Emergence of Global Competitors Threatens the EU - Term Paper Example

Is the further emergence of global competitors like India going to threaten the economic competitiveness of the EU? Table of Contents Summary 3 3 Introduction 4 Economic Competitiveness of European Union 5 Emergence of India as a global competition 6 European Union in troubled waters 6 India as a threat to European Union 8 Conclusion and recommendations 10 Summary This policy paper is addressed to the European Commissioner, explaining the current scenario of the European Union (EU) and emergence of economies like India as a threat to EU’s efficiency. The main objective of the policy paper is to study the impact of growth of Economies like India on the competitiveness of EU. The policy focus on the problems that EU is undergoing, such as, drop in inflation rate, overvalued Euro and internal disagreement among member countries, that are acting as a barrier to the Euro zone’s growth. The high level of unemployment in EU has resulted in increase in its product prices. Moreover, the Common Agricultural Policy is distorted and does not result in equal advantage for all the members. All this reasons are pushing the cartel towards losing its economic competitiveness. Post financial crisis, drop in the country’s inflation rate may result in deflationary spiral. To overcome the situation, a sharp decline in the value of Euro is required. A drop in value of Euro will balance its external trade with the outer world and improve its trade position. And in order to tackle the threats probed by the emerging economies EU need to develop strategies to import its export scenario. Introduction The European Union was formed with only six countries in 1952 and presently has 28 members, which are primarily located in Europe. The continuous integration of economies has become one of the prime aspects of economic development in last few decades across the globe, including Europe. This progressive integration in Europe has taken the shape of European Union (EU) (McDonald and Dearden, 2005). The EU has an overwhelming influence on economies of its member countries as well as on third nationals. The economic integration of the European Union has always been a debatable issue worldwide. During 1950s and 1960s, main focus of economic integration was on global economic relations. However, in 1970s and 1980s, the concept of economic integration started to impact sectors related to economic activities such as, agriculture, service, energy, transportation and manufacturing. The other sectors that got affected during that period were market regulation, large-scale economic equilibrium, regional balance, financial control and societal welfare (Hansen, 2001). By the end of 1980s and beginning of 1990s, unification of local markets and realisation of financial integration were priorities of the European integration. The European integration is of great significance from economic point of view for individual consumers as well as business houses of Europe. This is because this integration resulted in gradual merging of borders among states related to goods, services, workforce and capital and creation of one single market (Baldwin and Wyplosz, 2004). By 2012, the European Union comprised 21 million companies and 500 million consumers. As a result of this integration, millions of jobs were created and overall GDP (Gross Domestic Product) showed growth as well. The idea of merging all individual economies in order to create one single market is easy on the paper, but achieving this agenda is strenuous; true integration of markets can only be possible when national policies and that of the EU create a favourable environment for growth of cross-border business (Pelkmans, 2012). Economic Competitiveness of European Union The budget of European Union is funded mainly through a certain percentage of gross national income of all member countries. This fund is basically used to raise the living standard of underprivileged regions and to establish food security (Hitiris, 2003). The revenue of EU not only comprises the contribution of member nations, but also that from levied duties on imported goods from outside of EU and a certain percentage of value addition done by the countries in terms of various taxes. The European Union budget is used to pay for several activities that are related to different regions, businesses, people and others such as, environment safety, prevention of cross-border crime and protection of human rights (European Commission, 2009). Euro is the official currency of the EU; it is a proof of official cooperation among the EU countries (European Commission, 2009). There are several factors that are responsible for economic competitiveness of the EU. Firstly, existence of an integrated market with high degree of co-operation among its members, followed by a common currency that holds together 332 million Europeans approximately. The creation of a single currency has greatly helped the EU with free flow of capital. Formation of one market and the resultant growth in trade and usual economic activities has transformed the EU into being a major trading power (El-Agraa, 2011) It is said that conflicts and misunderstandings aggravates with increase in cultural differences. The EU has a blend of different cultures. Yet to avoid conflicts, the EU took a slow step towards merging all the economies. It implemented a softer version of the integration. The main benefits of such integration are reduction in cost and achieving scales of economies (Neal and Barbezat, 