Causes, Consequences and the Response of the Eurozone Member Nations to the Crisis - Research Paper Example

International Finance Project: The Eurozone Crisis Contributors Table of Contents International Finance Project: The Eurozone Crisis 1 Introduction 1 About BMW AG 2 About Mercedes-Benz 3 Literature Review 3 Research Objectives 4 Methodology 4 Data collection 4 Results and Analysis 5 BMW 5 Mercedes-Benz 7 Conclusion 8 References 9 Introduction The 2008 Euro crisis has been described as the worst since 1930s, with the GDP of the major European economies predicted to shrink by almost 4 per cent in 2009. This is the sharpest contraction in the history of the European Union. Recovery has since remained uncertain and fragile. The EU moved swiftly and decisively to this crisis by establishing the European Economic Recovery Plan (EERP), which was launched in December 2008. The EERP was mandated with the task of restoring confidence and bolster demand through coordinated injection of purchasing power which is accompanied with strategic investments and measures to lift up business and labor markets. In addition to this, the European Union intervened to stabilize, restore and reform the banking sector. Overall, the amount of fiscal stimulus, compounded with the effects of automatic stabilizers amounted to five per cent of the GDP in the European Union. The Eurozone crisis refers to the financial crisis that made it difficult for some countries within the European Union to finance their debts without assistance from other quarters. The debt crisis is believed to have emanated from a combination of complex factors among them; the globalization of finance, the 2007 global financial crisis, international trade imbalances, fiscal policies related to government revenues and expenses, and the approaches used by nations to bail out the fragile banking sector, while assuming the debt held by the private sector. The Eurozone crisis was preceded by a long period of rapid credit growth, low risk premia, abundant liquidity and the development of real estate bubbles. This research paper seeks to analyze the causes, consequences and the response of the Eurozone member nations to the crisis. Also, this paper discusses the toll the Eurozone crisis dealt on multinational companies which operate both in the west and in the east, and the response the governments of both the eastern and the western nations had on the Eurozone crisis. This research furthermore focuses on the factors and the issues that are likely to be faced by BMW AG and Mercedes companies in their businesses in the east and the west and those that are likely to be faced by their hosting country. About BMW AG Bayerische Motoren Werke (BMW) is a German automobile company with motorcycle and engine manufacturing wing. With it’s headquarter in Germany, it produces motorcycles under BMW Motorrad. It is among the top largest luxury automakers in the world, along with Audi and Mercedes-Benz. The ownership of BMW spans all over the world with majority of shareholders emanating from North America, United Kingdom and Ireland. The company has been growing steadily with sales increasing from 1,126,768 cars in 2005 to 1,540,085 cars in 2012. The company has overseas subsidiaries in Canada, China, Egypt, India, japan, South Africa, and the United States. The sales from these subsidiaries were all affected by the Eurozone crisis between 2008 and 2009. This was characterized by a significant drop in the number of vehicles sold. About Mercedes-Benz This is a German automobile manufacturing company whose brand is used for luxury cars, trucks and buses. The headquarter is in Stuttgart, Germany. Besides major manufacturing taking place in Germany, Mercedes-Benz has other manufacturing centers in Argentina, Austria, Bosnia, Brazil, Canada, China, Egypt, Finland, Hungary, India, Indonesia, Iran, Malaysia, Mexico, Nigeria, Philippines, Russia, Spain, South Africa, South Korea, Thailand, Turkey, United States, Vietnam and Jordan. Literature Review Since late 2009, Greece has gotten itself in a financial crisis which has never been seen before in human history. Greece had perfected the culture of structural adjustment where it cut down social expenditure as it raised taxes. In addition, Greece embarked in a privatization spree of major state-owned corporations. The crisis prompted the European Union to give Greece a €110 billion bailout loan which kept Greece from defaulting on its debts. The fund was not however sufficient and the EU and IMF confirmed a further €109 billion in 2011. The bailouts were meant to keep Greece liquid and containing its