Euro Zone. Decision Making Process - Assignment Example

? Euro Zone Contents Introduction 3 Recent Events- Eurozone Crisis 4 Leadership and Decision Making in the Eurozone: A Critical Analysis of Recent Events 5 Analysis of decision making process in Euro zone 8 Importance of decision making process in future of the Euro zone 11 Conclusion 14 Reference 16 Bibliography 17 Introduction The Euro zone, which is officially known as euro area is the monetary and economic union between the 17 member states of the European Union. The member states belonging to the Eurozone are Austria, Belgium, Finland, France, Cyprus, Estonia, Germany, Ireland, Italy, Greece, Luxembourg, the Netherlands, Malta, Slovakia, Slovenia, Portugal, and Spain. The European Central Bank is responsible for undertaking monetary policy of the region zone. It is governed by the President and the board comprising of the heads of the central banks of nations. To keep inflation in control accounts for the principle task of the European Central Bank. Without any common representation, fiscal policies and governance of the current union and other decisions are take in close cooperation and association between member nations in the Euro group. It accounts for making the political decisions with regards to the euro and the European Union. Comprising of finance ministers of member states the Euro Group, it also includes national leaders in the decision making when need arises during emergency situations. The project discusses the range of events happening in the Eurozone and steps taken to control them through effective decision making and controlling. Reacting late to the global financial meltdown, the Eurozone has suffered significant losses arising out of rising public debts and unsustainable deficits in the peripheral economies. Different national leaders have responded to the crisis differently. The project analyses the decision making processes used by leaders in countering with the crisis. This is done in terms of the strategies, cultures, psychology and also the different leadership styles applied in the process. Leadership issues concerning the corporate social responsibilities, ethical conducts and leadership styles are analysed in the project. Lastly the effects that these issues could raise on the future of Eurozone are put to analysis. Recent Events- Eurozone Crisis The euro which was introduced in 2002 as the universal currency of the entire European Union was able to consolidate a huge trading area across the world and was instrumental in rivalling the dollar for attaining global supremacy. However, along with the accumulation of unsustainable and massive deficits and rising public debt levels in the numerous peripheral economies the viability of the Eurozone was greatly threatened. This triggered the immense debt crisis of the Eurozone. The crisis is also a vivid depiction of the economic interdependence of the European Union coupled with the lack of political integration within the system which was much needed for providing a coordinated monetary and fiscal stimulus to the crisis. France and Germany showed their reluctant efforts to step inside the political vacuum created out of the crisis. On the other hand, even the wealthiest members of the Eurozone called upon the weaker states to implement rigorous austerity measures for dealing with the crisis. However, this was not successful as it led to the great political unrest and crumbled governments of countries like Italy, Spain, Portugal and Greece. In spite of many measures to rescue the Euro agreed upon by the leaders of Eurozone volatility prevailing in the markets continued to persist consequently raising questions about the future of the euro (Grauwe, 2010). Analysts have noted that the originally powerful members of the European Union Community like Germany had been initiative and eager to develop a large and competitive Eurozone. Because of this initiative they had also allowed a large number of countries to adopt the euro despite the fact they were not fulfilling the required criteria outlined by Maastricht. However, today all of the member states within the union are to fulfil the criteria with the exception of UK, Denmark and Sweden in order to join the Eurozone. The comparatively weaker economies belonging to the union were tended to defer the stringent budgetary measures arising out of their domestic challenges in their home countries. The political price that economies had to pay for this was considered to be too high for countries like Greece, Italy and Spain. However the effect of the result was not felt promptly. Some of the periphery states continued to prosper and flourish for the first three years of euro. This flourish and success was primarily felt and driven by great influx of large liquidity combined with unprecedented and easy access to credit from the other states in the Eurozone. During the same time, the productive capacity of the periphery states was reduced considerably out of the rigid labour market conditions coupled with reduction in economic competitiveness of the nation states. The structural issues underlying the Eurozone periphery became prominent and visible after the global financial meltdown and economic crisis in 2007 and 2008. Liquidity completely dried up and most of the states felt public debts and unsustainable deficits often higher than their home country GDP. In the year 2010, the sovereign debt crisis most prominently felt in Greece and eventually spread across the other periphery states imperilling the future of the Eurozone completely. However, in the same year the IMF along with the European Union combined acted together in their efforts to bail out Greece, Portugal and Ireland (Alessi, 2012). Leadership and Decision Making in the Eurozone: A Critical Analysis of Recent Events The debt crisis originating in Greece came forth because of its huge consumption and spending along with increases in government benefits and wages during the years after its adoption of the Euro. In 2009 in November, it came forth that Greece had manipulated its balance sheet before the occurrence of the financial crisis to hide its alarming debts. According to a report presented by George Mason belonging to the University’s School of Public Policy presented the fact that the roots of the country’s fiscal calamity and deficit was inherent in its prolonged deficit