EU Economy: Issues and Policies - Essay Example

? EU Economy issues and policies Contents Contents 2 Introduction: threat of global competitors to the economic competitiveness of the EU 3 Economyof EU: consideration of main issues 4 Emergence of economy of global competitors: main issues under consideration 6 Analysis and Discussion: Threat of emerging global economies on the economic competitiveness of EU 10 Conclusion 18 References 20 Introduction: threat of global competitors to the economic competitiveness of the EU The economy of the European Union is based on the interconnection of debt facilities between the banks of different members of the European Union. This exchange of credit facilities between the European Union members forms the main the bloodstream of the economy of European Union. Due to the sovereign debt crisis in the Euro-zone, the share of international debts of the economies of European Union started to increase thereby resulting in the fall of consumption demand and subsequent fall of GDP of the member countries. Thus the economy of European Union faced a situation of crisis during the period of economic recession. The crisis in the European economy can also be attributed to the policies of the governments in member countries. The central banks were not allowed to print notes in order to reduce the liquidity crunch in the economy (Ruozi and Ferrari, 2013, p.12). On the other hand, they are dependent on the European Central Bank for their bail outs in the time of crisis. The crisis situation in the European economy was aggravated by the rise of emerging economies like China or India that threatened the economic competitiveness of the European Union. China or India have undergone economic reforms since the 1980s and 1990s by opening up their economies to the global markets and took initiatives to gain comparative advantage in the international stage. China or India invested in the development of their infrastructure that reaped the seeds of industrial growth along with other sectors of the economy. China emerged as the largest net exporter even during the period of recession. On the other hand, the economy of European Union was facing debt crisis in the international stage and received funds from several sources like International Monetary Fund, World Bank, etc for rescue from the crisis situation. Thus the emergence of economies like China or India and increase of international market share of these economies in global trade has posed a threat from the global competitors to the economy of the European Union (Allen, 1999, p.29). Economy of EU: consideration of main issues The economy of European Union is supported by the production and exports of the member countries. The manufacture and sell of goods and services in the European Union economy is supported by the inter-connection of debt facilities of the banks of the member countries. The supply and interchange of money between the banks form the main bloodstream of the economy of European Union. The monetary arrangement is done by the member countries with the help of interbank facilities between the members of the European Union. Thus a fall in the gross domestic products of one country would affect member countries which are linked to this member by way of credit (Berend and Berend, 2012, p.27). The liquidity in the economic system is governed by the European central bank. The sell of goods and services from the economy of European Union occurs along a long supply chain that is spread all over the world. Thus in the age of globalization and liberalization as economic reforms adopted in various parts of the world, the export of the products of the European Union is highly dependent on its competitive edge over the rest of the world. In order to attain sustainability of economic competitiveness of the European Union economy, various policy reforms have been adopted. The economic reforms include introducing additional focus on the industries of the sectors of manufacturing and exports that hold edge in international competitive scenario. Apart from opening up the local market to foreign investments, special attention was given to ensure proper allocation of resources to various sectors of the economy so that the foreign partners also open to the trade of European Union. The strengths of the European Union economy lay in the rich talent base consisting of both knowledge and expertise. The economy in European Union sources products from all parts of the globe and processes the same in its manufacturing units which are ultimately exported. This is how the European Union has been able to dominate the economy in international platform and gained competitive advantage in the global stage. In response to the economic pressure and challenges from the global economy, the European Union Commission has adopted economic reforms on its trade policy. The trade policies of the European Union have been recognized as an agenda to improve its performance in the area of globalization. The agenda includes not only opening up of the European markets to the world but also keep the markets competitive and protected against unfair practices of trade. Free trade agreements have been signed by the European Union with the emerging economies like India, South Korea and other countries in the ASEAN region. The market access of the European Union has been reconsidered on the basis of existing relationship with the partners. The European Union has entered into new partnership agreements with the trade partners to ensure high level of trade practices. The commission has entered into negotiations with the US to reduce the barriers of transatlantic trade. The enforcement of intellectual property rights has given significant importance in the policies of European Union trade. In order to ensure consumer rights to the people of European Union through delivery of high quality, low prices and higher choices, the European Union has also taken into consideration the existence of a single economy to provide a far better reach of its regulatory controls. A look at the specialization of international trades for the European economy reveals that there has been a change in the specialization as a result of the policy reforms in order to maintain its competitive advantage in the international markets (European Commission, 2006, p.1). Emergence of economy of global competitors: main issues under consideration The emergence of the economies in global stage like China or India has led to the shift in the centre of gravity of the international economy. The emergence of the global competitors like China or India occurred as a result of their abilities to meet the rising demand with the support of economic reforms. The global emerging economies were able to develop a position of comparative advantage in the changing economic conditions in the world stage. China is the largest democracy in the world in terms of population and its high speed of economic progress was achieved by its focus on increasing the total factor