

They admitted that these private agents frequently use the public cloud service because of its convenience.  The main concern of both British and Europeans is that only a limited number of the cloud service providers outside Europe offering such a service.  Despite its convenience and accessibility, they are worried about the potential security threats of sharing the financial and personal information with the limited number of the private sector outside their country. Therefore, they implied something like reinforcing the security audit conducted by the public entities.  

The underling aspect is that FinTech (abbreviated form of Financial Technology) is rapidly growing in the world.  FinTech requires the providers to be capable with supplying the elastic loads of the service usage volume which dynamically changes across time, place, and occasion.  

The conventional use of the on-premise computer servers incurs the fixed cost for setting the servers and the maintenance cost for the servers and the operating system (OS).  By contrast, by outsourcing such as the servers (The infrastructure) and possibly the OS and the middleware (The platform) as well, and their maintenance, the usage of the public cloud service can transfer their cost from fixed to variable.  Furthermore, by outsourcing the servers, etc., the these economic agents can be concentrated on their projects without taking much time and efforts on preparing for their on-premise infrastructure (and possibly the platform too depending on the service). 

In order to understand how significant the public cloud service is for the FinTech industry, it is accessed by means of the following five forces analysis:

    Competitive rivalry: Reasonably High

What FinTech offers already varies from online money transaction to the crypto-currency based on the blockchain management. They are already in various kinds of competitions.  As long as their technology enables the duplication of their rival technology, it allows them freely join the competition.  At the same time, there is still a barrier of the entry: Information technology (IT) literacy and the efficient use of the latest available technology are the key condition to enter this market.  For example, the usage of the public cloud service is essential for the cost and operational efficiency to compete with the others. 

    Threat of substitute products: Relatively Low

Only and the biggest substitute product is the traditional conventional financial institutes such as major banks and asset management companies.  FinTech is already the most technologically advanced financial service.  Then, the older financial services are their only substitutes.  Majority of economic agents in the world feel like being familiar with the traditional financial industries and the fiat-currency based trades, and various services offered by FinTech are still relatively new to them.  Therefore, there are still people stick to the older services instead of adapting FinTech in their daily life.  However, more and more people have already started realising how convenient FinTech services are. Unless there is a revolutionary invention of any unimaginable alternative product taking place, there is a little threat from substitute products.

    Bargaining power of buyers: Relatively High

 

FinTech is one of the attempt to liberate the financial market. This aims at capturing the demand dead-weight caused by the monopolistic power of the conventional financial institutes.  

The favourable characteristic of FinTech is offering the lending money to those who are struggling to borrow money from the conventional financial institutes.  Then, FinTech lenders are assumed to often offer a lower interest rate (r(Inv.) ) than the conventional counterparts by lowering the cost of risk monitoring.  Furthermore, in order to attract more savers/investors producing their lending resources, FinTech companies inevitably offer a higher return than the conventional counterparts (represented as r(Sav.) ).   

The key for FinTech industry to survive to thrive, these companies highly rely on attracting customers who used to be unfamiliar with these newly introduced services with both the higher accessibility for borrowers and the better convenience for savers/investors.   In order to achieve this objective, the procurement side mentioned in "Bargaining power of suppliers" is highly relevant.

    Threat of new entrants: High

Not only the conventional financial institutes and traders but also those from the other industry types such as the IT media also join this market competition.  In order to attract more customers, it offers something which the conventional financial services hardly offer is the key.  For example, on the top of managing the customers' financial assets (The service outcome), it offers "enjoyment" while using this service (The service process). 

The media companies have a strong advantage of offering the "entertainment" in their offering service.  For example, they can adapt some gaming elements in financial services. Then, customers enjoy not only their monetary gain by using the service but also the entertainment while using the service. 

Both the financial transfer and the accessing entertainment incur a very elastic load of service usage.  Moreover, these entrants need to spare enough time and resources for their project of inventing their extra service elements without spending too much time, energy, and cost.  The public cloud service fits in with what is required to accomplish both requirements.

