The Euro Crisis: Euro vs Non-Euro Countries - Implications for Business and US Marketers - Research Paper Example

?The Euro Crisis: Euro vs. Non-Euro Countries (E.G. Belgium vs. UK) – Implications for Business and US Marketers Table of Contents Overview 3 Euro versus Non-Euro Nations 4 Pound versus Euro 5 Comparison of the Performances of the UK’s and Belgium’s Economy 6 Euro Crisis 7 Implication of the Euro Crisis on the United States 9 Works Cited 11 Overview The European Union (EU) is an exclusive partnership on the basis of economy and politics in between 27 countries of Europe. There are above 500 million residents in the EU who comprises of 7.3% of the population of the world (Osterreichische Akademie der Wissenschaften, “European Union reaches 500 Million through Combination of Accessions, Migration and Natural Growth”). As of 2010, the gross domestic product (GDP) of the EU was 16,242.25 billion USD, which represents around 20% of the global GDP in terms of purchasing power parity (PPP) (International Monetary Fund, “Report for Selected Country Groups and Subjects”). The EU was formed after the Second World War to promote cooperation on economic grounds amongst the European countries. The idea was that the nations which conduct business with one another are reliant on each other economically and a formation of a union amid them will consequently avoid clashes and disagreement amongst themselves (Europa, “Basic Information on the European Union”). In the year 1951, six European nations viz. Belgium, France, Germany, Italy, Luxembourg and Netherlands signed an agreement to unite their industries in the coal and steel sector, so that there would not be any difference between them in future. After six years they made a deal of ‘Treaty of Rome’ by forming the European Economic Community with the idea of forming a common single market, the community later came to be recognized as the European Union (Europa, “Historical Overview”). Over the years, many other European nations joined the EU and presently there are 27 EU member nations. The 27 member countries of this union are Austria, Bulgaria, Belgium, Cyprus, Czech Republic, Denmark, Finland, Estonia, Germany, France, Greece, Hungary, Ireland, Italy, Latvia, Luxembourg, Lithuania, Malta, Netherlands, Poland, Romania, Portugal, Slovakia, Slovenia, Sweden, Spain and the United Kingdom. The countries who have requested for membership of the European Union are Croatia, Former Yugoslav Republic of Macedonia, Iceland, Montenegro and Turkey (Europa, “Countries”). Euro versus Non-Euro Nations The Union has brought about around 50 years of harmony, stability and opulence in Europe. It has also helped to elevate the standards of livelihood in the region. One of their most important contributions is the commencement of a single currency for the whole of Europe. The euro is the common currency used in 17 of the EU nations called the Euro zone and is a concrete proof of European amalgamation. It was launched on January 1999 as an implicit currency but the ‘notes and coins’ were commenced on January 2002. The sole currency system has many benefits like eradication of exchange rate fluctuations and the exchange cost. It helps in maintaining the economic stability resulting in low interest rates and also helps business firms to perform cross border dealings easily (Europa, “Money and the EU”). Nevertheless, the UK and Denmark are two EU member nations who did not adopt Euro as their currency. The United Kingdom did not opt for Euro owing to economic, social and political hurdles. In the economic context, the UK economy is not in alignment with European economic cycle, it being the only oil economy in Europe. Additionally, the British financial system is unlike that of the European Continent. Moreover, the UK does not have an elevated extent of interdependence with the other EU nations in terms of trade. In the social and political perspective, the British citizens are unwilling to adopt Euro because of fear of identity loss and the expected economic collapse of the Euro (Layard & Et. Al., “Why Britain Should Join the Euro”). There are both positive and negative consequences of the UK’s decision of not adopting Euro. On one hand, the non-adoption of Euro would protect the UK from the counter-cyclical volatility caused due to the fiscal policies of EU and the potential frictions in the process of attuning to a sole monetary policy. While on the other hand, the non-adoption of Euro would make the UK susceptible to the impacts of the European Monetary Union (EMU) policies. Furthermore, the fiscal and exchange rate policies would be more concerned with the welfare of the EMU nations (Layard & Et. Al., “Why Britain Should Join the Euro”). Pound versus Euro It has been noticed that the value of British Pound is more than that of Euro. For instance, as on November 11th 2011, the value of 1 Euro was equivalent to 0.856 GBP. During the period June-November of the year 2011, the highest value of Euro was 0.905 Great British Pound (GBP) (July 1st) and the lowest was 0.853 GBP (November 10th) (X-Rates, “British Pounds to 1 EUR”). The graph below (Figure1) depicts the movement of British Pound in relation to Euro, during the period June 2011 to November 2011. Figure 1: Movement of British Pounds to 1 Euro from June 2011 to November 2011. Source: (X-Rates, “British Pounds to 1 EUR”). Comparison of the Performances of the UK’s and Belgium’s Economy It was observed that the economic performance of Belgium was much better than that of the UK in the first half of 2011. While the economy of the UK grew by a rate of 0.2%, the Belgium economy grew at the rate of 2.2%. However, the recent enhanced economic growth of Belgium can be credited to the deficiency of operating government. Unlike the other European nations, Belgium has not gone on board the austerity drive. In addition to this, the Belgian remunerations and pensions are indexed to inflation. These two factors have led to the recent augmentation in the economic growth. However, it would not be possible for Belgium to avoid austerity eternally. Moreover, its public debt to GDP is more than 100% which is much elevated than that of the UK. Hence, it can be stated that the growth of Belgian economic performance is owing to its absence of a functioning government and not due to its real economic growth (Weldon, “Why Belgium’s Economy Has Performed Better than the UK”). Euro Crisis The Maastricht Treaty, which was formulated in 1992, required the European countries to fulfil certain criteria in order to enter the Euro-zone. The nations wanting to get