Challenges the Eurozone Faced in 2011-2012 - Essay Example

? International Business Context Introduction Globalization has brought numerous social, political and economic changes in the world and the rapid increase of international business is one among them. Lauder et al (2006) have pointed out that globalization is the process of transportation of jobs, ethnic and cultural composition of nations etc from one country to another (Lauder et al, 2006, p.32). The barriers for international business have been weakened over the last few decades because of the revolutionary changes taking place in the world as part of globalization, liberalization and privatization. It is easy for an American company now to establish its business units in in China or India even if these countries may have huge differences in social, political, technological, cultural, environmental and legal spectra. Eurozone is a European economic and monitory union with the strength of 17 European countries; Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain. The members of Eurozone do not have a domestic currency now. All these member countries have adopted Euro as their currency in order to reduce the formalities in money transactions of economic transactions between these countries. In short, Eurozone can be defined as “A geographic and economic region that consists of all the European Union countries that have fully incorporated the euro as their national currency”(Definition of Eurozone, 2011). The Eurozone is the largest economic zone in the world at present and its currency Euro is believed to be stronger than American dollars. However, the 2008 global financial crisis has negatively affected the functioning of Eurozone in many ways. International business suffered lot of setbacks as a result of the recession. Eurozone countries forced to implement many economic changes in their countries to escape from the damages caused by recent recession. The financial crisis has become a sovereign debt crisis and a Banking crisis in Europe, threatening the very existence of the Euro currency. The economic problem in Eurozone countries is known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain). This paper analyses the current political, economic, financial and social challenges facing the Euro zone along and also explains the measures that can be taken to solve the crisis threatening the collapse of the Euro zone single currency – the Euro. Current political, economic, financial and social challenges facing the Euro zone Political problems in Eurozone Stiglitz (2011) has pointed out that more of political in nature rather than economic. In his opinion, “If Europe issues Eurobonds, debts are manageable. Even a 150 per cent debt to GDP ratio can be handled if interest rates are low enough, but if rates are high they cannot be”(Stiglitz, 2011). Many people have the illusion that the Eurozone problems are caused by economic factors rather than political factors. Such people believe that Europe is comparatively a stable political region and therefore political problems have fewer roles in causing any challenge to the functioning of Eurozone. However in reality, as in the case of many other regions in the world, political problems are causing more damages to the ambitions of Eurozone to become the strongest economic power in the world. For example, Greece is one Eurozone country which is facing huge financial problems now. Kotios et al, (2011) have pointed out that the inconsistent economic policies of Greece have contributed heavily to the downfall of Greece (Kotios et al, 2011, p. 263). Greece adopted some kind of economic policies which were unsuitable to the needs of the current economic climate. Their inconsistent economic policies affected Greece as well as Eurozone. “The European Central Bank is under pressure to bail out indebted countries by printing more euros. But it really isn't as straightforward as that” (Obama Accuses Eurozone of "Problem of Political Will", 2011). However, many of the European countries are against printing more euros to assist Greece like nations. These countries are of the view that such drastic measures may destroy the economic backbone of Eurozone as many other countries may approach European Central Bank with the same complaint in the future. Greece should take more meaningful actions to come out from the present crisis according to the views of many Eurozone members. Italy and Spain are two other prominent members in Eurozone, waiting for the mercy of European Central Bank. According to Dr. Spyros (2011), the basic problem facing by Eurozone is structural. In his opinion, the idea of a single currency across 17 states which don’t have centralized political system was not a smart decision. He has also pointed out that the absence of centralised political management is causing big problems to the functioning of Eurozone. He has mentioned that each member countries are functioning independently and the political control of Eurozone over member countries is negligible (Dr. Spyros, 2011). It is impossible for a regional trade bloc like Eurozone to function efficiently without a centralised control. Since the activities of each member country affect other member countries in Eurozone, centralized political control is a must for Eurozone. Even though majority of the Eurozone countries have democratic administrations, the functioning of the governments is somewhat different. Some governments may have better control over the fiscal policies in their country whereas other countries may not have absolute control over such matters in their countries. In other words, fiscal policies in Eurozone countries do not have centralized control and each government is functioning in its own way as far as fiscal and tax policies are concerned. Interest rates may increase in a country if the fiscal deficit increases. “Some experts suggest that a high deficit will not affect rates as the banking system currently has ample liquidity” (Interest rates may rise due to high fiscal deficit, 2009). However, in the case of Eurozone countries, interest rates are growing as a result of growing fiscal deficit. Interest rate growth is not good for smooth economic activities in a country. Business groups are often taking huge loans from financial institutions to expand their business. When interest rate increases, business people will not