    Bargaining power of suppliers: Relatively Low

In order to offer the lower lending interest rate with the higher saving interest rate for the users, the cost efficiency is indeed the crucial factor to reduce the lending fee and the investment return.  Then, the procurement becomes an unavoidable factor to achieve this goal.  At this time, taking an advantage of the public cloud, potentially lowering various costs, is the essence of reducing the cost. 

All in all, FinTech and the Public Cloud are something tied up with each other in order to thrive in the world economy.  FinTech has a potential to liberate the entire world financial economy by offering a wider range and more convenient services.  Then, the public cloud offers a higher degree of liberating the market by assisting the new entrants of the financial market. 

New Alternative Political Compass

Analogy of how Greek, Irish, and German monetary union works

In the past:
A Greek man used to drink a lot in a relaxing traditional inexpensive pub.
An Irish man used to drink in a narrow rought working class bar while a British man drinks in a wide classy middle class salon beside where this Irish man is (both places are next to each other but separated by a partition.)

Now:
This Greek man and this Irish man started to go to a modern urban-like expensive pub where a German man goes. This Greek man and this Irish man are not used to the culture of German man's pub. So, this German man doesn't like this Greek and this Irish manner so this German wants to teach them his own way in his regular pub!


* I don't way this German man is always right. Personality takes all kinds. Only the thing I can say is that "When in Rome, do as the Romans do".

The European Monetary Union is inevitable, but has to be fundamentally revised

Published on 23/07/2011 09:18 British Summer Time

1. Introduction

This Eurozone crisis has been predicted by many economists. These economists put emphasis on the impact of the money supply volume on the stability of economic environments such as the price inflation rate, the unemployment rate, the gross domestic product (GDP), and the speculative trend on financial market. They argued that, when the monetary policy is unified, the common fiscal policy is also required to be established, all the member countries of this monetary union are supposed to have the financial regulation for all these countries, and the labour mobility needs to be flexible for workers in these member countries to move across these countries in order to stabilise the economic environments. In addition, the econometric analysis of the Eurozone average inflation rate indicated that the European Monetary Union (EMU) is beneficial to majority of the member countries owning to the harmonised inflation rate, but it still requires something to control the different inflation rate of each individual member country. The reason of German refusal of issuing Eurobond is assumed to be because of uncooperative attitudes of Greece. Mr. Trichet, the governor of the European Central Bank (ECB) also suggests that the EMU has to fundamentally change its overall structure before allowing any countries to keep incurring their debt. Overall, the solution of the currently ongoing Eurozone crisis is the fundamental improvement on the EMU fiscal, financial, and labour market structure, and getting rid of the common currency will never be a solution.


2. The problem caused by the monetary policy transformation

The disadvantage of abandoning the national monetary policy (to join the common monetary union) is that this country becomes no longer able to set her own interest rate and the volume of her own money supply. Greece used to be heavily relying on her own unique monetary policy, based on the money supply which was remarkably higher than the average of European countries, in order to finance her government expenditure which could not be sufficiently financed by her unsophisticated fiscal policy. However, after Greece joined the EMU, she could no longer use her high money supply. Greece may rely on the tax revenue burdened on her export revenue such as her tourist industry and the growth of her private sectors stimulated by the economic growth of the entire Eurozone economy. Nonetheless, unless she tightens her fiscal policy, when the entire Eurozone economy falls into recession and/or the demand of Greek tourist industry declines, Greece starts struggling to obtain her public finance resource. This problem has been seen in many Southern European Nations such as Italy, Spain, and Portugal. But, Greece seems to be more problematic than these Southern nations. Spanish government shows a strong commitment on tightening Spanish fiscal policy under the European central government’s induction. Italy still has her strong initiative in European economy thanks to her famous industries such as finance, manufacturing, and tourism. Portugal seems to be similar to Greece, but the quantitative data analysis shown in the next chapter indicates Portuguese suffers much less than Greece.