financial crisis. Many believed that the EU injected funds into the Greek economy so as to prevent the crisis from spreading to other more vulnerable peripheral Eurozone countries like Portugal, Italy, Ireland and Spain (PIIGS). Greece is viewed by the media as the sole cause of the European financial crisis; ‘the sick man of Europe’ that needs to be cured (Malkoutzis 2011b). If the Greece disease cannot be cured, then it should be contained to prevent it from spreading to the other parts of the Eurozone countries. European Union leaders are wary that if at all Greece defaults on its debt-repayment obligation, then some of the PIIGS who have high debt will be most likely to default and this is likely to cause a domino contagion scenario (Lynn 2011). Just as Nouriel Roubini stated, ‘Greece is just tip of the iceberg’ (Anon 2010b). Ever since the Eurozone adopted a single currency, the financial markets of the countries have become far more integrated than before. They share the same currency, bail each other out and hold close trades with each other. It is believed that if any of the highly indebted Eurozone countries will put the entire European union banking system at peril, and probably lead into a worse recession (Castle and Saltmarsh 2010; Simeunovic 2010; Kitsantonis 2011; Dixon and Unmack 2011) Research Objectives This research will dwell in the causes of the Eurozone crisis. I will analyze the various reasons which led to the crisis and the events which led to the crisis. I will also put forward the relationship between politics of the land and the crisis. Whether the respective governments had a thing to do with the crisis occurring, or it was spontaneous. I will also outline how the Eurozone Crisis affected BMW and Mercedes-Benz companies. Methodology To achieve the objectives and the aim of this research, I consulted widely on the available books on financial crises, newspapers and the electronic media like radio and television. I also had access to journals on finance. The research required wide consultation and I consulted with fellow student and lecturers. All this was to try and unravel the mystery behind the occurrence of financial crises not only in Europe but also in the United States and the world in general. Data collection The information was to be obtained through different methods, and, although interviews with professionals in the field of finance was not possible, I used all means possible to gather the relevant data that could help me fulfil the objectives of my research. I collected data from various sources, mostly from secondary sources. I visited websites to find more information about the Eurozone crisis and how it affected the European nations as well as the businesses in Europe and Asia. Results and Analysis The Eurozone crisis started to come to picture when a new government which was elected in Greece revealed that the previous governments had been underreporting the budget deficit. This crisis was then reported to have occurred in Ireland and Portugal. But since the GDP growth of Portugal and Spain was very weak for much of the previous decade, their economies did not experience much dip. This crisis has had its impact felt on the major companies of the world, examples being BMW and Mercedes-Benz. BMW The German multinational was hard hit by the euro crisis with its first quarter profits fall by 17 per cent. The German automobile company was hit by the global financial crisis, a weak dollar and soaring prices for raw materials. The company reported a net profit of £487 million from £587 million in the earlier first quarter. The drop in profit came from the £236 million taken to cushion the company from the risk of default on loans for leased cars in the United States and from lower prices for used cars. Despite this, the company expected to sell more cars from its three brands in 2008 and it intended to sell 1.8 million vehicles in 2012. With a market condition that remained uncertain, BMW Group Middle East ended the first six months of 2009 with a steady growth which continued to be steady in the market share. This came amidst a modest 10 per cent sales decrease in sales as compared to 2008 the same period. A total of 7,165 motor vehicles sold across fourteen Middle East recorded positive sales growth for a number of importers. The importers included Lebanon, where sales increased by a whopping 84 per cent which represented 531 units. Syria reported a 58 per cent growth represented 451 units, while Saudi Arabia had the sales increased by 24 per cent representing 1,241 units. For the first half of 2009, several BMW models made