approach banks for loans and therefore, business growth may not take place. Domestic and international business plays an important role in the economic growth of a country or region. High interest rate often affects international business drastically which is evident from the experiences of Eurozone countries. Economic & Financial problems in Eurozone As in the case of other countries and regions, recent global recession has negatively affected Eurozone also. Many of the Eurozone countries are struggling now even though they have ample support from European Union. Germany seems to be the only country which is facing less economic troubles now. “Some of the smaller member states were having issues meeting their debt obligations amidst skyrocketing unemployment and decline in real estate sector. Most notable of these countries were Greece and Spain”(Oranika, 2011). In fact problems in Greece and Spain are causing more headaches to other member countries. In a heavily globalized world, the problems in one corner can affect other corners as well. In the case of Eurozone countries, the above fact is more accurate because of the strong interconnection between these countries. Greece is rapidly approaching bankruptcy and the Eurozone members have no clue at all in how to solve the crisis in Greece. Between 2000 and 2011, Greece's average quarterly GDP Growth was 0.46%. It reached 3.80% in March of 2003 and -2.80% in December of 2010 (Greece GDP Growth Rate, 2012). In other words, Greece is currently undergoing negative economic growth. Alderman (2011) has pointed out that even though the Papandreou government has implemented some new policies, it was not sufficient enough to solve Greece’s problems (Alderman, 2011). The case of Spain is also not much different. Oranika (2011) has mentioned that the unemployment rate in Spain has reched an all-time “20% and deficit about 11% of the country’s GDP in 2011(Oranika, 2011). In short, economic problems in some Eurozone member countries are causing problems in all the other member countries. Some member countries believe that the poor performances of Spain and Greece are retarding their growth also. It should be noted that Germany and France have better economy than any other member countries in Eurozone and they forced to share the benefits of their economic growth with other member countries. Such things are generating huge displeasure among public in Germany and France even though they are still supporting the idea of the integration of Europe through Eurozone or European Union. Social Problems in Eurozone Phillips (2011) has argued that the public support of EU is coming down drastically over the last few years of time. He has quoted a regular European Commission social issues survey to substantiate his arguments (Phillips, 2011). Eurozone failed miserably in fulfilling the expectations of Europeans. Europeans earlier thought that the formation of Eurozone will make Europe the most powerful economic zone in the world. Moreover many people thought that Euro may defeat US dollar decisively. However, the realities have been far away from expectations or imaginations. Many economists believe that the global wealth is slowly shifting from less heavily populated Europe to more heavily populated Asian region. It should be noted that the most heavily populated countries in the world; China and India are growing much rapidly than any other country or region in the world at present. Because of globalization, large volumes of exchange of workforce and jobs are taking place between different countries. In order to exploit cheaper labor markets in Asian countries, many European companies are engaged in outsourcing and offshoring like business activities. In other words international or cross cultural business is growing day by day through outsourcing and offshoring like new business strategies. One of the major characteristics of these developments is the fact that Europe forced to be at the receiving end while emerging countries such as Brazil, Russia, India and China are reaping the profits. In other words, employability in European countries is getting diminished as time goes on. These new developments are creating lot of social unrest among many of the Eurozone countries. Apart from Greece and Spain, Britain is also currently struggling to avoid social agitations against growing unemployment. China is currently trying to catch fish from the muddy water of EU. China is ready to spend billions in Eurozone to purchase infrastructure assets from ailing economies. Moreover Chinese banks are ready to increase its purchases of euro zone sovereign debt (Secret Commitments, n.d). China was waiting for an opportunity to expand its business prospects to Europe. Currently America is the largest market in the world for China. It should be noted that Chinese philosophy is to produce bulk quantities and thereby reduce the unit price. Because of the above strategy, many of the prominent companies in Europe are struggling to compete with Chinese companies in international market. The intrusion of Chinese products into European market may definitely affect the products of European countries. Chinese companies have already attained saturation in America and they are looking for enough spaces for expansion in other parts of the world. Europe is a fertile soil for Chinese companies and they are currently shifting their attention from America to Europe. EU cannot block China from entering their soil because of international trade commitments as part of globalization. Europeans are watching this new scenario with lot of concerns. Measures that can be taken to solve the crisis threatening the collapse of Euro Britain has already supported the idea of dropping out of ailing economies such as Greece and Portugal, from the single currency system in order to rescue Eurozone and euro (Groves, 2011). One of the major reasons for the Euro collapse is the economic problems in Greece, Spain and Portugal. Euro is the prestigious currency of Europe and it is difficult for the European countries to assemble under the banner of Eurozone, if Euro fails to recover. Collapse of Euro may prevent people from investing in Euros and they may go back to dollars or other stable currencies. “To make the euro survive in the longer term, it needs countries to be sufficiently competitive to have some economic growth to