productivity supported by a strong system of governance. China had a huge base of human resource in its economy. This demographic factor was used in optimal fashion in order to achieve economic growth. China encouraged more number of people from its population to participate in the work force. Thus the available resources and labour for production increased significantly which led to the increase of production capacity. Thus the productivity was increased which contributed to the increase in the gross domestic product in the country. This was also fuelled by a strong system of governance of China. Strong governance indicates formation of appropriate economic policies for reforms and taking necessary measure for implementation of those policies. The strong system of governance in China helped in rapid implementation of the economic policies that led to high rates of economic growth of the Chinese economy. Thus the emergence of economy of China emerged as threat to the international economy. China has been aiming to obtain sustainable economic growth rates by increasing the consumption by introducing reforms in the value chain of the industries. China considered introduction of new resources in the value chain to increase its total factor productivity that would in turn increase the consumption demand in the economy (Rivera-Batiz and  Oliva, 2003, p.30). Before the economic reforms, China had a rich base of public education and health which were used as inputs to accelerate the economic growth. Also China maintained a transparent trade system with the international economies with a large share of exports that helped them to attain huge foreign currency reserves. This wealth was utilised by China in the development of its infrastructure. China focussed on industrial development which acted as a catalyst to its rapid economic development. Huge share of investments were allocated to the industrial sector in order to expand the productivity of the economy required to meet the rising demand of consumption. The markets were opened and liberalization of the economy attracted foreign investments into the economy of China. The market oriented economic policies fuelled the growth of the local markets in the competitive scenario. The policy of economic liberalization led to exchange of goods and services in a much larger volume and this boosted the exports of the country. The rise in exports of the economy of China enabled the economy to maintain a strong position of net exports in the scenario of global competition. The huge inflow of foreign currencies led to the appreciation of Chinese Yen and the country gained comparative advantage in the import-exports at the world stage. The government in China played a crucial role in allocating the resources to the different sectors of the economy and laying sound infrastructural facilities to boost industrial production that fuelled the rates of economic growth. The growth of infrastructure in China as one of the leading and emerging economies in the global stage has been represented below. In order to encourage investment in the industries, the government lowered the cost of inputs like land, water, electricity, etc. The government offered cheap credits to the industrial sectors and also provision of subsidies were declared to encourage investments in the industrial sectors in China. The general investments scenario of the emerging economies like China or India in global competitive economic scenario is shown below. This clearly reveals the reason for China being to emerge as a leading economy in the world and posing a threat to the economic competitiveness in the global platform. The emergence of China in the competitive scenario of the international economy occurred due to its comparatively high share of investments over GDP over the years that have enabled them to attain large share of industries in the global economic competition. This has been depicted in the diagram given below. The increase in capital accumulation and expansion of foreign exchange holdings helped China to invest more in increasing the productivity of the economic sectors that resulted in higher profits. Thus the national income per capita also increased as a result of the rapid progress in economic development of China. China is at the peak of its economic growth at present for which it poses a threat to the economic competitiveness of the leading economies all over the globe (Carbaugh, 2010, p.19). Analysis and Discussion: Threat of emerging global economies on the economic competitiveness of EU From the year 2000 to 2007, the economy of the world went radical changes with emerging economies like China heavily investing on the industrial and manufacturing units for development of the economy. As a result of this, the centre of gravity of the world economy has undergone changes. The holding of comparative advantage due to goods manufactured as a result of abundant supply of resources has helped China to increase its balance of trade over the years. On the other hand, the European Union members who underwent a debt crisis due to the economic recession and subsequent decrease in consumption demand, had to depend on its proven reserves for sustaining the growth of its economy. The graphical representation shown as follows depicts the growth of trade balance of China skyrocketed after a steady performance. The trade balance of China and the rate of its growth have superseded the balance of trade of the European Union. Thus China holds a dominant position in the world economy among many other emerging and leading economies of the world which is a potential threat to the economic competitiveness of the European Union (Chatterji and Gangopadhyay, 2005, p.26). The trade balance is the difference in the exports and imports of a country. The trade balance shown above is specific to the industrial and manufacturing sector which has placed the global emerging economies like China in challenging position to the economic competitiveness of the European Union. The European Union increased its surpluses in the manufacturing sector by relying on its proven reserves. The surpluses were, however, offset by the deficits in the agricultural sector. The exports in motor vehicles, pharmaceuticals, paper, plastics, and non-electrical machineries exceeded the imports in those sectors by double the margin. Apart from the agricultural sector, the European Union economy faced deficits in the sectors of office and telecommunication equipments, textile and clothing sectors. All these deficits reduced the trade surpluses of the manufacturing sector. On the other hand, China apart from registered massive growth rates in the industrial and manufacturing sectors have also registered trade surpluses in the textile and cloth trading. The exports in these sectors also exceeded the imports. In the office and telecommunication equipments industry, the exports of the European Union surpassed the imports of this sector (Kuijs, 2012, p.1). As a result of overall improved performance