European Business Issues - Essay Example

?European Business The European Union (EU) is a political and economic entity and confederation composed of 27 member s located in Europe. Its origin can be traced back to the European Steel and Coal Community (ECSC) and the European Economic Community (EEC), formed by six nations in 1958 after the Rome Treaty of 1957. Since then, the EU has undergone tremendous growth in size, with the entry of new member states, and in power, through the addition off areas of policy to its merit (Nelson et al. 2012 P.1-5). The EU works through a system of supranational independent institutions and inter-government negotiated resolutions by the member states. The most important institutions of EU are the Council of the European Union, European Commission, and the Court of Justice of the European Union, European Council and the European Central bank. These institutions play a vital role in ensuring that the policies and matters affecting the EU member states are taken care of (Nelson et al. 2012 P.1-5). Apart from the growth of EU member states, the Union has also undergone a number of significant changes since its formation in 1957. The most important changes, which have been witnessed, are the Single European Act of February 1986 and the Maastricht Treaty of February 1992, which led to the establishment of the Euro. The objective of this paper is to explore the importance of the Single European Act of February 1986 and the Maastricht Treaty of February 1992 and their impacts on the UK economy and business. The Current Problems in the Eurozone and the Response of EU Institutions The Eurozone has faced a lot of challenges over the recent years. For instance, what begun as a debt crisis in Greece towards the end of 2009 has evolved as a big economic crisis in Eurozone, which has threatened the economic stability in Europe and the world at large. In fact, some economic analyst views the Eurozone as the biggest threat to the economy of the United States according to Nelson et al. (2012 p.1). At least four major problems related to economic challenges have been identified with the Eurozone. These include weakness in the European banking system, high levels of debts and public deficit in Eurozone nations, persistent trade imbalances within Eurozone and the economic recession as well as high rates of unemployment in Eurozone countries. High level of public debts in Eurozone countries (periphery) The problem of high level of debts in some Eurozone countries has raised a lot of concerns as to whether these countries will default on these debts. These concerns arose after high debt levels in some countries in Eurozone periphery increased immediately after joining the eurozone over the past decade followed by the global financial meltdown of 2008-2009, which further strained the public finance. As a result, the worst affected countries such as Ireland, Greece and Portugal had to be bailed out by the Eurozone governments and IMF in order to pay off these debts. However, even after the bailout, a country like Greece is still seeking for ‘haicuts’(losses on bonds held by private creditors. Portugal is also argued to be considering restructuring its debt. Italy and Spain are also grappling with the problems of debts, which have seen many investors becoming increasingly nervous (Nelson et al. 2012 p.2-4). Secondly, weakness in the Eurozone banking system is raising a lot of concerns about the levels of public debts. The ongoing concerns regarding the crisis have triggered capital flight from banks among some Eurozone nations, and some banks are now reported to be experiencing a lot of difficulties to borrow in capital markets. Furthermore, analysts argue that European banks have insufficient capital to absorb losses on their holdings of autonomous bonds in case any of the Eurozone country defaults (Nelson et al. 2012 p.2-4). The third problem experienced by the Eurozone concerns lack of growth and high unemployment in Eurozone member states. For instance, A survey conducted by the IMF in January 2012 downgraded the Eurozones’s growth forecast by 1.1% in 2012 and to reduce by 0.5%. This was mainly witnessed in Eurozone’s major economies such as Greece, Italy, and Portugal. The rate of unemployment in eurozone periphery was forecasted at 18.5% in Greece, and 22.9 in Spain. A survey also revealed that Youth unemployment is increasing at an alarming rate in Greece and Spain, where the rate is nearing 50%. Growth rate in Germany has also been forecasted to drop by 3.0% of gross domestic product in 2011 to 0.3% in 2012. This drop is also expected in France in the year 2012 (Nelson et al. 2012 p.2-4). The fourth problem facing the Eurozone is the persistent trade imbalance, which have developed within the Eurozone. Many analysts argue that these trade imbalances are making the Eurozone more vulnerable to financial meltdown. Germany for instance has actively persuaded policies involving wage cut aimed at increasing its economic competitiveness by maintain cost of production low while increasing its exports. The Eurozone periphery’s cost of production tends to remain higher many due to rigid labor markets, barriers to economic competition and generous pension problems (Nelson et al. 2012 p.2-4). Major European Policy Responses to the Problems Financial bailout from IMF and other Eurozone countries The Eurozone has often taken a bold step by establishing a crisis lending capable of providing financial assistance to financial institutions and governments experiencing market pressure. The