Macroeconomic Environment of Business: Eurozone - Term Paper Example

Macroeconomic Environment of Business The introduction of the euro was one of the highly anticipated economic phenomena in international trade. Itsconcept of single currency for the European Union was widely received with deep enthusiasm as this signaled the convergence of European economies such as Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, also known as the Eurozone. The euro became the single currency for over 300 million Europeans and was predicted to revitalize the flagging European economies. However, seven years after its inception, problems have arisen and actual disadvantages were experienced especially in the microeconomic area. This paper seeks to address whether the expected advantages of the euro as a single currency for Europe was achieved, while in the process, we expect to discover the reasons behind. Background The euro was introduced in the financial market back in 1999. It is the culmination of the three-stage European Economic and Monetary Union (EMU) which aims to coordinate economic policies. There was a three-year transition period and, after, national currencies from participating countries ceased to exist. Today, states seeking membership to the European Union must adopt this currency as a requirement within varying timetables in the span of ten years based on specified economic factors. The United Kingdom and Denmark, however, is exempted to this policy. Ideally, there is a list of economic advantages in using euro in the European Union. Foremost of this is that it is said to be a tool for political solidarity. On the economic front the following are some of the most important output: Elimination of the exchange-rate fluctuations Price transparency Transaction costs Increased trade across borders Simplified Billing Expanding market for business Financial market stability Macroeconomic stability Lower interest rate Structural reform for European economies As mentioned beforehand, problems not previously anticipated emerged with the introduction of the euro. For instance, a minimal rise in inflation was expected only during the transition period, but until now, Europeans are complaining about skyrocketing prices in commodities. On a more general scale, we have also a report by the Centre for European Policy Studies that the euro is responsible for Italy's plunge into a full-blown recession. (Browne, 2005) In Germany the euro is also believed to have failed in invigorating employment statistics or curb rising prices, insolvencies and general stagnation of the economy. Not just economic managers but senior government officials have floated around the idea of a return to national currencies as a way out of their current economic woes. What is worse, unofficial currencies are currently being circulated in some parts of Germany to replace the euro in business transactions. Vissol (1999, p. 75) tells us that "the short term economic benefits accruing to consumers through the transition to the euro concern only the minority of consumers who travel and/or cross the borders." He argued that the long term benefits are uncertain and difficult to put across unless an explanation could be given on how the euro will guide the future payment community as a sovereign community and a value system shared by the vast majority. At present, the global economy is recovering but the Eurozone is lagging behind, posting a meager 1% growth. The Germans are fearful of losing their jobs; Italy is on recession while inflation is high. So one might say, there is more than a hint of failure here and euro is in the thick of things. While officials are running around Europe trying to dispel the rumor that the euro is going down the drain, economic managers' prediction and finance ministers' slips shows otherwise or at the very least express trouble. Milestones But if there were a question on whether the euro has been successful so far, the answer would still be indefinite especially if we are to use the foregoing in quantifying a possibility of failure. Most importantly, we cannot also set aside the significant milestones the euro has achieved for itself and for the European Union. The unification of the European capital markets created tremendous efficiencies and opportunities that continually encourage trade and investments, as well as convenience for travelers. There is now an increase in liquidity and in the range of financial services that help bolster the growth that has been posted since November of last year. The euro has already attained a stabilized status side-by-side the dollar or the British sterling. Although short-term effects on European economies, specifically on microeconomic level, proved to be a disappointment so far, there is still a high probability that the euro will live up to expectations. We should be reminded that the economic movements in the Eurozone are not solely determined by monetary policies. The impact of euro is tied to the political landscape, the effect of the global economy and the support of the Continental Europe. Paul Scalise (2004) explaining the theory behind inflation argued that what impact open market operations may have depends largely on one's interpretation of why we hold money in the first place. He went on quoting John Maynard Keynes' liquidity preference theory, where he argued that people do not merely use or hold on to money just for transactions but for speculative purposes as well. It is a given that inflation, as a monetary phenomenon in the monetarist principles' point of view, can always be controlled by the central bank (in this case, the European Central Bank in Frankfurt). But there are limits to the means a central bank may employ to control monetary policy, especially