1998). The logic behind companies accepting European integration is that they are exposed to a bigger market than their own, which provides them with competitive and strategic advantage related to opportunities and resources of Europe’s local markets. The competitiveness of the EU lies in scale of economies provided by it to member countries like, open market, greater learning scope, easy exchange of knowledge and intellect and opportunities for a better export zone (I. Barnes and P. Barnes, 1995). Emergence of India as a global competition A developing economy is often termed as an emerging economy; emerging because these economies are mostly developing countries with a developed market and the potential to match that of developed countries. Keeping in view the present economic scenario, countries like, Brazil, India, China and Russia, are expected to have the potential to become largest emerging economies. India is world’s largest democracy with diversified social and economic resources (CSIS, 2013). Prior to 1990s, India was a closed economy. However, after adoption of liberalisation, privatisation and globalisation reforms, it has become an open economy and ever since, it has been changing and growing at a fast pace. India is a developing nation with lesser wealth compared to developed nations like, USA and Europe; but, its strength lies in technology industry, tourism industry, worldwide famous entrepreneurs and vast indigenous industries. The most astonishing fact about the country is that when financial crisis and global recession rocked every developed nation by the core, financial system of India was impregnable enough to avoid the worst of financial despair (CSIS, 2013). Unlike China, whose prosperity is mainly based on export, India’s growth is determined by its domestic demand. As Indian economy continues to integrate with the world, it has become an attraction point of Foreign Direct Investment. The main reason for India to become a potential investment hub is availability of high quality resources at low cost. In India, land, technology, workforce and transportation costs are comparatively cheap. Due to availability of inexpensive yet quality workforce in India, many multinational companies rely heavily on the country for business outsourcing processes. Many manufacturing companies and telecommunication companies are entering India so as to raise their economies of scale and competitive advantage. Overall, in few years, India will be sufficiently powerful to compete with world’s major economic super powers (CSIS, 2013). European Union in troubled waters Ever since the financial crisis of 2007-08, the entire globe faced economic slowdown, which affected developed countries the most. Economies like, USA and EU, have been encountering permanent decline in the GDPs. The financial crisis led to mass unemployment and bankruptcy of various financial organisations. The following graph represents the economic scenario of BRIC (Brazil, Russia, China and India), US and EU. Figure 1: Growth of emerging economies as compared to EU and US (Source: Goldman Sachs, 2011) The prolonged unemployment in EU during that span resulted in loss of talent and movement of talent outside, which raised cost of labour in the EU (El-Agraa, 2011). In addition to that, infrastructure and stocked equipments had become obsolete due to lack of proper investment. Another major problem that the European Union is facing currently is absence of innovation and cutting-edge technology in its industries. This is because during recession, the first thing that the Union did was cutting down of its expenses related to research and development. The credit crisis in the EU market also made investors pull out their investment as the ROI (Return on Investment) had been facing tremendous downfall. Figure 2: Budget of EU and Euro zone (Source: European Commission, 2014) There are a number of disadvantages that the member countries of EU encounter. Firstly, the countries lose their autonomy over their economy, which means that they have to abide by common laws of EU even if such is non-beneficial. Secondly, Common Agricultural Policy (CAP) of EU benefits only those members who are mainly into agriculture. As per EU law, CAP is an aid provided to only those farmers who are actively involved in farming or agriculture, rather than those who are marginally involved. The CAP is often considered expensive by many countries and a major share of EU budget is spent on that. The Common Agricultural Policy has also caused distortion in agricultural sector of the economy (European Commission, 2014). Lastly, free flow of labour has made movement of workforce mainly towards the UK cities, thereby making them over-populated (Artis and Nixson, 2001). Post financial crisis, Euro zone is still stuck in the crisis with almost stagnant economic growth that resulted in high unemployment rate and expensive labour cost. To tackle such a scenario, EU can work towards reducing the internal competitiveness among member countries as that may result in quicker recovery of individual economies and contribute towards overall growth of European Economy. Moreover, countries like Portugal, Ireland, Italy, Greece and Spain (PIIGS) face unequal competition and require regulation for economic development. India as a threat to European Union There has been considerable amount of debate about the emerging economies posing threat to the European Union. The robust growth of Indian economy has become an active subject of discussion for economists worldwide and is considered to be a