spending, tax evasions, government misreporting and economic mismanagement. The European Financial Stability Facility was started by the joint efforts of the IMF, the European Commission and the European central Bank to address Greece’s bourgeoning debt crisis. After its inception the ESFS assisted Greece with a provision of $163 million loan on the assurance that Greece would commit to implement strict spending norms and implement tax hikes. However, in 2011, even though Greece’s debt was reduced considerably, it was struggling to implement the privatization plans and IMF-EU mandated budget cuts. It was under the leadership of German Chancellor Angela Merkel along with the French President Nicolas Sarkozy that the three pronged rescue plan was implemented with the aim of providing Greece with a bailout package worth $178 billion. However, this plan was a bit different from the former in that the deal included a scheme of voluntary write down by the private debt holders in Greece. However, the cut in Greece’s budge triggered a political crisis in the nation after which the Prime Minister of the George Papandreou country had to resign and create the technocrat government of national unity. The new Prime Minister undertook the highly disliked austerity measures through the parliament which paved the way for the implementation of a new bailout system. However, there still remained apprehensions about the effectiveness of the rescue process to allow Greece attain fiscal soundness. Even the official creditors of Greece such as Germany was called for accepting loses on their Greek debt holdings. After 2011, the focal point of the debt crisis moved to Italy, which is the third largest economy in the Eurozone only after Germany and France. The Prime Minister Silvio Berlusconi’s attempts to implement the long promised austerity measures were a failure and the market has lost complete faith in him. This took the yields on the ten year government bonds over and above the unsustainable levels of 7%. Countries like Greece, Portugal and Ireland sought for similar level of financial assistance from IMF and European Union when their borrowing costs attained similar high levels too. For the country of Italy, which had a public debt accounting for more than $2.6 trillion which was 115% more than its GDP, bailout was certainly not considered to be a suitable option. The Italian political leaders in Greece forced Berlusconi to step aside in order to harness the process of creation of a technocratic government of national unity in order to undertake budgetary reforms. By 2012, Mario Monti who was the Prime Minister in Italy had put forth billions for tax increases and cuts on spending in his attempts to restructure the pension system and the rigid labour markets. He was also for the change towards a growth oriented approach from the conventional austerity approach of the government. In the mean time Spain which was running at a budget deficit had reached a high in terms of its GDP growth from 3.8% in 2008 to 9.7% in 2010. In the same way as Ireland, Spain also went through a significant bust in its housing market which made its banking sector all the more exposed and vulnerable to global financial crisis (CNBC, 2012). Therefore in the wake of debt crises and global financial, EU had adopted measures which would help in centralising the mechanism of the government and coordinating the economic and fiscal policy. In the year 2011 the EU leaders had agreed to the formation of fiscal union. According to the reports published by the Reuters, about twenty five EU countries signed the German engineered fiscal pact but except Czech Republic and UK, this allowed the EU to dictate the national budgetary policies for the participating nations. The EU leaders had also agreed to introduce the European Stability Mechanism of about $650billion. However Germany, as per the reports issued by the Guardian has resisted the call by the President Jose Manuel Barroso in order to issue the joint Eurobonds. Analysis of decision making process in Euro zone The analysis of the decision making process of Euro zone can be conducted on the basis of its declining financial performance. It is found that the Euro zone is constituted by bodies like Ecofin and Euro group that consists of financial ministries pertaining to 12 Euro regions. Finally the European Commission also holds a significant hold in the decision making process. This system of decision making held in Euro zone makes the matters further complicated for it entails a large amount of overlapping. Decision making process therein thus becomes a matter of confusion subjected to large scale jeopardy. In regards to the matter of bringing about salient policies Euro group is found to render potential competition to Ecofin in that the former tends to be quite agile in nature in formulating salient policies. Again in regards to the matter of political and economic surveillance the Ecofin and European Commission both compete where Ecofin is found to have a political blend of interest in rendering its surveillance operations. Politically compromising roles thus reflected by the Ecofin while conducting its surveillance activities goes against the need of global transparency. Further it is also found that the different national governments constituting the Euro zone body has in fact rendered significant impact on influencing the decision making process thus making it seemingly inflexible in nature. Thus in regards to the above problem segregation must be made between the Ecofin and Euro group in relation to the system of issuing economic policies. Euro group to be given an upper hand in regards to bringing out policies on exchange rates, policies to help in promoting stabilisation and economic growth, coordination of the policies generated and in providing strategic recommendation to the member countries is considered to help in enhancing the effectiveness of the decision making functions. Moreover the surveillance functions of the body need to be rightly managed and henceforth must be freed from any political interference. Thus Ecofin’s impact unto the surveillance functions needs to be rightly checked in. The policies once generated in the Euro zone need to be rightly amended and reviewed from time to time to help increase its adaptability and henceforth must be flexible in nature. Again the European Commission must