EU Crisis and its consequences - Essay Example

?Running Head: PROJECT MANAGEMENT: EU CRISIS Project Management: EU Crisis The European Union (EU) crisis that hit the union in 2009 has been a challenge to the different nations who are member states. Although it has been a crisis of historic significant proportions, in 2009 things went beyond control. There are some possible causes of the crisis published in different magazines, talked of in meetings and others brought to openness through the media. Some of them are, rising government debt levels; trade imbalances, monetary policy inflexibility, and loss of confidence. All the latter causes happened in a chronology of events that involved a number of the member states. Members pinpointed to contribute to the evolution of the crisis are Greece, Ireland, and Portugal. From the three states, the crisis is noted to have spread to Italy, Spain, Belgium, France, and the United Kingdom. On the issues, there are different solutions that have been tried including EU emergency measures, ECB inventions, and economic reforms and recovery. All the latter have been implemented however; the crisis has not yet been settled. Due to this, there are some recommendations that may act as long-term solutions to evolution of such crisis. These are European fiscal union and revision of the Lisbon Treaty; Eurobonds; European stability mechanism; address current account imbalances; European Monetary Fund; drastic debt write-off financed by wealth tax, and speculation about the breakup of the eurozone. Contents Abstract 1 Contents 3 Project Management: EU Crisis 4 Introduction 4 Analysis of the European Crisis 4 Recommendations to the EU Crisis 13 Stakeholder Diagram 16 Conclusion 16 Reference list 17 Appendix 19 Project Management: EU Crisis Introduction The European crisis is an ongoing financial crisis that has led to involvement of third parties to help in the situation. The crisis began in 2009 with increased fears from investors attributed to by the rising government debt levels around the world (Maylor, 2009, p.23). This was followed by an era of downgrading of government debt in a couple of European states. The issue became worse in 2010 leading to actions of rescue. Meetings have been held by the leaders in the project to come up with possible solutions. In projects, leadership should play a key role and this is the case with the European Union however other factors let it down. According to Olsson (2009), there are different things that the leaders have been agreeing on for instance creation of a common fiscal union and balanced budget management in each state. In an issue like this one, it becomes necessary to look at the causes of the same before going deep to get solutions and recommendations. Although the European currency has remained stable despite the shock, sovereign debt has raised substantially in a few eurozone countries. In the crisis countries that are most affected are Greece, Ireland, and Portugal, which collectively contribute 6 percent of the eurozone’s gross domestic product (Olsson, 2009, p.23-26). Analysis of the European Crisis Complex factors have resulted to the European sovereign debt crisis including globalization of finance; easy credit conditions between 2002 and 2008 that encouraged much borrowing; trade imbalances in the international markets; slow economic growth after 2008; fiscal policy challenges particularly high entitlement spending; and approaches used by nations to bailout banking industries challenged (Chrisdoulaki, 2010).The dawn of the crisis was in 2000 to 2007 where the global pool of fixed income securities increased. This increased savings in individual states as developing countries entered global capital markets. Different countries in the European were affected by these swings in the global economy that had begun in United States of America. Some borrowed and invested in different ways for instance Ireland, one of the leading contributors of the crisis, lent the money to property developers through its banks thus generating a massive property bubble. With the bursting of the bubble, Ireland’s government and loyal taxpayers had to assume private debts. In Greece, the case was different whereby the government became extremely generous and increased the earnings of the workers by a good percentage. The pension benefits in Greece were also raised. In analyzing, the issue there is a need to understand the soft and hard systems. The hard systems are the ones in the leadership in the union and they have ways of analyzing challenges since they have records and transactions sheets. They therefore impart fewer challenges and their goals are also minimal. On the soft systems, the public and the stakeholders have high goals for the union. Due to this, they see many problems. They lack empirical ways of solving the issue since they only operate in prevailing conditions. This is why in Greece the public went into the streets when the government vowed to take another loan. According to Orbie (2009, p.42), three countries, Greece, Portugal, and Ireland had high expectations for their economies. Actually, they thought that through the favors and the investments they made they would be able to boost their economy to the standards of other states in the European Union. This was been unrealistic and it is one of the reasons that have led to fail of many projects. They were expecting a great future but with poor strategies of