if people start hoarding money instead of consuming or investing. Finally, if we go back and illustrate a problem, the incredible price hike, which have occurred upon the inception of the euro, (especially after the transition period) is not supposed to happen because, ideally, the price transparency and the strong competition brought about by an increase in trade is expected to lower prices down. What these tell us is that, it appears that the problem lies not in the introduction of euro as a new and common currency for the European Union per se, but in two very significant factors: organization/implementation and public perception. Implementation Euro's current dilemma could be blamed to the wait-and-see attitude being adopted by the European Union governments. Even with the demise of their respective national currencies, Europeans fail to adopt the euro as their own, while continuously implementing nationalistic policies. Even with the professed commitment on the success of the currency, many countries This has serious repercussions on the stability of the currency and its impact on the European economy in general. The result is a disparity on the level of commitment among the euro-using countries that eventually spells fragmentation. Apparently, countries are still hesitant to surrender sovereignties politically and economically, which unfortunately is a requirement if the common European market and the single currency is to be successfully achieved. The European common market, as with other expressions of the concept of globalization suffer the liability of politics and nationalism, which is far more potent than borders. (Gomez 2003, p. 38) Let us take the Swedish anti-euro propaganda launched by the Green Party last 2003 as an example. According to the 1995 accession treaty, Sweden is required to join the euro and therefore must convert to the euro at some point. Notwithstanding this, on 14 September 2003, a consultative Swedish referendum was held on the euro, the result of which was 55.9% against adopting the common currency versus 42.0% in favour. (The OECD Economic Survey Sweden 2004 Issue 4) The Swedish government maintains that such a policy is possible since one of the requirements for Eurozone membership is a prior two-year membership of the ERM II. By opting to stay out of the exchange rate mechanism, for example, the Swedish government is provided a formal excuse in order to avoid the theoretical requirement of adopting the euro. Some of Sweden's major parties continue to believe that it would be in the national interest to join, but they have all pledged to abide by the results for the time being and show no interest in raising the issue again. The collapse of the Growth and Stability Pact underscores this culpability of respective states in the failure of the euro. The once rigid set of rules imposed by this pact has been continually broken by member states, prompting revisions time and time again. This setback was reflected on the dismal performance of the euro in currency market amid the growing perception that this is a sign of lack in fiscal discipline as well as the fragmentation mentioned above. There is a difficulty in this particular area due to instances where countries exercise protectionist policies which further hamper the prospects of the euro. As an example, we cite some cases in France and Italy where cross-boarder company mergers and acquisitions under euro are being banned. The European Central Bank's plea for national parliaments to enact market reforms so as encourage a dynamic market fell on deaf ears. Public Support The reservations on the euro are most importantly expressed by its meager public support. In a Swedish referendum, for example, the euro was unceremoniously junked while around 56% of the Germans also wish to return to the mark. (Browne, 2005) Not long after this, a senior level official of the Italian government issued a statement that perhaps it would be for the best if lira would stage a comeback even if temporarily. The euro suffered a setback both in the currency market as well as in the campaign to win the public's support. There are some quarters who argue that the public's indifference towards the euro is due to the absence of any form of public consultation at the time of its inception. Some points out that the continental Europe does not have the advantage of the United States which has a common language, religion and culture. It is further argued that the history of war adds up to the uncertainty with some states eyeing each other suspiciously. These psychological, cultural and historical variables hamper the significant opening up of economies, much less harmonizing the whole continental Europe. "In a democratic system, economic reforms of such audacious scope cannot be imposed upon unwilling populations." (Wikipedia, EMU) The psychological impact of this is felt heaviest in the microeconomic level, with scrupulous traders and speculators capitulating on each opportunity to raise prices or hoard currency. Inflation and stagnant economy is felt strongest in the grassroots. Conclusion There is still an air of expectancy on the euro because the timeline is still relatively short to be considered a transition period. In fact, policies are continually being updated to respond to emerging problems. One of these, albeit viewed negatively on the other hand, is the constant revision of the Growth and Stability Pact to accommodate those economies that have a hard time following the rules. At present, there are two school of thoughts regarding monetary policy and its impact on the Eurozone's economic health. On the other side of the fence, politicians are urging the European Central Bank to take actions and implement an aggressive monetary