gain a superior position in regards to conducting an overall review of the policies generated inside the European Union such that it does not affect the interest of the new entrants to the body. The Euro group in its actions of generating salient policies can endeavour to take resort to innovative agendas to help counter the emergence of significant contingencies. Moreover the group needs to bring about potential regulations that would help in monitoring the decision making process and also the actions performed by the different Euro zone states. Further the decision making actions of the Euro zone body must also incorporate key elements relating to markets for labour in the international scenario and also in regards to financial and economic stability of the member nations (Coeure and Ferry, 2003; Europa, n.d.). The Euro zone also focused on its expansion plans where it aimed to gain entry of new countries into its existing constitution making the decision making functions gain further complicacy. Thus with continuous expansion on the round actions were continuously taken to help avoid further complications by streamlining the different policies and regulations taken in from time to time. Different treaties and policy agreements made from time to time were also focused to be streamlined to help in fruitful and effective decision making activities with also significantly defining the powers of the different bodies (BBC News, 2012). The decision making activities of the European Union mainly revolves along the system of negotiations that involves the process of tremendous bargaining and problem-solving methods. Actions like generation of potential policies and also of redistribution activities where the resources belonging to one party are transferred to the other focus on the system of tough bargaining activities. On the other hand the activities concerning distribution of resources amongst the various parties and also of the issue of different regulations takes into consideration the problem-solving skill sets. Thus both the problem-solving skill sets and tough bargaining activities constitute an integral part in the decision making activities of the European Union body such that one is set above the other as per the need of the hour. It is held that the initial stages of decision making activities depend on the problem-solving skill sets while in the latter stage such decision making ventures strictly depend on tough bargaining sessions between the different parties involved. Especially in the case when the European Union conducts negotiations with other bodies in the international region the process of tough bargaining is taken into mind. However it is also found that decision making activities concerning problem-solving skill sets aims to arrive at effective conclusions than that obtained from tough bargaining activities. The parties in the European Union taking part in important negotiation activities contains of parties that include both the national and local authorities, the European Union Parliament, the European Commissioners and the broader society that are the subject of such regulations. The decision making process of the European Union takes in forth large amount of such negotiations that are held in a recurrent fashion. Similarly the decision making activities of the European Union body take in forth these large amount of negotiations depending on the parties holding such or also in regard to the contexts for which such negotiations are held to be carried out. Again the negotiation procedure in regards to decision making activities of the European Union is also decided upon the different outcomes that such activities can result to. Thus it is found that decision making activities of the European Union depend to a large extent on the diversity of the negotiation procedure taken in the course of such. Thus the two common negotiation programs that are carried out in Euro zone consists of both problem-solving skills and tougher bargaining activities, latter of which appears to be the most popular one for the body in its international and diplomatic ventures (Pooter, 2011). Importance of decision making process in future of the Euro zone The importance of decision making process in the future of Eurozone can be well explained with the prevailing issues on the strategies, culture psychology and also leadership styles, ethics and corporate social responsibility. The decision making process includes the issues and therefore their importance is discussed in details. The disappointing economic performance of the Euro zone and the likely strain for enlargement calls for a strategies that can be maintained and useful for the future of Euro zone. It is important for EU to get out of the crises for which an exit strategy is recommended. With the right kind of strategy the pursuit of Europe 2020 objectives with respect to monetary and budgetary policy and the direct support from the government to the economic sectors. Thus the strategies to the several exits are important. Thus a reinforced coordination should ensure a successful exit in global area. The first strategy is to reform the financial system for which five objectives should be met. The importance of this strategy is that it would help to build a more stable and healthy financial sector in order to finance the real economy. The stability and growth pact is also one of the strategies for overcoming the crises. It is important for all the countries to form a policy which would help to come out of the crises and thus strategies related to financial sustainability and fiscal consolidation should go hand in hand with structural reform. The importance of strategies would help the country to get back to the position and it is important for EU to take charge of the future. It can only succeed when it acts collectively as a Union, thus the strategies would help the countries to come out of the crises and turn EU to sustainable, smart and an inclusive economy which would deliver high level of employment, social cohesion and productivity. The vision set by Europe 2020 is to achieve the social market and therefore the strategies are an important part of the decision making process (European Commission, 2010, p.25). The downfall or the euro crises has affected the cultural and psychological factors of Europe and other related countries. In the decision making process