getting there. This shows how putting down of realistic strategies is of benefit to any project. The governments in the different countries were setting themselves in a risk since when one of the nations enters in a sovereign debt under the situation it would cause inconveniences to the state lending. This was evident in Italy were France had borrowed extensively from it. The French government became under pressure due to payment of the debts. These situations are called financial contagion and they made the issue of sovereign debts to spread over the states. Locally there were interconnections between institutions as it is in the concept of debt protection. The institutions entered in financial contracts known as credit default swaps (CDS). All this was due to lack of risk management team. In any project we are told by Orbie (2009, p.67), that risks are mandatory to any project. In the case of the European states, they should have employed a risk management team to analyze how the risks could be mitigated if not fully controlled. This could have saved a bit in the project from the consequences received. The European Union has been successful for long. Some of its achievements before the 90s were; improvement of the economy through improvement of infrastructure; creation of employment; promotion of local and international trade; common currency in the states; and coordination between the states in different things like games (Pinto, 2007). Maybe this is a reason as to why football games in Europe have become a career and really exciting. Despite the achievements, things began to go astray with the dawn of 90s decade. In 1992, the members signed the Maastricht Treaty with the aims of limiting their spending and debt levels. A number of states including Greece and Italy were unable to comply with the terms of the treaty. The latter used complex currency and credit derivatives structures designed by US investment banks. When parties in a project do not show Full Corporation then this should not be left to go since the impacts of the same might be intolerable. Greece was given all the freedom to do what she wanted that was against the written terms of the treaty, thus the results were lack of corporation between the members. In a project, there is always a need of fully involvement of all members concerned as they come to terms on all they do. The case of crop up of the EU crisis can therefore be reflected back to these days when they just assumed some things. This is the same reason why Greece became the biggest contributing state to the evolution of the crisis. Issues should therefore be settled once they rise. According to Maylor (2002, p.56-58), ‘appalled economists’ claim that the financial crisis in the European Union began at this times with increasing spending from the governments. Actually, the spending in the 1990s was controlled as it is in the treaty signed. Only a few nations exaggerated their spending during this decade. Increased debts sprout in the late-2000s due to the huge bailout packages channeled to the financial sector. After the dawn of the bailout packages, the global economic growth slowed. In the financial crisis, the fiscal deficit in the euro area rose from 0.6% to 7%. Government debts during this period rose from 66% to 84% of GDP. According to Kaster (2010, p.24-27), members of the European Union were not showing fiscal irresponsibility except Greece which showed fiscal irresponsibility at the heart of the crisis. Either way, Meredith & Mantel (2003) claim that high debt levels alone may not fully explain the evolution of the crisis. In comparisons with other states like UK and US. This is shown in the figure below. (Project, fiscal balances, Financial Times, 2012) As Lannoo (2008) puts it, trade imbalances contributed greatly to the EU crisis. This was supported by a commentator of the Financial Times, Martin Wolf, who asserted that trade imbalances created a fertile ground for the crisis to crop up. Germany saw a rapid increase in its benefits in the trade as it had the largest number of commodities in the trade. Compared to other nations it had a better public debt and fiscal deficit relative to GDP. On the other hand, Portugal, Ireland, Italy, and Spain had worse balance of payment positions thus there was imbalance in trade as the latter states became worse while Germany continued to benefit abundantly from the trade. However, this was addressed after sometime, it took long thus the imbalance in the trade continued to go higher. Recently, the situation in Greece has improved recently as they marked a higher percentage of exports than imports in 2010. After the membership of the eurozone, they established a single monetary policy such that no single state could be independent. This situation creates a higher default risk as a country may be affected because of another. When a state tries to prints its own money it is devalued relative to its trading partners in the eurozone. This makes the exports of such a state to be cheaper leading to an improving balance of trade, higher tax revenues in nominal terms and increased GDP. In addition, assets that are held in that currency lose value and the owners end up making losses. For instance, in 2011 investors in sterling suffered losses for selling their assets. This factor has been seen as a factor contributing to the financial crisis (Juncos, Emerson & Schroeder 2007, p.34-36). Before setting up the project, this