into the Euro-zone were required to ascertain that their inflation rate is within 1.5% per year, ensure their budget shortfalls are not greater than 3% of GDP and retain a debt-to-GDP ratio of below 60% (Alessi, “The Eurozone in Crisis”). In order to fulfil these criteria, the European nations had to implement austere budgets by reducing public expenditure and increasing the tax rates. However, there were reprehensibly feeble due diligence in evaluating the appropriateness for admission into the Euro-zone. Additionally, there was a similar weak appliance of the criteria that were supposed to be the prerequisites for Euro-zone entry. The members of the European Economic Community (EEC) were keen to enlarge and strengthen the Euro-zone and in the process they permitted some of the less-solvent European countries to adopt Euro. As a result, European countries like the Spain, Italy and Greece entered Euro-zone without the required financial structuring. Though, initially these countries prospered due to the huge infusions of liquidity and exceptional credit access from other Euro-zone nations, the inappropriate entry into the Euro-zone subsequently led to the Euro crisis (Alessi, “The Eurozone in Crisis”). The two main elements of the Euro Crisis was the challenging sovereign debt in Greece and other susceptible and weak European nations and the weak European banks which held a major portion of that debt (Dadush, “Paradigm Lost- The Euro in Crisis”). The implications of the Euro-zone debt crisis is apparent from the fact that the real GDP of the Greek economy contracted by around 12% over the last couple of years in addition to the perceptible amplification in their unemployment rate to more than 15%. At present, Greece owes a sovereign debt of US$450 billion and it is very likely that there would be an extensive write down of the debt value in the near future. If this happens, it would amount to as the biggest sovereign debt non-payment on record (Lachman, “Implications of the Euro crisis for the United States”). In addition to impacting the smaller economies of Europe, such as Ireland and Portugal, the debt crisis of Greece is also having its effect on some of the biggest economies of Europe, for instance Spain and Italy. This spreading impact of the Greece debt crisis on the other member nations of the EU is likely to cause a real challenge to the survival of Euro in its current form. Furthermore, the Euro-zone crisis is affecting the European banking system as well. This can be validated from the facts that the share prices of the European banks have almost reduced to half and there has been a significant rise in their funding expenses also. Consequent to this banking crisis in Europe, the economic growth of nations like France and Germany have also considerably slowed down. The crisis situation of the European banks is expected to worsen, as they would most likely have to accept a major percentage of the write-down on their holdings on the sovereign debt value of Greece. The further deterioration of the European banking crisis is expected to drive the overall economy of Europe into a scenario of economic downturn. Furthermore, the decline in the economic growth prospect of the major nations of Europe would decrease the likelihood that the nations located in the European border would be able to raise themselves out of their current debt predicament (Lachman, “Implications of the Euro crisis for the United States”). Implication of the Euro Crisis on the United States The European economy makes up for more than 30% of the output of the global economy as a whole. Hence, the intensification of the Euro crisis could disrupt the economic recuperation of the US through various channels. For instance, the potential economic depression in Europe as a result of the current Euro crisis would lessen the prospects of the US exports to the EU nations, which constitute for a significant percentage for the US goods market. The deteriorating banking crisis in Europe in addition to the concerns regarding the endurance of Euro could weaken the value of Euro against that of Dollar. Such a situation would place the US organizations at an obvious disadvantageous state in comparison to the European organizations in the markets of the third countries, particularly in the context of e-commerce. Furthermore, the banking crisis of Europe would influence the US economy via the conduit of financial market and a comprehensive augmentation of risk aversion in the global economy (Lachman, “Implications of the Euro crisis for the United States”). The transmission of the European economic depression into the US is likely to cause a decline in demand and consequent decrease in industrial production. During the global financial crisis of 2008, it was observed that the US automobile industry was the most effected industry and there was a decrease in the year-on-year auto sales by 66% and 56%, even in the first couple of months of 2009 (Economic Commission for Latin America, “The Crisis and Its Future Impact on the Global Economy”). Thus, it is highly probable that the impact on the US economy due to the Euro crisis would affect the US automobile industry harshly. Works Cited Alessi, Christopher. “The Eurozone in Crisis”. November 12, 2011. Council of Foreign Relations, 2011. Dadush, Uri. “Paradigm Lost- The Euro in Crisis”. Carnegie Endowment for International Peace (2010). Economic Commission for Latin America. “The Crisis and Its Future Impact on the Global Economy”. November 12, 2011. Publications, 2011. Europa. “Basic Information on the European Union”. November 12, 2011. Europa, No Date. Europa. “Money and the EU”. November 12, 2011. Europa, No Date. Europa. “Countries”. November 12, 2011. Europa, No Date. Europa. “Historical Overview”. November 12, 2011. Europa, No Date. International Monetary Fund. “Report for Selected Country Groups and Subjects”. November 12, 2011. Data and Statistics, 2010. Lachman, Desmond. “Implications of the Euro crisis for the United States”. American Enterprise Institute (2011). Layard, Richard. & Et. Al. “Why Britain Should Join the Euro”. November 12, 2011. Final Version, 2002.    Osterreichische Akademie der Wissenschaften. “European Union reaches 500 Million through Combination of Accessions, Migration and Natural Growth”. November 12, 2011. Data Sheet, 2010. < http://www.oeaw.ac.at/vid/datasheet/EU_reaches_500_Mill.shtml>   Weldon, Duncan. “Why Belgium’s Economy Has Performed Better than the UK”. November 12, 2011. Liberal Conspiracy, 2011. X-Rates. “British Pounds to 1 EUR”. November 12, 2011. Graph, 2011. Read More