reason of concern to the European economy. The greatest advantage that India has over EU is that the former did not suffer similar amount of market crash during the financial crisis of 2008. This only foregrounds the nation’s efficiency and a strong financial structure. Moreover, it is a complicated process as well as expensive to become a member of EU; however, such discrepancies are non-existent in emerging economies like, India. In addition, India is mainly an agricultural country and one of the major exporters of fruits and vegetables, where EU has agricultural issues. Recent data provided by UNCTAD in figure 1 shows that flow of FDI has been declining in developed economies and showing a growth trend in developing economies. Figure 3: FDI inflow shares by major economic groupings in percentage (1991-2013) (Source: UNCTAD, 2014) Figure 4: Power forecast for developing and developed nations (2010-2050) (Source: Daily Mail, 2014) India has been blessed with potentially important factors such as, cheap skilled, semi-skilled as well as unskilled labours, abundant agricultural land, vast industrial areas, globally recognised entrepreneurs and specialized financial institutions for investment. In India, inexpensive labour is available in abundance which is the main reason that manufactured Indian products are available for a lesser price. Presently, EU import several products from India apart from agricultural products such as electrical goods, optical and medical equipments, wool, tea, coffee, precious stones, apparel and footwear. Moreover, India is having a booming market for business and knowledge outsourcing which is also adding to its competitive advantage over EU. With an overvalued Euro and inflation rate close to zero, the Euro zone is moving towards deflation which is needed to be controlled by stimulating greater export and reducing domestic consumption (Feldstein, 2014). The greatest threat that EU is facing from India is that India’s export market is growing rapidly whereas internal conflicts in EU are acting as a deterrent to its export market. Conclusion and recommendations As a conclusion to this paper, it is evident that emergence of global competitors like, India and declining position of EU economy are to some extent co-related. The disadvantages of EU, such as high unemployment rate, economic slowdown and a ‘nearing zero’ annual inflation rate, are providing a competitive edge to the Indian economy. The need of the hour for EU is to adopt new reforms that will improve it unemployment scenario, invite fresh Foreign Direct Investment in its economy and improve its GDP. A vital step is necessary towards implementation of Common Agricultural Policy so that advantages of the policy can be enjoyed by all members equally and if that is not possible to achieve, it is advisable to obliterate the policy. The European Union require a major remodelling in terms of laws and decision-making process so as to remove internal conflicts and distortions. Although Europe has the largest internal market, yet it is flooded with inexpensive Indian and Chinese products which are a big threat to the EU products. Since import consumption of EU is quite high, it needs to develop its export market as well. One important step that EU can pursue is entering in bilateral agreement with emerging economies which will add economic advantage from a competitive point of view. Moreover, economic condition of EU suggests that it should focus on devaluating its currency. A sharp drop in value of Euro as well as stimulation of export is what the Euro zone needs. It is very necessary to encourage Europeans to substitute domestically produced products for imported goods. The above mentioned strategies if implemented appropriately can be a cause of great economic support to EU. Reference list Artis, M. and Nixson, F., 2001. The Economics of the European Union, 3rdedition. London: Oxford. Baldwin, R. and Wyplosz, C., 2004. The Economics of European Integration. New York: McGraw Hill. Barnes, I. and Barnes, P., 1995. The Enlarged European Union. London: Longman. CSIS, 2013. The emerging Indian economy. [pdf] CSIS Available at: [Accessed 26 April 2014] El-Agraa, A., 2011. The European Union: Economics and Policies, 9thedition. New Jersey: Prentice Hall. European Commission, 2009. Economic Crisis in Europe: Causes, Consequences and Responses. [pdf] Europa Available at: [Accessed 26 April 2014] European Commission, 2014. Competition policy newsletter. [online] Available at: [Accessed 26 April 2014] Feldstein, M., 2014. A weaker Euro for a stronger Europe. [online] Available at: [Accessed 06 May 2014] Hansen, J. D., 2001. European Integration: An Economic Perspective. London: Oxford. Hitiris, T., 2003. European Union Economics, 5thedition. New Jersey: FT Prentice Hall. McDonald, F. and Dearden, S., 2005. European Economic Integration, 4thedition. New Jersey: FT Prentice Hall. Neal, L. and Barbezat, D., 1998. The Economics of the European Union and the Economies of Europe. London: Oxford. Pelkmans, J., 2012. European Integration: Methods and Economic Analysis, 4thedition. New Jersey: Pearson. UNCTAD, 2014. Global investment trends monitor. [pdf] UNCTAD Available at: [Accessed 26 April 2014] Goldman Sachs, 2011. The rise of the BRICS and N-11 consumer. [online] Available at: [Accessed 13 May 2014] Daily Mail, 2014. How China and India will be more powerful that the U.S. by 2030: Study claims Asian cultures will supersede America and Europe in 20 years as global middle class grows. [online] Available at: [Accessed 13 May 2014] Read More