of exports over imports in all economic sectors with respect to the European Union over the years, China poses a threat to the economic competitiveness of the European Union. The emergence of the global economies like China or India poses threat as well as opens up new dimensions of opportunities fro the economy of European Union. Due to increasing presence of the emerging global economies like China in the international market, the economic conditions of the European Union undergone several changes and also it led to the changes in market shares on international trade. The changes in the market shares of the European Union economy were due to the demand of higher level of quality of the goods and services and as effects of the advancements of technology. The European Union’s deficit with China grew from €47 bn in 2000 to €159 bn in 2007. This is due to the comparative advantage of China in mainly three sectors which include office and telecommunication equipments, manufactured items like toys, furniture and shoes and textile items. Thus by holding comparative advantage, China has been able to challenge the economic competitiveness of the European Union. The economic competitiveness of the European Union, however, could not be assessed only in terms of the volume of the exports of the region. China has asserted itself as the most remarkable performer in the domain of international exports for which it has increased its market share by 14.1% since 2007. The market share in international trade for European Union has declined more in terms of volume of trade than in terms of value. This depicted from the tabular representation as given below. It could be understood that the fall of market share of the European Union has been 1.7% in terms of volume as compared to fall of 1.3% in terms of value of international trade. Apart from the decrease in exports, the figures also represent up-gradation of exports of the European Union as the value earned has decreased less as compared to the volume. The rate exports of the European Union have fallen below the level of China over the years. This could be explained from the data given in the table below. During the period of 1995 to 2005, the market share of exports of the European Union has fallen by 1.77% as compared to the growth in exports by 8.37% in terms of value for China (Swamy, 2010, p.25). In terms of market share of high-tech products, China has performed well in the areas of technological advancements and export of its low price electrical and electronic equipments to the world markets. It could noticed in the tabular distribution given below that the market share for export of high-tech products for European Union fell by 2.39% from the time of 1995 to 2005 while China has its market share in international trade of high-tech products by 12.36% in the similar time frame. Despite the emergence of China as a leading exporter and decrease in volume of market shares of the European Union, the economic competitiveness could not be concluded if the market shares in terms of absolute values are considered. The market share in terms of value for the European Union and the emerging economies of the world is given below in the graphical presentation. Although China has registered a skyrocketing growth in the recent years, the value of market share of European Union is still higher. This has been possible to a great extent as the European Union has been able to sell their products at a premium due to its high quality and efficient services. The European Union which holds a deficit with China in manufacturing sector holds a trade surplus of €12.5bn in the area of services. The quality of exports has been sustained as a result of the foreign direct investment that occurs in the European Union all over the world. The European Union has been the preferred destination for foreign direct investments. This could be explained from the graphical diagram given below which shows that the FDI activities in the European Union are much more than that of China. The prevalence of increased FDI in the European Union as compared to China has resulted in large stocks of global FDI over the years. This is represented by the diagram given below. Conclusion The emergence of global economies like China has led to the shift in the centre of gravity of the economy of the world. China has experienced rapid growth rates in its economic development which it achieved through wide investments in the industrial sector. China has also asserted itself as the leading exporter in the world leading to accumulation of foreign currency reserves and establishment of comparative advantage. This has posed threats to the economic competitiveness of the European Union. The European Union also adopted policy reforms by not only opening up its own markets but also allocating resources in a way so that the other economies are also open to the European trade. Due to changes in the world economy, the market shares of the European Union underwent changes more in terms of volume than in terms of value. This happened due to its ability to sell products at a premium by leveraging on its quality. The presence of proven reserves of resources with the European has allowed them to withstand the competition from emerging economies like Chine or India. In terms of FDI activities and FDI stock as well as in the services sector, the European Union surpassed the performance of China which helped to offset the competitive advantage built in some sectors by the emerging economies. In terms of the overall absolute market share, the European Union still holds an edge although its economic competitiveness has been challenged by the growth of emerging global economies (Urata, 2010, p.1). References European Commission. 2006. GLOBAL EUROPE. [Pdf]. Available at: http://trade.ec.europa.eu/doclib/docs/2008/october/tradoc_141196.pdf. [Accessed on 3 May, 2013]. Berend, I. T. and Berend, T. I. 2012. Europe in Crisis: Bolt from the Blue?. Routledge; UK. Allen, R. E. 1999. Financial Crises and Recession in the Global Economy. Edward Elgar Publishing; Great Britain. Rivera-Batiz, L. A. and  Oliva, M. A. 2003. International trade: theory, strategies, and evidence. Oxford University Press; Great Britain. Ruozi, R. and Ferrari, P. 2013. Liquidity Risk Management in Banks: Economic and Regulatory Issues. Springer; Germany. Carbaugh, R. J. 2010. International Economics. Cengage Learning; USA. Chatterji, M. and Gangopadhyay, P. 2005. Economic Globalization In Asia. Ashgate Publishing, Ltd.; England. Kuijs, L. 2012. Economic Growth Patterns and Strategies in China and India: Past and Future. Available at: http://www.fungglobalinstitute.org/images/docs/340.pdf. [Pdf]. [Accessed on 24 April, 2013]. Swamy, S. 2010. Economic Development and Reforms in India and China: A Comparative Perspective. Har Anand Publications; India. Urata, S. 2010. China and India Continue High-Speed Growth. Available at: http://www.jcer.or.jp/eng/pdf/asia10intro.pdf. [Pdf]. [Accessed on 24 April, 2013]. Read More