significant sales figures. The flagship BMW 7 series successfully achieved the sales of 2,077 units, BMW X6 accomplished 1,249 unit sales, BMW X5 and 3 Series achieved 1,176 unit sales and 1,021 unit sales respectively with BMW X5 reporting the sale of 979 units. The company reacted to the Eurozone crisis by obtaining a license to deposit funds with the European Central Bank, the safest haven in the Eurozone. BMW had adopted an approach to handling excess liquidity and to use a number of international commercial banks as well as ECB’s deposit facility. This was in the wake of slumping sales in the United States with deliveries going down by 9 per cent. To counter this sharp fall in sales, Credit Suisse allowed consumers in the united states were allowed lease a BMW Z4 for $369 a month. Vehicle registration in Europe also went down, though not as acutely as in the United States. Deliveries managed to increase by 11 per cent.BMW unveiled a new strategy, which included plans to increase production in the United States, the united signal and China and to set up its purchasing in dollars in an effort to counter currency exposures. BMW planned to increase production in China from the 30,000 units it manufactured to 44,000 units a year. Even though the crisis hit hard on the European market, BMW had strong sales in China which helped boost BMW’s net profit 16 per cent in the third quarter. The market appeared to be friendlier in Asia and the sales in the Asian market helped the company to overcome a stagnant market in Europe due to the economic crisis. Net profit rose to €1.29 billion as sales jumped a record €18.82 billion representing 13.7 per cent. Sales in Chinese market rose 30 per cent as the European sales grew at a paltry 2.6 per cent. However the Southern Europe market added little or no value in the total sales. This is because the crisis was more pronounced here than in any other part of Europe. BMW sales in North America increased in May 2009, 27 per cent lower compared to the same period the previous year. Despite the harsh economic conditions in the Eurozone and globally, the company Group managed to sell 109,402 units in May. This represent a sales decrease of -18.3 per cent, which was moderate, compared to the months before and this gives BMW the possibility to position itself in the market. Mercedes-Benz The German luxury car maker was not spared in the crisis that hit Europe. The company recorded general drop in sales and profits which was attributed to the Eurozone crisis. Generally, the company achieved sales boost from the United States as well as China and the Middle East. The company opted to promote the sales of Mercedes-Benz in the United States and the Middle East. In May 2009, Mercedes-Benz sold 25,600 vehicles in Germany. This increased sales by 11 per cent. The sales of Mercedes A and B-Class segment added up to 18,900 units the world over which did not change much from the same time the previous year. In China, Mercedes-Benz posted high sales records, managing to sell 5,200 units which represented an increase of 59 per cent from the same period the previous year. The sales of Mercedes-Benz in Brazil rose by 39 per cent since the beginning of 2009. The sales in Canada rose to 9,400 since the beginning of the year which represented 17 per cent from the same period of time the previous year. However,the sales in the Middle East did not increase much when it recorded a dismal rise in sales from 1,303 cars sold in February compared with the 1,415 cars sold in March. This represented a nine per cent increase. Sales in January recorded 1,100 units being sold. The company was however confident that sales would rise once they introduced the new E-Class, S-Class and S400 into the market. The sales made by Mercedes-Benz brand rose by 8 per cent to a total of 1,260,912 in 2011. Addition of the smart car and the luxury Maybach brands catapults the sales sold by Daimler to 1.36 million cars in 2011. The company had sales records in China, Russia and India. Deliveries in the United States rose by 13 per cent to 245,231 cars. The sales in China went up a staggering 31 per cent to 193,339 cars sold. Sales in Western Europe went down by 1 per cent because the area was worse hit by the Eurozone debt crisis. The demand for Mercedes-Benz’s large SUV models broke record of sales in each of the twelve months of the previous year. Dieter Zetsche, the chief executive revealed that Daimler would continue their product offensive and launch additional attractive vehicles on the market, which was expected, would boost the sales. Daimler announced it would disband its ultra-luxurious