be able to pay off their debts"(Cooper, 2012). It is well understood now that countries like Greece, Spain, Italy and Portugal may not develop properly without taking assistance from others. Germany, France and Britain like countries should enough assistance to these countries to rejuvenate their economies and to save Euro from total collapse. “The European Central Bank is now extending unlimited loans to banks in the 17 nations of the European Union that use the euro, provided that those banks put up collateral” (From six economists, six ways to confront 2012, 2012). These unlimited loans are intended to stimulate the economies of the ailing nations in Eurozone. These nations have the luxury to repay the loan only after three or four years. The European Central Bank should provide more assistance to ailing economies and the repayment rules should be liberalised further to save Euro. Without a doubt the euro zone bears the primary responsibility for resolving the sovereign debt crisis. But all countries now have to pull together to avoid contagion (Spiegel, 2012). Britain should take more proactive role in solving European economic crisis. Even though Britain is not a member of Eurozone, they have a major role to play in preventing euro collapse. It should be noted that Dubai has recently faced severe financial crisis and Abu Dhabi saved Dubai from total destruction. At present Dubai is back on track and Abu Dhabi need not assist Dubai further to solve its economic problems. Eurozone countries should take lessons from the above incident. Instead of leaving Greece, Italy, Portugal and Spain to their destinies, countries like Germany and France should provide more assistance to these countries. The destruction of Greece and Spain may cause lot of problems to other European countries also. According to German chancellor Angela Merkel, "If the euro fails, Europe fails” (Schuman et al, 2011, p.29). Germany knows the importance of Euro in European integration. However, they have not taken many interests in solving the crisis. Being a prominent player in Eurozone, Germany should actively participate in the European crisis and they should provide more assistance to the ailing economies in the zone. Foreign trade or international business has the ability to affect the living standards of the people. So, all countries are so particular about the exchange rates of their domestic currencies and monetary policies. However, such domestic monetary policies should not affect international exchanges. Nations should obey certain international rules about exchange rates instead of trying to safeguard their interests alone (Conference At Bretton Woods, n. d.). Globalization has brought huge changes in this world. Global economy is highly interconnected at present because of globalization. In other words, the problems happening at one corner of the world may have detrimental effects on other parts as well. So, cooperation between countries should be strengthened further to exploit the opportunities brought to this world by globalization. Selfishness is the major obstacle which prevents many countries from attaining proper growth. It should be noted that the slogan of globalization is collective growth; however, almost the entire countries are currently trying to safeguard their interests at the expense of others. Eurozone countries should work collectively to solve their economic problems. There is no point in forming a trade bloc and then leave the member countries to solve their internal problems. Regional trade blocs such as Eurozone should demonstrate more interest in solving internal crisis before attempting to participate actively in cross cultural business. International business is not easy as domestic business. Countries engaged in cross cultural business should mutually respect the culture, politics, social norms, environmental or geographical characteristics and legal frameworks prevailing in each country. According to an article appeared in national review, “Economies in the Eurozone have had lower economic growth than European economies outside it from 2001-2011 due to overspending in Greece and Portugal. Euro should be dismantled before it collapses” (The Euro in Retrospect, 2011, p.14). Many economists are of the view that euro should be dismantled at least for a temporary period in order to avoid total destruction. It can be reinstated once the ailing economies solve their financial problems. Another drastic measure suggested by the economists is the expulsion of Portugal, Greece, Ireland, Italy and Spain from Eurozone. It should be noted that these five countries are causing huge problems to the other 12 Eurozone members. Under such circumstances, it is better for Eurozone to expel these countries until they become financially stable. Conclusions At the time of formation Eurozone was the largest trade bloc in the world and it was expected to dominate global trade in the twenty first century. However, Eurozone failed live up to the expectations because of political, economic, financial and social reasons. Even though the concept of integration of Europe is acceptable to all European countries, many of them do not have the courage and will to work hard for the success of it. Eurozone is facing huge economic problems now because of the poor performances of some of its member countries such as Greece, Ireland, Portugal, Spain and Italy. Euro is on the verge of collapse and many people believe that the recovery of euro is unimaginable at least for another ten years because of the severity of economic problems in some of the ailing economies in Eurozone. Germany and Britain should play more significant roles in preventing the total collapse of Euro and Eurozone. Even though Britain is not a member of Eurozone, they should realize that the destruction of Eurozone will cause financial stalemate in the continent which is not good for them also. Germany speaks volumes, but does nothing to solve the problems in Eurozone. Germany should take the leadership of Eurozone and provide enough assistance to the ailing economies. European central bank should provide more assistance to PIIGS to recover from the financial problems. References 1. Alderman L. (2011). Struggling to Stoke Economic Growth in Greece. The New York Times. June 19, 2011 2. Conference at Bretton Woods. 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