issue should have been addressed extensively to balance the coin. Before the evolution of the crisis, regulators and banks assumed that sovereign debt from the eurozone was safe. Bonds has substantial holding of bonds from some countries like Greece who were really weak but this was done since they offered a small premium. With time, some states discovered that Greece and other countries’ bonds offered substantially more risk. The issue at hand was now lack of information about the risk of European sovereign debt. This became a conflict of interest between banks that were holding the bonds. There was an increased sovereign CDS price and this led to lack of confidence. The market expectations of the countries had gone high than it could be. This was been unrealistic. The banks did not analyze the situation in advance to see the consequences of the same; they were realizing this after things had gone beyond control. Investors created doubts about the policy makers since states that used the euro had fewer monetary policy choices. This called for Multinational Corporation however, it was already late and nothing could have been done to save on this. (Project, Sovereign credit default swaps, Bloomberg, 2012) On December 5, 2011, a rating agency placed its long-term ratings on the 15 members of the eurozone where they identified some interrelated factors that led to development of the crisis (Grant, 2011, p.32). They said this was totally a failed project and yet all the opportunities were there to create success and not disasters. The agency reported that there was tightening of credit conditions across the eurozone, markedly increased risk premiums, continued disagreements among the policy makers in the union, high levels of sovereign debts, and rising economic recession in the eurozone as a whole in 2012. All the latter factors were challenges since at times it would not be easy to force a government to do something like in the case of Greece. Despite this, lack of planning was a factor that led to challenge of such a project. They should have realized ways of fighting the challenges in advance through incorporation of other parties. The real crisis evolved in 2010 with renewed anxiety in relation to rapidly rising national debt. The investors were afraid of the current situation and they demanded higher interest rates from some governments with higher debt levels, deficits, and current account deficits. Budgeting became an issue in some governments in such a situation where foreign debts were high and the economic growth rates were slow. Time was not on their side since things had already gone beyond control. The three things in the theory triangle became applicable. Successes had been achieved but they now became useless in this case. This led to a continued debate among economists. The states began clashing among themselves for instance Germany who had lent money to some of the member states. There was lack of communication among the states as some kept quiet on some issues. Greece had made some member states to carry their burden and they were now quiet on the issue. Communication is always necessary in a project. It is through communication that they will realize some of their weaknesses and strengths. This could have saved on the economy of some nations who came to suffer later. The project had many successes like improving the economy through betterment of the infrastructure and markets. Peace was also promoted in the union but all these varnished at once. The budgets became complicated to be drawn. There was no cash to budget on as most of the governments were in sovereign debts. Much of the blame for the evolution of the crisis was put on Greece. Grant (2011) asks whether a single nation could affect 14 nations. Looking at the situation in Greece, their economy was one of the fastest growing economies in the 2000s and the government utilized this boost by running a large structural deficit. In the mid of 2000s the world economy began to cool and in Greece this hit hard in its main industries, shipping and tourism. As a result of this, the country’s debt began to go high. On April 2010, the government requested a loan of €45 billion from the EU and the IMF. This was intended to cover its financial needs. Economists said that at this time 30-50% of the money in Greece was from debtors (Kaster, 2010, p.34-45). The euro currency declined together with the stock markets. The government on May of the same year said that they would take another loan that would cater for their needs in the next three years. The public was annoyed by this and they went into the streets together with social unrest in the country. In October 2011, the crisis had gone beyond control and the government was totally broke, they were given another loan worth 130 billion Euros. The country was receiving pressure from its counterparts in the European Union who promised to withdraw their investments. The loans were helping Greece to support itself while on the other side the matter was becoming worse since repayment of the same would be worse. Some proposed that Greece had to leave the euro however according to Craig & Derluguian (2011); this would make the situation worse. The issue of loaning to Greece continued and even in 2012, an extra loan of almost 130 billion Euros would be given to them. One factor that seems to have caused all this is poor planning. Planning plays a key role in any project. In the case of