3. The econometric analysis of the Eurozone average inflation rate

This graph (Qualitative method) above shows the different inflation of the Eurozone countries (IMF, 2011). Majority of the Eurozone countries have a synchronised inflation rate trend from 2002 to 2010. The econometric analysis of the Eurozone average inflation rate, whose results are shown by the following figures, indicated that the price inflation of the individual countries joining the European Monetary Union (EMU) is influenced by the price inflation of the other different EMU countries.




This equation is the inflation rate of all individual Eurozone countries (〖Inflation〗_(i,t)) regressed on the inflation rate in the last year 〖Inflation〗_(i,t-1). As the coefficient of 〖Inflation〗_(i,t-1) is less than 1, this variable is stable enough to converge into a particular point in the long run as follows:




So, this proves that the Eurozone inflation rate is converging into 2% which is what the ECB targets to make! The following regression analysis proves that the GDP grows furthermore when the inflation rate becomes closer to 2%:




This result shows the natural log of the GDP in the Eurozone economy, ln⁡(〖GDP〗_(i,t) ) (Footnote 1.) , is significantly negatively correlated with the inflation rate deviating from 2% which is shown as the absolute number of the inflation rate minus 2, |〖Inf〗_(i,t)-2|. The following auxiliary regression shows both the GDP and the inflation are co-integrated each other:



〖 u〗_(i,t) is the residuals from the previous regression. As the lagged residuals 〖 u〗_(i,t-1) is negatively correlated with change in the residuals 〖∆u〗_(i,t), the variables used in the previous regression, ln⁡(〖GDP〗_(i,t) ) and |〖Inf〗_(i,t)-2|, are stable and co-integrated with the EU inflation rate, which means the movement of these variable affects on the other’s. However, the stability test for Greece and Ireland showed a relatively pessimistic result as follows:

Greek inflation on the inflation of the entire Eurozone countries



This analysis suggests that, , not only the percentage of the entire Eurozone inflation's contingency on Greek inflation rate is 47% in average, which is high,(Amended part) but also change Greek inflation is highly contingent to the entire Eurozone (Footnote 2.). Therefore, it is not only Greece suffers more than the other Eurozone countries and but also Greek economy is highly responsible on the entire Eurozone economy. This aspect may suggest both Greece and the entire Eurozone need to cooperate each other very seriously because Greece should not leave the EMU because her business cycle is already tied up with the EMU.

Irish inflation on the inflation of the entire Eurozone countries



On the other hand, Irish inflation rate is neither stable nor co-integrated with the entire Eurozone one. Therefore, Greece seems to suffer from the volatility of the inflation far more than the other Eurozone members so that she needs either the intervention by the European central government or the fiscal restructuration, or both, to calm down her inflation rate. Unlike Greece, Ireland may be benefitted when she leaves the EMU. Irish business cycle is not correlated with the Eurozone economy. But, if Ireland still wants to keep the membership, the Eurozone eventually needs to have a strong fiscal stimulus enough to enable Irish business cycle to harmonise with the entire Eurozone business cycle.

4. German refusal of participating into the Eurobond programme

The concern of Germany on Greece is that Greek catastrophic crisis will be permanent unless Greece tries to reform her fiscal policy fundamentally and cooperates with the EU central governmental policy rather than her own selfish and irrational nationalism. When a person purchases equity, s/he expects its value to be either stable in the long term or predicted to grow significantly. The value of Greek national debt seems to be neither stable in the long term nor predicted to increase its value in the short term. Even if German government is altruistic enough to sustain Greek public finance by purchasing Greek debt in order to rescue the entire Eurozone, there is a risk for Germany to be drawn into the recession or even to be bankrupt.
The Eurobond programme suggests the Eurozone countries to share both the risk and the benefit of issuing the government debts among the entire Eurozone countries rather than burdening the responsibility on each individual country for incurring the government debt. For example, as shown in the graph below, when Germany experiences the economic growth relatively higher than any other nations whilst France falls into the recession, it needs to tune the aggregate demand of both nations.