main rescue fund under operation currently is the European Financial Stability Facility (EFSF). This fund has a lending capacity of up to €440 billion and is used to provide support to finance bank capitalization, governments or buy government bonds traded on secondary markets. Currently, EFSF is giving financial assistance to Ireland and Portugal in conjunction with IMF. Other response includes Austerity Programs and Structural Reforms, establishment of EU government reforms, increasing of funding to IMF for bail out (Nelson et al. 2012 p. 4-6). The Role Of Fixed And Floating Exchange Rates And The Advantages Of The Single Currency. Under fixed exchange rate, the central bank acting on behalf of the government or the government intervenes in the currency market, to stabilize the exchange rate close to the target. For instance, in 1990 when Britain joined European Exchange Rate Mechanism it fixed its sterling against other European major currencies. In this case, it was allowed to vary against major currencies such as German mark by 6%. Britain, however, walked out of the ERM in 1992 after its pound came under selling pressure, thereby adopting the floating system of exchange (Bayoumi 1997 p.111-114). Roles of Fixed Exchange Rates It reduces uncertainties in the economy. This allows businesses to plan for what is a head with confidence It serves to reduce speculation in foreign exchange markets. For instance, sterling came under massive speculative attacks during autumn in 1992 since the market perceived it to overvalued and good for devaluation It serves to exert discipline on employees and domestic firms to maintain costs under control in order to remain competitive in foreign markets. This, in turn, assist the government in containing inflation, which then lowers interest rates, thereby stimulating investment in the country. Countries with fixed rates of exchange tend to impose tight controls on capital inflows from and to their economy. This enables the government or the central bank of the country to limit outflows and inflows of currencies that may dilute the target of fixed exchange rate. Floating Exchange Rate A floating exchange rate, on the other hand, is determined by the private market through the forces of demand and supply. It is usually referred to as ‘self correcting’, since any difference in demand and supply automatically adjusts itself (Bayoumi 1997 p.111-114). Roles of the Floating Exchange Rate One of the major roles played by floating exchange rate is the fact that it provides monetary/government authorities flexibility in determining interest rates. This is due to the fact that interest rates need not top be set in order to keep the exchange rate within set targets. For instance, when UK walked out of ERM in 1992, this created unprecedented shard cut in interest rates, which assisted in revamping the economy out of recession. Secondly, floating exchange rate provides automatic adjustment for nations with huge balance of payments deficit. This assures a country of external balance of trade with its trading partners (Bayoumi 1997 p.111-114). It is argued the Bank of England does not usually actively intervene in currency markets to realize the desired exchange level of exchange. However, in July 1999, the twelve members of a single currency agreed to fix their currencies against each other. This later led to the adoption of the Euro as a common single currency for the twelve members. The adoption of the Euro as a single currency was associated with several advantages. This includes: It makes it easier to compare prices between different countries Since there is no currency fluctuation between member countries, this enables firms to plan more effectively and build confidence It also serves to reduce transaction costs. For instance, countries operating under monetary union are not expected to keep trading currencies between each other during trade. This implies that there is no commission being paid on currency exchange. This indeed promotes trade between different countries It is likely to attract FDI to the monetary union due to low transaction costs, low uncertainty and access to a bigger market. The Difference Between Free Trade And Protectionism Protectionism Protectionism occurs when a country stops trading with other nations with the aim of becoming autonomous. Certain government uses protectionist economic policies as a way of restricting exports and imports. This generally helps in protecting a country from imbalance of trade due to increase in imports. Some of the protectionist policies include keeping the industry in the nation competitive, in the domestic market, raising prices of imports against tariffs among others. Protectionism may also involve import quotas or restrictions of imports (Tucker 2007 p.376). Free Trade Free trade is a situation where a country accepts to trade with other countries allowing the other countries to specialize in production of certain goods and services while trading in others, thereby increasing the consumption among all the countries involved. It plays a major role as it removes the barriers to allow free flow of trade between countries. This helps in opening up the market and allowing fair competition, thereby fostering economic growth (Tucker 2007 p.376). The role of tariffs and quotas and the impact of immigration within the EU Tariffs Tucker (2007 P.376) argues that tariffs are the most visible and popular measure used to discourage trade. A tariff by definition refers to a tax on an import. Certain countries in the