Greece, they took the loans but the government did not take time to plan adequately on how to use the amount so that it could help in improvement of the economy of the state (Lock, 2003). In Ireland and Portugal, the situation was almost similar with the one in the Greece. From these three states, the problem began to spread to other states in the union. Italy and Germany were highly affected since they had invested much in the three states whose economies were in a devastating condition. The whole union was now in a mess and the crisis had fully grown to attention. It was however late thus they began to involve third parties to help. Despite this, strength with the union is that their currency did not lose value in the stock exchange. Kaster (2010) says that the currency in the European Union is strong to help it regain its initial economic status despite the shocks that have hit some of its members. This is yet to be revealed but with time, it will be known. Recommendations to the EU Crisis Looking at the downfall of the project, the members of the European Union have not taken it lightly. They have tried to implement some solutions to this. For instance, in May 2010 they agreed to create the European Financial Stability Facility that would help to preserve financial stability in Europe by helping states that were weak financially. This would be for instance through giving loans and buying sovereign debts. They also set up some programs like the European Financial Stabilization Mechanism (EFSM) that was an emergency funding program reliant upon funds raised on the financial markets. This was to run under the European commission and it was enacted in January 2011. It was also aimed at preserving financial stability. They also laid strategies to improve the economy of the states by increasing their investments. All the latter solutions according to Craig & Derluguian (2011, p.55) were only short-term solutions with the ultimate aim been settling down of the sovereign debts and regaining back their economy. In a project, there is always a need of long-term planning so that the situation may be solved for the last time and in case it hits again they have ways of overcoming the challenge. It is always necessary to use the past in a case of this type so that all the weaknesses and the strengths are identified. In the case of EU crisis, there are different recommendations that have been put in the media, in symposiums, in meetings, and in different publications, thus they have to analyze them since they will act like long-term solutions to the crisis. The recommendations that were got from different resources are and they were all discussed on the grounds of project management. Recommendation 1: European Fiscal Union and Revision of the Lisbon Treaty - since the ultimate goal of the EU was to improve the economy of the different states, they should make it a fiscal union. This is to say that the union will be purposively for addressing all financial issues. Looking at the root cause of the crisis, sovereign debts, they should strategize on how to make their union a fiscal union. This had already been done by some nations among them Germany, France and other smaller states but the other states did not take it positively. This showed that there was lack of corporation among the members (Chinyio, 2010). This would be avoided when all the members agreed to make the union a fiscal union. To make this realistic, they will have to lay penalties for those who violate the terms they will lay down. For instance it is expected that in any financial project there should be controlled spending thus all members are supposed to adhere strictly to this. Through this, they will have created a long-term solution to the problem since all financial problems will be addressed immediately they are noticed. This will however need corporation among the leaders. The leaders should lead by example thus they should corporate to make the union a fiscal union (Kerzner, 2001). This should not be like the case of Greece where the citizens were perturbed by the increased loans of the government from other states and went into the streets. This showed poor governance thus the leaders should be responsible for their own states. Some terms those are in some treaties that hinder corporation among the members. Such terms should be changed and this will call for corporation among the leaders. This should not be like the case of the British Prime Minister, David Cameron who failed to support the existing EU treaties (Pugh & Sidhu, 2003, p.34). There should be penalties for those who do not show corporation. This can also be enhanced by forming committees who will be involved in planning for the union. Recommendation 2: Eurobonds-investors and economists have supported the idea of Eurobonds to act as a solution to the crisis. This will however call for budgetary corporation between the members. In the treaties they sign, they should incorporate Eurobonds and regulations to the same. The European commission had suggested this in November 2011 to act as a solution to the crisis. This is good concept however, it requires much dedication from the leaders to avoid moral hazard and ensure sustainable public finances. This would protect the different financial institutions like banks. The problem with this is that Germany is not ready to corporate saying that this will increase its liabilities (Jeston & Nelis, 2010). Due to this, different