As there is no national monetary policy available for both France and Germany, one of the optimum solutions would be increasing the tax revenue of Germany to transfer it to subsidise France. The econometric analysis shown in the previous chapter indicates that French and German economies are highly contingent to each other so that French downturn has to be diverted by German contribution to save Germany herself. This is the idea of sharing the risk and benefit of the national debt and its usage under the collective responsibility among the countries.
Nonetheless, this mechanism may work efficiently and effectively because French fiscal policy does not have a problem like Greek. France and Germany have much more similar labour market situation than Greece. In addition, France and Germany are geographically closer each other than Greece. So, the labour mobility is much more flexible between France and Germany than between Greece and them. Furthermore, France and Germany balance their budget without relying on the excess money supply unlike Greece. If this case scenario were Greek instead of France, German tax revenue transfer to subsidise Greece is ineffective and inefficient.
The intervention from the European central government into Greek fiscal policy under the strict guideline of the central government is also emerged. Greece is still resisting against this intervention due to the sentimental irrational populist nationalism. The European central government regards that, in order to make this money transfer to Greece more effective and efficient, Greek fiscal reform lead by the further privatisation of the entire Greek economy are inevitably required. Greek labour market is rigid because of Greek economy’s reliance on the huge public sector, which disrupts the flexibility of the labour mobility. On the top of the inflexible labour mobility, Greek public sectors are not rational enough to balance their budget. They are not used to the market competition and the thread of bankruptcy because they are always protected by the nation unlike the private sectors. By contrast, the private sectors are much more used to balancing their budget under the market competition. As long as Greek public sectors struggle to rationalise their budget to be balanced by their own effort, the enforced privatisation seems to be only the antidote of the fiscal imbalance.
All in all, the responsibility of Greek fiscal policy should be burdened more on European central government to discourage Greek irrational populist nationalism which is notoriously uncooperative to solve this currently ongoing problem for both Greece herself and the entire Eurozone economy. In order to discourage this pathetic nationalism, the privatisation to minimise Greek national government authority can be a key solution before substituting the power of Greek nationalism with the European economic cooperation.


5. The ECB’s point of view and warning from Mr. Trichet

Focusing on the ECB’s point of view on the current Eurozone financial havoc, the ECB executives are suffering from the dilemma between putting priority on saving the Eurozone economy and focusing on calming the inflation by suggesting the fiscal policy of all Eurozone countries to be tightened. In particular, Mr. Trichet, the governor of the ECB, always rejects the optimism on the Eurobond programme without fundamentally reconstructing the fiscal structure in the entire Eurozone. Mr. Trichet has been always suspicious about the stability of the Eurozone economy since the ECB was established. His suspicion is related to the fiscal problem mentioned in the previous chapter.
The ECB has been purchasing a large volume of the national debt of the Eurozone countries by its quantitative easing. In order to keep the value of these bonds to invest to rescue these governments, the ECB has. The ECB cannot survive without an economic activity of these nations so that the ECB needs to save the national governments of the Eurozone. Otherwise, the value of Euro becomes zero so that the ECB itself disappears. However, the expected result still cannot be seen, and the aggregate government bonds incurred has never stopped expanding. This mechanism still enables the Euro exist, but it depreciates the value of Euro further. This phenomenon causes the inflation to hike up, and then the nominal interest rate eventually needs to rise. Overall, rescuing the Eurozone countries damages the private sectors and individual citizens by a high interest rate, and it creates further government deficit which requires the further ECB’s quantitative easing, which again induces a further inflation. Mr. Trichet has already warned this spiral would occur and urged to divert from it since the beginning of the Eurozone crisis (Footnote 3.). Thus, he rejects all the optimism of perpetuating this situation.
The ECB also struggles with negotiating with the private sectors. Although the previous chapter stated the positive aspect of the private sectors in terms of the fiscal policy, the private sectors cause problem in the monetary policy set by the ECB (Footnote 4.). The private sectors are willing to raise their profit and the wage for their executives, and detest the high interest rate. These characteristics of the private sectors perpetuate the inflation which discourages an economic growth of both countries and private sectors themselves in the long term. Generally speaking, the private sectors are uncooperative to the European economic stabilisation. Although the stabilised European economy which the ECB expects to establish benefits to the private sectors in the long term, these private sectors are less interested in it than the ECB.
This aspect infers a danger for European economy which is now also fund by the private sectors. This could be the reason why Mr. Trichet is modest about the private sector contribution to rescuing the Eurozone national economies .