culture and psychology has taken a major part and they are equally important for the future of euro zone in addition to other factors. The Euro zone crises have affected the culture as well as the psychology of the people. The crises did affect the cultural budgets and the political leaders should work for integration of culture for the future of Euro zone crises. As per Belgain artist Luc Tuymans have stated that in times of crises such as the Euro zone crises, the nation is left with one thing and that is culture. Culture is one of the fundamental which is needed to re enchant the nation, Europe at all the level and prevent the countries from becoming synonymous with the economic crises. The politicians can restore the credibility of culture and it contains symbolic, economic and social value. By investing in the culture and the creative talent, the EU would be able to produce real competitive advantage in the globalised which generally lacks innovative vision and ideas. The importance of culture in the euro zone crises is that it would enhance the self image of the continent and would help to create a better understanding between the member states and the citizen which would lead to a greater and better dialogue, social cohesion and intercultural tolerance. Together with the political leader and artist can produce a future vision with respect to the culture of Europe and working towards generating culture for the future of EU. Finally, the association of culture who has a high decision making powers could send a strong message that the EU still calls on the artist and critical thinking which would allow people to innovate and see beyond the established frameworks by the rating agencies. According to a survey done, about 92% of the citizen of Europe thinks that the cultural and the activities of culture should play an important role in Europe. Culture should be acknowledged as one of the essential pillar in order to sustainable development of the society. It is through culture that Europe can gain back the place and the members of the European Union should understand the importance of the artists (EurActiv, 2012). Apart from the cultural factor the leadership style is also an important issue for the future of euro zone crises. This is because a leader plays an important role in the development of the economy and especially in cases where the country is governed by economic crises. It is through the leaders that the country have decided to make a new treaty where the members of the Euro zone would be made aware that the things which did not work in the past would not be taken into account for the future. Merkel and Sarkozy suggested that the Euro zone leaders should meet every month at least once as long as the crises last and try to support growth in Europe (BBC News-a, 2010). All the leaders of the nations are taking adverse steps to overcome the crises. When the leader knows their duties, the country can rely on them and in return get the confidence of taking firm decisions. Therefore leadership is important factor for the future of the euro zone crises. Apart from the leadership and its style, the issues on ethics corporate social responsibilities are also important for the betterment of the future in Euro zone countries. Ethics and corporate social responsibility are always necessary for any business and for all organisations. The role of ethics is important in business and when a country performs ethics it has greater chances to over the risk and debt because of its corporate responsibility and ethical practice. The financial and the economic crises had prompted the organisations to perform business ethically and make an effort to behave in a more responsible manner. The EU has taken up the issues on ethics and corporate social responsibility and has been trying to pave the way towards a more responsible corporate behaviour (Euractiv-a, 2007). Conclusion Immediately after the launch of Euro, the critics had stated that it was unstable as it was incomplete. A monetary union cannot work outside the fiscal union. The Euro has been successful till certain extend but failed to perform consistently and hence resulted in euro zone crises. The leaders in Euro zone now face a choice between two alternatives which are either to accept the Euro zone and do all the necessary actions in order to stay stable; or else they can stick to the factor of adoption of some tougher rules. But the 2010 crisis had few fortunate consequences like it did expose the weaknesses with the countries which were individual and in the treaty of Maastricht. It is confirmed that Euro zone just cannot rely on the financial markets to address the weaknesses. The crises revealed that bailout procedure is necessary. The Euro zone crises should not end the euro but it should be able to start a long overdue over haul. It is important for all the nations to come tighter and forma union and work accordingly to solve the crises. But as per the reports published by Reuters, the meeting that took place between the euro zone leaders of European diplomats and EU officials have lowered the expectation. Thus to conclude, new innovative products with integration of financial markets have also led to the growth of economy. Due to the global financial crises the factors such as responsibility, transparency and sustainability should be taken into consideration. The Banks need to maintain transparency about the goals and mission. At the same time it is unethical that investment banks should sell risky financial products. Coming to the responsibility the credit rating agencies should show some responsibility to ensure a proper understanding of ratings and communicate it accordingly. The Basel II is essential for the future stability of the system, the banks needs to be transparent about the activities which would help to avoid crises. Therefore to measure the crises successfully, the key players of the financial market should come together and work closely with each other. Measures should be taken to ensure the stability without having any negative impact for the future. Reference Alessi, C. (2012). The Eurozone in Crisis. [Online]. Available at: http://www.cfr.org/eu/eurozone-crisis/p22055. [Accessed on February 27, 2012]. BBC News-a. (2011). Eurozone crisis: Late night summit talks to save euro. [Online]. 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