skills should be employed so that all the parties come to an amicable solution on how to employ this. Recommendation 3: European Stability Mechanism- this is a program that would rescue the temporary European Financial Stability Facility. This would be a permanent bailout program. It had already been agreed on however it was not implemented. This should an intergovernmental organization as stipulated in the EU Lisbon treaty of 2010. This is a mechanism that would serve like a financial firewall to ensure that downstream nations and banking systems are protected by guaranteeing some of their obligations. In a project this kind of firewalls are crucial at times of crisis and they reduce the impacts of the crisis. Recommendation 4: Need to Address Account Imbalances – if the issue of current account balances are not addressed, then this will remain to be a problem no matter the much capital that flows in the union. There should be a balance of payment such that a country that runs a large current trade deficit will ultimately be a net importer of capital. This is more so due to the case in Germany thus it is recommended that they should either increase its savings reserves or be a net exporter of capital. In a project, all the parties should receive same treatment such that when they are down no one among them is up. This had already been warned of by Ben Bernanke in 2005 but they did not take it with the seriousness deserved and the results where clear in the genesis of the crisis (Larson & Gray, 2011). Recommendation 5: Drastic Debt Write-off Financed by Wealth Tax- according to statistics from Bank for International Settlements, the debts of around 18 countries in the European Union quadrupled between 1980 and 2010. According to Grant (2011), this is expected to rise within the next few years. In a project, one thing that works well is to settle all the financial issues in advance before they go beyond control. This should have been the case with the debts but they waited until they accumulated to intolerable amounts. For the European Union to be able to settle down for once and for all, then they must be able to repay all this in the next few years. This will be possible by implementing all the solutions that have been brought forward. Stakeholder Diagram Conclusion In any project, there are challenges, opportunities, and problems but what matters is how such is settled. In the case of the European Union, there are some things that attributed to the crisis that hit at the end of 2009. They should have sought ways of settling this for instance the increased sovereign debt. Through the solutions to the crisis discussed, they should try to implement the recommendations for a long-term solution. All parties must corporate in this and the leaders should be role models in this. Reference list Burke, R, 2006, Project Management Planning and Control Techniques, British Library: John Wiley & Sons. Chinyio, E, 2010, Construction Stakeholder Management, John Wiley and Sons. UK. 1 - 416. Chrisdoulaki, S, 2010, EU’s Position: Regulations on the Financial Sector, York: GRIN Verlag. Cini, M, 2007, European Union politics, Oxford: Oxford University Press. Craig, JC & Derluguian, MG, 2011, The deepening crisis: governance challenges after neoliberalism, New York: NYU Press. Grant, M, 2011, Out of the Box and Onto Wall Street: Unorthodox Insights on Investments and the Economy, New Jersey: John Wiley and Sons. Jeston, J. & Nelis, 2010, Business process management: practical guidelines to successful implementations, Butterworth-Heinemann. USA 1 - 437. Juncos, EA, Emerson, M & Schroeder, CU, 2007, Evaluating the EU's crisis missions in the Balkans, Oxford: CEPS. Kerzner, H, 2001, Project Management: A Systems approach to Planning, Scheduling, and Controlling, New Jersey: John Wiley & Sons. Koster, K, 2010, International Project Management, London: Sage Publications. Lannoo, K, 2008, Concrete Steps towards More Integrated Financial Oversight: The EU’s Policy Response to the Crisis, Oxford: CEPS. Larson, WE & Gray, FC, 2011, Project Management, The Managerial Process, Gray: McGraw Hill. Lock, D, 2003, Project Management, Aldershot: Gower. Maylor, H, 2002, Project Management, London: Financial Times/Prentice Hall. Meredith, J & Mantel, S, 2003, Project Management - a managerial approach, New Jersey: John Wiley & Sons. Olsson, S, 2009, Crisis Management in the European Union: Cooperation in the Face of Emergencies, Rotterdam: Springer. Orbie, J, 2009, Europe's global role: external policies of the European Union, London: Ashgate Publishing, Ltd. Pinto, KJ, 2007, Project Management: Achieving Competitive Advantage, New Jersey: Prentice Hall. Pugh, CM & Sidhu, PW, 2003, The United Nations & regional security: Europe and beyond, Blackpoll, UK: Lynne Rienner Publishers. Appendix No. Stakeholder Title Interest and their power 1 State governments Corporate in solving the crisis by offering fair treatment to all parties on different things. Owners of the project. 2 EU commission The commission aims at ensuring that all the terms of the union are adhered to by all parties. They have the power to make recommendations when the need arises. 3 Foreign parties Foreign parties intervene when things go astray. They provide loans for the states in need. 4 International corporations They are the overall since they link the economy of the states with the global economy. This is for instance through stock exchange. Read More