6. Conclusion
In conclusion, there is no optimistic prospect on this current Eurozone economic situation. In order to solve these structural instabilities, the Eurozone may need a fundamental radical revolutionary act on altering both economic and political entire structure. But, they cannot stop the European economic integration because the almost all Eurozone economies are highly correlated with each other as proven by the econometric analysis. It seriously needs an IMF of Europe, which the ECB is trying to act like. The ECB should have a much stronger authority to instruct the fiscal policy of national governments in the Eurozone as same as the IMF does to the national governments in the globe. In addition, if the priority is saving the European economy, the heavy reliance on the private sectors contribution is very risky. Hence, the ECB policy based on Trichetian Monetarism, which is tough against the irrational egos of both the national government fiscal policy and the private sectors’ short-termism, seems to be only the reliable tool, and the economic agents had better listen to it.


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Footnotes:

1. When a variable is positively skewed, it needs to be logged or transformed into the root (E.g. square root and cube root) in order to offer a reliable, unbiased, and consistent statistical analysis.

2.

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My Additional Comment added on 4th of August 2011:

Well, as I mentioned in my essay, it depends on the hamonisation of the business cycles in these candidate nations (I referred to the price inflation rate as an indicator of the business cycle). When the business cycle is harmonised (Synchronised), the monetary union becomes necessary or inevitable, such as the Greek and the other Eurozone countries' case. Otherwise, such as Irish case, it should not join the monetary union or it has to have a great intervention to artificially harmonise the cycles.

Some African nations might be benefited because they trade each other often, and their economy is not self-sustainable i.e. needs to be corroborated each other. But, they indeed need to have a common fiscal policy to modernise and tighten the fiscal policy of all these nations.

South American nations should not have the monetary union yet. These individual South American countries are too big by means of the land mass relative to their population density (I.e. The cost of the inter-country trade inside South America is higher than the benefit from it). Furthermore, these countries do not trade each other often compared to the other blocks of countries in this world such as Europe, North America, Africa, and Asia (According to the statistics shown in Economics of Monetary Union (Paul De Grauwe)).

The trade frequency of among Asian nations is the highest of all the international trade made in this world. So, as Lee Kuan Yew, the first Singaporean prime minister, said forming Asian trade community could benefit Asian nations. However, other than economic factors, the political factors exist as the obstacles which disrupt forming this trade community.

Only the person concerning the EMU whom I can truely respect and trust is Mr. Trichet and his ECB. I claim that not only the EMU national fiscal policies but also all the private enterprises in the Eurozone economy should be instructed by the ECB based on Trichetian Monetarism...!

The EU, Still Far-away from the peace

I agree that the ideal of the European Union (EU) fits in with what the Nobel Peace Prize regards highly of. But, unless the EU unifies their fiscal policy by relinquishing the national governmental authorities among these EU countries, it is still too early to give the EU the Nobel Peace Prize.


The aftermath of WW1 caused European citizens to think of the European unification. The alliance countries force all the Central-Power countries to take their immense responsibility their ability cannot afford to bear the responsibility at the end of WW1. This resulted in the rise of ultra-nationalism in the former Central-Power countries in order to forcibly default their immense national debts. Even though some might argue that the main cause of the European integration was the loss of all empires, this fiscal havoc as an aftermath of WW1 was an extremely significant cause of the motivation in the European integration.