Maybach car marque in November due to poor sales. The company reported drop in sales in 2012 as the Eurozone debt crisis resulted in a sharp decrease in demand in the group’s major western European market while the demand in china went down a little. The German company reported that group sales went down 3.2 percent in July compared to the same month in 2011. The total sales for the month stood at 97,327. The sales in Western Europe slumped 10.2 percent as sales in its market tumbled 11.3 per cent. The car maker, which is part of the Daimler Group, reported that sales in its key international market in China also posted a 0.8 per cent decline. The company however remained optimistic that it would finally record profit in sales in 2013. Mercedes sales were up 5.1 per cent in the first seven months of the year as compared with the same period the previous year. Conclusion The Eurozone crisis was one of the worst economic recessions in the history of European Union. The crisis left some companies in the Eurozone literary fighting for survival, threatening to send them out of business. The European Central Bank was forced to come to the rescue of the Eurozone economy by injecting some €1 billion into the economy of the Eurozone countries to keep money circulating in these economies. The crisis was so bad that some companies like Siemens and BMW Group were preparing for a possible collapse of the Eurozone. Although the economies of the Euro countries have not fully recovered, a positive growth can be witnessed in Germany, Portugal, Spain and Italy although the economy of Greece still remains fragile to date. Financial crises are caused by both economic and political policies. This can be seen at the start of the Eurozone crisis when the Greece government gave false evidence of their debts. This is considered to be the major cause since it is after the newly elected government in Greece announced this that the other Eurozone countries embarked on an exercise of trying to settle the debt. The economic causes also play a critical role on averting financial crises. The European banking sector appeared to be vulnerable since it got involved in the global financial chain that was dragged down in the 2007 financial crisis, which was then amplified by the burst of the mortgage bubble in the United States. European companies with subsidiaries in the Middle East and China were cushioned from the impact of the crisis since these parts of the world were not much hit by the Eurozone crisis as it was the case in Europe. Companies like BMW and Daimler which owns the Mercedes-Benz generally recorded increase in sales in these areas as compared to the sales in Europe which slumped to a record low between 2008 and 2011. These companies however showed signs of recovery since 2012 due to some governments in the Eurozone putting some austerity measures to cushion their citizens from the inflation brought about by the Eurozone crisis. References 1. THE GUARDIAN. (2012). BMW Enjoys Sales Record After 30% in China. 6th November. 2. BBC NEWS BUSINESS. (2012). Eurozone Crisis Explained. [Online] Available from: http://www.bbc.com/news/business-16290598. [Accessed 16th May 2014] 3. JACK, E. (2008) Strong Asia Sales Help BMW, but Europe is Still a Challenge. The New York Times. [Online]. 6th November. Available from: http://www.nytimes.com/2012/11/07/business/global/strong-asia-sales-help-bmw-in-third-quarter.html?_r=0. [Accessed: 16th May 2014] 4. MOTOREN AUTOMOTOVE NEWS. (2012) Mercedes-Benz Global Sales Figures for 2011. [Online] Available from: http://motoren.wordpress.com/2012/01/09/mercedes-benz-global-sales-figures-for-2011/. [Accessed: 16th May 2014] 5. GOOD CAR BAD CAR. (2012) Mercedes-Benz Sales Figures. [Online] Available at: http://www.goodcarbadcar.net/2012/10/mercedes-benz-sales-figures-usa-canada.html. [Accessed on: 16th May 2014] 6. ALBAWABA BUSINESS. (2009) BMW Group Middle East Announces Growth of Premium Segment Market Share for the First Half of 2009. [Online] Available at: http://www.albawaba.com/business/bmw-group-middle-east-announces-growth-premium-segment-market-share-first-half-2009. [Accessed on: 16th May 2014] 7. HUFF POST BUSINESS. (2011) Eurozone Crisis Causing Companies to Plan for Possibility of Euro’s Collapse. [Online] Available at: http://www.huffingtonpost.com/2011/11/29/eurozone-crisis-companies-collapse_n_1118302.html. [Accessed on: 16th May 2014] 8. FINANCIAL MARKETS. (2013) Five Main Reasons for European Debt Crisis. [Online] Available at: http://www.icn.com/en/article/2013/04/08/five-main-reasons-for-debt-crisis/. [Accessed on: 16th May 2014] Read More