policy in keeping with the Keynesian principle that the governing entity cannot stand aside and watch everything go into ruin. Meanwhile, the European Central Bank is standing its ground, blaming the inaction of European politicians to enact market reforms. As cited beforehand, the problem of the euro lies in the implementation and the public perception. The task of implementing a common monetary policy is always undermined by nationalistic sentiments and existing statutes that politicians refuse to reform. We see this in the example of the United Kingdom who opted to remain with its precious sterling because it is wary that the euro is a prelude to the establishment of a European superstate. Specifically, the country is afraid surrendering its right to set its own interest rates is of great disadvantage on its economy. Each country in the Eurozone has issues of their own and unless this is resolved, the potential of the euro can never be maximized and the rosy picture painted in theory would remain a dream. Perhaps, a formula should be taken in order to do away with the obstructionist stance of individual states. It is imperative that they act as "mediators and intermediaries in an ongoing process of European unification, especially stressing the arguments of strengthening an area in which democracy reigns and of pacifying European domestic conflicts." (Vissoly) It is hoped that following this approach, the image of euro could be rectified among the Europeans. Finally, we cite the public perception as a very important factor in the success of the euro. We have elaborated how the historical and cultural divide drives a wedge among Europeans that the integration and a common currency is greeted with lukewarm reception. The people factor is significant, especially those who belong to "the strata of the population who, though not necessarily poor, tend to reject money and all talk of money... They express a more widespread unease and reveal a mentality whose influence is greater than the number of people concerned would suggest." (Vissoly p. 48) In my opinion, it is essential that a balanced financial information be communicated to these people by financial institutions themselves on the euro - its attributes - in the context of a bigger community that is not taking the part of the old one, peace in Europe and brotherhood among Europeans instead of "an abandonment of the motherland". The idea is strengthening the existing institutions not leaving them behind, following the application of a principle of (rising rather than falling) subsidiarity." (Vissol, p. 48) Tommaso Pado-Schioppa (2004, p. 36) reminds us that through history the strength and success of a currency have been closely related to the strength and success of the economic, social, and political entity of which it was an expression, and not just to the skills and professionalism of its central bank. It is therefore of utmost importance that a genuine political union is taken for the euro's advantages to materialize. As of now, the European Central Bank is just a central bank without a state and thu s have means and instruments that are limited and is confronted by problems that no central bank has. We should think twice of adopting policies - whether it be Keynesian, post-Keynesian and monetarist principles - which have proved to be successful in the case of individual economies. The euro is a unique case in contrast to the dollar, yen, sterling, the defunct lira, franc or the mark. When aggressive central bank interference on monetary policy have saved Japan from economic stagnation, we can not surely say the same for the Eurosystem for reasons cited beforehand. The current microeconomic situation, though significant, is not altogether representative of the euro's impact. If we are to view the whole situation on a long-term perspective, there is a reason to believe that it promises a bright future. European, though wary of the currency presently, have also expressed this sentiment in the same surveys and referendum that posted their disapproval of the euro. The widespread discontent among the people over the perceived failure of the euro is based on the short-term effects that are still subject to the volatility of the market driven by external variables such as the movements of the global economy and the rising price of oil in the world market. Unfortunately, the repercussions are immediately felt in the local level and therefore, usually clouds individual judgments. Finally,we should not forget that the European Union policy is mainly aimed at macroeconomic stability and that the microe conomic woes are the result, partly, of the experimentation in this early stage of the European integration. Hence, we are still in the proverbial situation where the jury is still out and judgment is too early to be considered at all. Vissol (1999, p. 8) have argued that the success of the euro is highly dependent on psychological, social and cultural conditions for confidence, or trust, in a currency and to the social dimension of a financial relationship. References Browne, A. (2005). EU leaders forced to calm jitters over euro. http://www.timesonline.co.uk/article/0,,13509-1640754,00.html , Date accessed 8/9/2006 Euro. (2006) Wikipedia. http://en.wikipedia.org/wiki/Euro, Date accessed 8/9/2006 Gomez, R. (2003). Negotiating the Euro-Mediterranean Partnershi. Ashgate Publishing, Ltd. Scalise, P. (2004) Can the Bank of Japan Create Inflation' http://www.japanreview.net/essays_can_the_bank_of_japan_create_inflation.htm, Date accessed 8/9/2006 Schioppa, T. (2004). The Euro and Its Central Bank. The MIT Press The OECD Economic Survey Sweden 2004 Issue 4. Organization for Economic Co-operation and Development Vissol, T. (1999). The Euro. Springer Read More