Polish still detest their past of being occupied by both Germany and Russia. But, because Germany is neither imperialistic nor oppressive nowadays, Polish started to think they are more co-habitable due to the successful political integration.

Nonetheless, I am still worried about the fiscal fragment and the nationalistic rigid labour market of these EU countries. Unless they start tacking with establishing the collective responsibility among these EU countries, the similar fiscal havoc at the end of WW1 might take place soon... Furthermore, the EU really needs to stimulate deregulation of their national labour market. The labour market has to be flexible as much as at the level of the USA and Asia in order to harmonise their business cycles together.

Greek and Eurozone Fiscal Crisis compared to Water Plumbing and Supply

The Eurozone shares one big primary water pumping engine, and all member countries replaced their old primary water pump from their own well with the auxiliary pumping engine drugging the water from the ECM primary pumping engine. Therefore, they now share only one well of the water.

The Greek plumbing system used to rely on the big but old engine which drains a huge amount of the water from her well. But her pipe, connecting from the pumping engine to those who need the water, has got many geographic barriers (curves, hills, rivers, seas, bays, etc) to run the water faster and many water leakages as well. The Greek water supply system used to cover such a supply inefficiency by the power of her own pumping engine.

Nowadays, as pipes are connected to not only inside Greece but also the other Eurozone. So, the Eurozone nations decided to share one brand water pumping engine supplying the entire Eurozone nations. They only remained their auxiliary pumping engine (Fiscal policy) in their own countries. As Greece has taken her own primary pumping engine, and has to now rely on the water supply coming from the primary pumping engine, the volume of the water she is able to drug up to her people has been lowered since they change the entire water supply system. As the water comes from such a far away, the inefficient Greek pipe system with an old inefficient auxiliary pumping engine cannot make the water reach to the entire parts.

The current Greek problem is that her auxiliary engine is overheated due to the lack of the water reaching to Greece. In order to solve this problem, a well trained professional plumber from the ECB has to conduct to replace the water pipe connecting between the ECB and Greece, and the auxiliary engine has to be replaced rather than repaired. Furthermore, because all the Eurozone nations still use their old auxiliary pumping engine whose is not well compatible with the one new primary water pumping engine. Thus, all the old auxiliary pumping engines should be replaced with the new one compatible with the one shared primary pumping engine, and Greek plumbing has to be replaced with the modern ones (Not only the new tough pipes but also the straightened (digging the whole into hills and mountains and make them strong enough to stretch above and inside river, sea, and bay instead of making a lot of curves) the shape of them)!!

The Prisoners' Dilemma in the EU Parliament concerning the Fiscal Unification

Last day, Ms. Merkel said "At least, this is the second best outcome" in the treaty concerning the EU fiscal unification. She wished if all EU nations had agreed to participate the fiscal unification plan as the best outcome. However, there are some nations, such as the U.K., who objected to the participation in the rescuing the European economy by the fiscal unification. Although there are substantial numbers of the EU countries agreed to participate in rescuing the European economy by their unified fiscal stimulus plan, the best outcome (all the EU nations participate) was not accomplished.

The matrix shown above is the Prisoners' Dilemma matrix modified to explain the Prisoners' Dilemma in the EU parliament concerning this treaty on the fiscal unification. At this time, this Prisoners' Dilemma matrix is based on the mixed strategy which considers all agents do not act like the prisoner in the Prisoners' Dilemma theory. In the pure strategy of the Prisoners' Dilemma theory, all agents decide to take their action 100% rationally, do not trust each other to cooperate together, and cannot exchange the information between them. By contrast, the mixed strategy takes the possibility of agents not acting 100% rationally, cooperating together, and exchanging information between agents. Therefore, we never know how these agents select their choice.

In this matrix, there are two groups of EU nations, Pro-Europeanists, such as Germany, France, and Benelux nations, and Euro-Sceptics, such as the U.K., Sweden, and Czech. This model generalised to suppose all EU nations belong to either groups, and both groups' decision has a 50% influence over European economy.

