The Business and Macroeconomic Environment of the European Union - Essay Example

Macroeconomic assessment of the European Union and Macroeconomic Assessment of the European Union Introduction The European Union is an economic trading block that is made up of countries that are mainly located in Europe. Six member countries formed the European Union after the Second World War in 1958. The six countries formed the union as a result of the cooperation that had existed between them through the European Economic Community (ECC). The six states that include Germany, Luxembourg, Netherlands, France, Italy, and Belgium formed the union with the aim of achieving peace and stability in the region (European Union, 2012). The union became recognized globally when the member states signed the Maastricht Treaty in 1993. This essay assesses the macroeconomic environment of the EU particularly drivers of business and the challenges that organizations face in the region. Background Information The European Union is currently made up of twenty eight countries with the last ones to join being Romania and Bulgaria. The EU functions under the treaties that the member countries sign regularly to stabilize the region when the nature of the global economy changes. The greatest achievement of the EU is the use of the Euro as the only currency in the region (Vanke, 2010). The use of this currency has enabled businesses in the region to integrate and expand their operations to across the member countries. The European Central Bank regulates the monetary policy in the region according to the agreements of the member states. Another great achievement of the EU is the elimination of trade tariffs between across the borders of the member states (Hazans, 2011). This strategy has encouraged investors to invest in the region so that they can take advantage of the low cost of conducting business. The EU has set various conditions that countries must satisfy for them to be accepted as members. For example, new members must be willing to implement the economic and political strategies of the union. The states must also be democratic and willing to respect human rights and the law (Hazans, 2011). This means that countries that are not democratic may not be able to join the union and if they join, they should change their systems so that they become autonomous. PESTLE Analysis of the European Union Political Environment The European Union has a stable political environment that enables businesses to develop in the region. The stability of the union is governed by the European Council, which is has the greatest political power (Ailey, 2011). The council is headed by a president who is in charge of solving disputes that arise among member states. The president of the council also develops objectives that the union aims at achieving and the strategies that they use to realize these goals. The European Council is also in charge of bringing member states together when discussing new laws (Poletti, 2012). This means that the council is in charge of maintaining the political stability of the region. The stability that the council maintains enables investors to invest in long term businesses in the region because they are assured of the permanence of their operations. The EU also has a parliament that is in charge of making laws for the region. The parliament makes laws that encourage businesses to develop in the region, for example, the elimination of trade tariffs among member states (Poletti, 2012). The elimination of trade tariffs encourages businesses to conduct their operation in any country in the region as well as obtain raw materials from the state that offers them at the cheapest prices (Wetherly, & Otter, 2011). This law helps businesses to reduce their costs, sell goods at favourable prices, and earn high profits. However, the union charges tariffs when conducting business with non-member states (Ganzle, Grimm, & Makhan, 2012). This discourages businesses from the non-member states from trading with the EU countries because they incur high expenses that reduce their profits. Economical Environment There are no trade restrictions between member states of the European Union meaning that businesses trade in the region at low costs. The freedom of movement from one state to the other enables businesses to access a large market (Cavusgil, Knight, & Riesenberger, 2012). The large market leads to a high demand for goods and services and this encourages businesses to invest in the union. The freedom of movement also enables businesses to reduce their cost of production by employing cheap factors such as labour, raw material, and technology (Altug, Neyapti, & Emin, 2013). For example, a company in Netherlands may employ workers from Belgium if they accept lower salaries than employees from Netherlands. The use of cheap factors of production enables businesses to earn high sales and profits. This then motivates organization to expand their businesses within the region. The European Union also exposes businesses to a possibility of winning contracts that are offered in member countries (Chorafas, 2011). For example, a road construction company gains access to contracts offered in all the member states. This means that a construction company in Romania may be contracted by the Belgium government to develop roads in the country. The exposure to the wide range of contracts enables businesses to continue their operations and earn profits. The use of the Euro as the only currency reduces costs of conversion for businesses that operate in more than one country in the region. Organizations also incur low costs because the use of the Euro enables them to face an equal interest rate that is low and favourable to all the member states (Marsh, & Mackeinstein, 2011). This increases their sales and profits and it enables them to acquire loans for expanding their operations at a low cost. The openness of the European Union also enables businesses to face competition in a wide market. This enables consumers to acquire goods of high quality and low prices. Social Environment Businesses in the EU face a social environment where consumers have diverse tastes and preferences, ages, and culture (Somers, 2010). The diverse characteristics of consumers indicate that they change their tastes and preferences regularly. Businesses have to keep up with the changing consumer preferences in order for them to gain high sales and profits. Organizations also have to ensure that they produce goods that fit the diverse population in the European