European nations have the tendency of raising their tariffs as a way of protecting their industries. An example is Germany that raised its tariffs in eurozone to protect its major industries during the recent financial crisis. This discouraged trade thereby restoring its stability. Quotas Quota is another strategy employed by some eurozone countries as a way of limiting foreign competition. A quota refers to a limit imposed on the quantity of goods that may be imported at a given time. Tucker reveals that some European countries are demand quotas as a mean of protecting their countries from Chinese products (Tucker 2007 p.377). The importance of geographical and occupational mobility in wealth creation Bonin et al (2008 P.1) argue that one of the founding principle of EU is the freedom of movement of workers from one country to another. This is contained in Article 39 of the Treaty that established the European community. Free mobility of workers is important with regard to wealth creation as it establishes an area without internal frontiers, thereby strengthening social, economic, as well as active European citizenship. Geographical and occupational mobility are also important for EU countries as it helps in the transfer of technology from one country to another. This indeed assists in wealth creation. It also promotes trade between EU member countries thereby leading to wealth creation. The role of the main EU institutions in determining and legitimizing policy The Single European Act was signed in Luxembourg in February 1986 by nine-member state and later on by countries like Italy, Denmark and Greece. It is argued to have been the major amendment ever been made in EU creating the European Economic Community (EEC). The SEA added a new momentum to European integration by amending rules governing the work of European institutions and expanding the jurisdictions of community powers (Swann 1992 p. 6-13). This treaty facilitated the establishment of the internal market. The act also helped in increasing the number of cases under which the council can make decisions by qualified majority. This is said to have facilitated decision-makings and mitigated frequent delays associated with the search for agreement among twelve member states. SEA also helped in the creation of European Council, which formalizes summits or conferences of heads of states and governments (Swann 1992 p.13-26). The SEA treaty has also contributed immensely to political changes in the EU periphery. This is because it helped in the establishment of the internal market. The Single Market in this case refers to an area that has no internal frontiers, in which there is free mobility of goods, services, people and capital assurance (Swann 1992 p. 37-44). Roles of the Council of the European Union, European Commission, European Council and the European Central bank Major EU institutions such as the European Central bank and the European commission have helped in the establishment of the Single Euro Payment Area (SEPA) to allow for electronic payments across the euro area. This would enable easy transfer of debit card, credit card, bank transfers within the member states. SEPA means that individual citizens will be able to make fast and secure transfer between bank accounts to any country within the euro area. This indeed will help many people British nationals, not an exception (Blair 2011 p.116-122). The European council is also at the forefront in ensuring that the single market is completed. In this regard, the European council has helped in the creation of the Single Market Act, the Digital Single Market and the elimination of the ongoing regulatory burden for SMEs and microenterprises. To accomplish all this, council is calling for an agreement on standardization on simplification of accounting requirements and energy efficiency by June 2012. Other measures taken by the council include implementation of Commission Action Plan on e-commerce. This it argues will help create employment and boost the economy of member states (Blair 2011 p.116-122). Role Played By EU Directives The EU is a law, which requires EU member states to achieve a given result without necessarily dictating the mean of accomplishing that result. These directives are important since it guards other member states against unfair completion and business practices. An example is Unfair Commercial Practices directive. This directive prohibits unfair practices throughout EU. The directives also ensure that member countries do not engage in unnecessary wars with each other according to Werring (n.d). References Bonin, H., Eichhorst, W., Florman, C., Hansen, M.O., Skiold, L., Stuhler, J., Tatsiramos, K., Thomasen, H., & Zimmermann, K.F. (2008). Geographical mobility in the European Union: Optimising its economic and social benefits. IZA Research Report No.9. July. 1-139. Bayoumi, T. (1997). Financial integration and real activity: Volume 1997, Part 2. Manchester: Manchester University Press ND. Nelson, R.M., Belkin, P., Mix, D.E., & Weiss, M.A. (2012). The Eurozon Crisis Overview and Issues for congress: Congressional Research Service. 29 February. Swann D. (1992). The single European Act Market and beyond: A study of the wider implications of the Single European Act. London: Routledge. Tucker, I.B. (2007). Microeconomic for today. New York: Cengage Learning. Werring, L. (n.d). The role of EU Directives and policy. 1-6 file:///G:/fixed_floating.htm file:///G:/treaties_singleact_en.htm file:///G:/which-deficit-caused-the-piigs-problem.htm file:///G:/TR3.htm Read More