The bottom left cells of this matrix are deleted because it is less likely that the Euro-Sceptics sign the treaty whereas the Pro-Europeanists do not.



If this game is based on the pure strategy, the Eurosceptic group would definitely not sign the treaty. The benefit to the Euro-Sceptic group will gain the tremendously high benefit by not signing the treaty when the Pro-Europeanist group sign the treaty. Furthermore, in the pure strategy, the Pro-Europeanist group would have given up signing the treaty as follow:



Because, in the pure strategy, both groups are afraid of the situation that the other group gains the free riding benefit by not signing the treary. The pure strategy does not take account of any action motivated by an intuition, a superstitious belief, altruism, an expectation that the opponent may cooperate, and an anticipation without logics. All groups select their choice completely based on the benefit coming from the rational and logical but selfish interest if it were the pure strategy. Therefore, in the pure strategy, both groups take the possibility that the Pro-Europeanists would not sign the treaty while the Euro-Sceptics would sign the treary (This is a very odd case which would not happen in the real world) into their consideration. So, that is why the Ms. Merkel's wanting outcomes are the least likely in the pure strategy. This is the reason why it would be the case, even in the real world situation, that both would not sign up the treaty even though both groups could maximise the utility if both sign up the treaty if it were based on the pure strategy.


By contrast, the last resolution on the treaty was based on the mixed strategy. Even some Euro-Sceptic leaning nations took account of the possible benefit for themselves coming from signing the treaty by knowing almost 100% of the Pro-Europeanist leaning nations would sign the treaty. In the real world, especially in such a big scale rather than two prisoners in a separated shuttered cell, there are always cheap talks, a flexible flow of information exchange, and irrationality caused by human-emotion and belief in something superstitious, and/or anticipated outcomes rather than the outcomes derived from logical analyses. Thus, everyone knew that all the Pro-European leaning nations were more likely to sign the treaty, and the Euro-Sceptics leaning nations would not make the loss by any choice they could select. This is why Ms. Merkel really wanted all the EU nations signed the treaty.

The matrix of the outcomes in the mixed strategy is as follows:



The outcome of the last resolution could avoid the worst case scenario, in which all the Euro-Sceptic leaning nations did not signed the treaty, and either 100% or 25% of the Pro-European leaning nations signed the treaty. If the worst case scenario took place, all the nations who signed the treaty had to suffer, and the rest of the nations who did not sign the treaty could gain the free-riding benefit. This is what Ms. Merkel was afraid of, and Mr. Cameron would have induced if not only the U.K. but also substantial numbers of nations did not sign the treaty.

The outcome was the second best according to what Ms. Merkel said. Majority of the EU member nations (more than 50%) agreed with the treaty so that the outcome became the middle right cell. Although it could not be in the bottom right cell, it did cause neither the decline of the power of the EU economy (The center cell) nor the collapse of the Eurozone (The top left cell: The collapse would be 100% possible in the pure strategy), nor the free riding by the Eurosceptic leaning nations (The top middle cell and the top right cell).



Nonetheless, it was almost falling into the worst case scenario (either the free riding by the Euro-Sceptic leaning nations or the collapse of the European Integration) unless the Pro-Europeanists had given up signing the treaty by knowing all the other nations would not sign the treaty. This is why Mr. Cameron's reaction caused to significantly lose the trust in the U.K. from the EU. At least, Mr. Cameron should have acted not explicitly like what he has done. He should have been wise enough not let any one to know the U.K. has wanted to keep the distance from the fiscal unification. The way Mr. Cameron acted was to make the Pro-Europeanist nations to think the U.K. is quite happy to sacrifice the EU for her own sake. I did not disagree with the Euro-Scepticism at all. But, I just wanted him to know this Game Theory! All political leaders, diplomats, and any those who have to face a big complicated decision making have got to study this Game Theory!!