Union. The population mainly consists of children, the youth, and the aged. This means that businesses have to produce goods and services that satisfy all these consumers. The social environment offers businesses a disadvantage when consumers develop negative perceptions towards an organization and its products. The negative perceptions of consumers towards a business and its products would spread at a fast rate because of the free movement of individuals across member states (Chorafas, 2011). Organizations would incur huge losses in case they become victims of the negative perceptions of consumers. This indicates that organizations operating in the European Union have to take into consideration the effects of their decisions on consumer’s perceptions to avoid negative results. Technological Environment The European Union offers organizations access to a variety of technologies. These technologies include machineries and infrastructure. In fact, the union is aiming at developing cross-border infrastructure of member states through the Trans-European Network (Hazans, 2011). The infrastructure enables organizations to conduct their businesses across numerous states in the unions. The infrastructure also increases the efficiency of businesses and it saves them the cost of transporting goods (Somers 2010). The access to roads created by TEN also enables organizations to acquire and transport raw materials from suppliers to their plants for processing. Companies are also able to deliver goods to customers in the whole region as soon as they are produced. This means that the development of roads enables companies to meet the high demand for their products in the union (Grant, Matthews, & Newell, 2011). When other technologies develop in the region, companies are able to acquire and use them to increase their efficiency at a low cost. Legal Environment The legal environment of the European Union is favourable for organizations that conduct their business in the region. This is because the union has implemented laws that enable businesses to reduce cost and increase profits. For example, there is a law that requires the union to develop the regions that consist of consumers who are unemployed and deprived socially (Schule, & Tichy, 2010). This means that the union has to develop, for example, by installing communication and road networks in these regions. This law also enables organizations to conduct businesses in these regions because they make use of the available infrastructure to deliver goods to customers and transport raw materials from suppliers. Organizations are also able to create employment by developing businesses in these regions. The law also requires countries that belong to the union to avoid charging tariffs on member states (European Union, 2012). This assures businesses that they will incur no cost of transporting goods across borders. The EU has also implemented a law of competition that prevents businesses from competing unfairly in the region. This means that when an organization invests in the region, it is assured of surviving in the market as long as it makes profits. This law motivates new firms to put up businesses in the region and take home high sales volume and returns (Chorafas, 2011). Environmental Factors The EU has implemented laws that protect its environment from pollution, wastage of water, and emission of carbon. The laws aim at conserving the environment to avoid global warming and depletion of renewable energy. For example, the union aims at reducing the amount of carbon emitted to the atmosphere by 20% (European Union, 2012). This means that organizations must ensure that their businesses decrease the amount of carbon that they emit to the environment by the mount set by the union. Firms that fail to adhere to this rule may be closed down or be forced to achieve the target of the union by being penalised. Companies that conduct business in the EU also have to recycle their waste products so that they can help the union to manage waste. This means that firms have to take the effects of their actions into consideration before making decisions. This will enable them to conduct business in the EU smoothly and earn the high sales revenue and profits from the region. Business Challenges affecting EU as a result of Globalization Globalization refers to the merging of economies and it is caused by technology such as the internet and air transport. The EU is a fruit of globalization and it has offered organizations in the union a chance of conduct business at a low cost. However, the formation of the European Union as a result of globalization has led to the development of numerous challenges that affect businesses in the region. One of the main challenges that affect businesses in the European Union is liberalization that increases the standards of production and quality (Petrakes, Kostis, & Valsamis, 2013). Multinational corporations are responsible for the setting of standards that others should follow in the market. Since these companies have developed to the extent of using high-tech machineries to produce their goods and services, they set high quality standards. The small and medium enterprises cannot achieve the set standards and this prevents them from continuing with their operations in the region (Benjamin, 2010). This means that only the MNCs have the ability to survive in the market for long periods of time. The fact that it is the MNCs that set standards in the market also means that these companies provide the medium and small enterprises with high competition. The high competition may force the developing companies to quit from the market because of their inability to compete with the large organizations (Somers, 2010). This means that even if small and medium enterprises meet the quality standards, these enterprises still quit from the market because of competition from the MNCs. Business Challenges affecting EU as a result of World Trade Organization The World Trade Organization is an institution that ensures that all countries in the world conduct business fairly. The members of the EU receive equal treatment at WTO because the institution is considered a single state. The WTO has set standards that discourage the companies from investing in the European Union, which mainly comprises of developed countries. The organization has set standards that lower the environmental and labour standards below those set by the European Union (Wetherly, & Otter, 2011). These standards enhance the developing countries to expand further because they receive funds from foreign investors. While the developing countries receive funding from foreign investors, the developed countries experience withdrawal of funds from their economies (Schulte, & Tichy, 2010). This means that the laws of the WTO are affecting the EU negatively because they are encouraging investors to withdraw their funds and invest in the less developed nations. Businesses in the EU therefore earn low profits because they lack funds to expand. This then slows down the overall development of the union. Business Challenges affecting EU as a result of the Single Market Economy The development of the European Union has also made it impossible for workers to fight for their rights. This is because it is hard for unions to bring workers from various countries together to agree on factors that affect them in organizations. This impossibility of unionization creates a loophole that organizations use to take advantage of employees (Toje, & Palgrave Connect, 2010). The companies that take advantage of this weakness of the union pay their workers salaries that are below the minimum wage rate and they do not provide a comfortable working environment. This lack of sovereignty discourages new members from joining the EU because they want to maintain their national standards (Vanke, 2010). However, the new nations are still willing to join the union because of the numerous advantages such as protection by WTO and elimination of trade tariffs. The European Union lacks sufficient funds to use to develop the region. The union lacks funds because member states contribute little amount of money. The lack of funds prevents the region from achieving its goal of developing infrastructure and markets. The lack of well-built infrastructure and markets then discourage organizations from investing in the region (Somers, 2010). The firms that have already established themselves also incur high cost of transport, which reduces their profits. In the end, these companies leave the region and invest in emerging countries such as China and India, which are in the South East Asia. Business Challenges affecting EU as a result of the Development of India and China Companies in the union face the threat of cheap substitute products from China and India. China and India are the most developing countries in the twenty first century with China having the most organized manufacturing sector and India having an efficient service division (Pirvu, 2012). The development of the manufacturing sector in China enables companies to produce goods at low costs (Hazans, 2011). This is the same case with the service sector in India. This means that in the international market, countries especially those that are developing purchase cheap products from China and services from India. This then means that companies in the EU may export less than they have been exporting in the previous years because of the reduced demand for their expensive products. Companies, therefore, withdrawal their funds from the union and invest them in India and China where they produce goods cheaply and sell to a ready market. Effects of Business Challenges on Organizations The main effect of the business challenges on organizations is the increase in their cost of operations. For example, when MNCs set high quality standards on businesses in the region, it means that medium and small enterprises have to acquire expensive technology to help them meet the standards (Toje, & Palgrave Connect, 2010). Those firms that lack the funds to invest in technologies that increase their efficiency quit from the market. The other effect on businesses is the reduction in the demand for EU’s products in the international market. This is because of the availability of cheap products from China and India in the international arena (Petrakes, Kostis, & Valsamis, 2013). How Organizations can Respond to the Challenges The organizations that are in the EU may reduce the challenges that they face by adopting new manufacturing technology, differentiating their products, and using cheap raw materials. By acquiring new technology and using cheap raw materials, organizations in the union will be able to produce cheap goods of high quality that will compete against those from China (European Union, 2012). The businesses may set prices equal to those of China when they incur low costs in producing them and this will enable them to earn high sales and profits. Organizations may also differentiate their products because this enables them to satisfy the diverse needs of consumers. Differentiation also enables firms to charge high prices and earn high profits from their products (Marsh, & Mackeinstein, 2011). This is because consumers would pay any amount of money to acquire the goods that they prefer. Businesses in the region may also develop laws that hinder cut throat competition and set reasonable quality standards (Ailey, 2011). This means that MNCs should involve the small and medium enterprises in making decisions. This will enable the developing enterprises to thrive in the market for extensive periods until they also become multinationals. Conclusion In conclusion, globalization has enabled the European Union to develop and become a leading trading bloc in the globe. The bloc encourages business organizations to invest in the region because of the stable political and economic environment. Businesses in the region have to keep up with the changing taste and preferences of consumers, technology, legal, and environmental laws. The laws in the union offer businesses a chance to develop because they prevent unfair competition. Despite the successes of the union, organizations face challenges such as high competition in the international market, lack of sovereignty, and withdrawal of investors because of laws made by WTO. Businesses may avoid these challenges by acquiring modern technology and using cheap raw materials. Businesses may also differentiate their products and earn high profits by selling them in local and international markets. References Ailey, J. M., 2011. Modern competitiveness in the twenty-first century: Global experiences. Lanham: Lexington Books. Altug, S., Neyapti, B., & Emin, M., 2013. Institutions and Business Cycles. International Finance, 15, 3, 347-366. Benjamin, D., 2010. Europe 2030. Washington: Brookings Institution Press. Börzel, T. A., 2010. Coping with accession to the European Union: New modes of environmental governance. Basingstoke: Palgrave Macmillan. Cavusgil, S. 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