Economic Competitiveness of the EU Economy in the Global Markets - Essay Example

EU economy Executive summary The rise of emerging global economic players such as China will threaten the competitiveness of the EU. The EU economy is faced with high sovereign debt default risks, limited economic growth, high unemployment and illiquid financial system. On the other hand, China has attained impressive economic growth and increase in exports and significant foreign direct investment in the country. The EU must change its current economic policy measures in order to prevent the loss of competitiveness through bailing out the struggling member countries, investing in innovative technologies, improving the access to enterprise development capital and focusing on economic reforms that will ensure high economic growth, employment creation and innovation. The member states must commit to reduction of their budget debts, invest in new technologies, diversify their economies, invest in innovative research and stimulate the growth of new enterprises in order for the economic region to remain competitive. Table of contents: page number 1.0 Introduction ……………………………………………………………………...4 2.0 Economic background of the policy issue………………………………………5 2.1 Current European Union economic outlook…………………………….….5 2.2 Current China economic outlook…………………………………………....8 3.0 Current policy measures………………………………………………………....10 4.0 Alternative economic policies to counter the threat to EU economy……… ...10 4.1 Bail out struggling member states…………………………………………. 11 4.2 Enhance research, development and use of innovative technologies…… .11 4.3 Improve financial markets liquidity and access to capital……………… ..12 4.4 Focus on economic reforms……………………………………………….…12 5.0 Recommendations………………………………………………………………..13 6.0 Conclusion………………………………………………………………………...15 7.0 References………………………………………………………………………...16 The emergence of global competitors like China will threaten economic competitiveness of the EU economy in the global markets 1.0 Introduction In the past five years, member states of the EU monetary block has witnessed harsh economic environment characterised by imminent outright sovereign debt defaults, financial contagion, increase in unemployment, decline in overall economic growth and mistrust among the member states. The EU economy policies must ensure high economic growth, high innovation and improved resilience of markets to external economic shocks in order to attain global competitiveness and ensure high direct investments in the region (Finke 2012). On the other hand, emerging global competitors such as China have export-growth initiatives that improve the competitiveness of their products in the global markets (Finke 2012). China enjoys absolute advantage in manufacture of many products due to availability of highly qualified cheap labor, nearness to the source of raw materials and superior manufacturing technologies. China’s trade and services account for more than 65 percent of the GDP and has maintained a consistent annual increase of GDP over the last ten years. The policy paper is addressed to the European Commissioner and aims at highlighting how EU competitiveness in the global markets is declining due to emergence of global competitors like China and offers several alternative policy measures that should be implemented in order to counter the growing threat. 2.0 Economic background of the policy issue 2.1 Current European Union economy outlook The EU economy is undergoing a turbulent period since its formation since many member states are struggling to recover from the adverse impacts of recent global economic recession and financial crisis (Dressel 2007). EU’s share of global GDP has declined from about 25 percent in late 1990s to about 22 percent in 2010 and economic growth has been sluggish when compared with emerging global competitors such as China, India and Brazil (Golub 2013). EU depends on few export markets such as United States and China and need to exploit new market destinations for its exports (Pinder & Usherwood 2007). (Source:UK Independent party) Retrived from http://www.ukipmeps.org/news_704_The-UK-the-EU%60s-largest-export-market.html). (Source: www.marketoracle.co.uk. Retrieved from http://www.marketoracle.co.uk/Article18273.html). (Source: Chinese delegation in Europe for trade promotion: Retrieved from http://english.peopledaily.com.cn/90001/90778/90857/90861/6602020.html). Political discontent on the future of the Union and calls for some member states to leave the EU due to high sovereign debts have dimmed the prospects of economic growth and competitiveness of the region (Baily and Kirkegaard 2004). EU faces a major risk of fragile domestic economies of countries such as Portugal, Spain and Greece as many economists have warned of ‘double dip’ recession that is imminent since some countries are incapable of passing economic and financial ‘stress tests’ due to their dependence on sovereign debt (Prasnikar 2006). (Source: Bloomberg) The EU has not been able to increase its global market share beyond 20 percent since 1990s unlike other emerging economies like Japan and US that have substantially grown their global market share of trade in goods and services (Eichengreen 2008). (Source: http://www.tradingeconomics.com/euro-area/gdp-growth). 2.2 Current China economic outlook China is slowly overtaking the United States and economists assert that it will be world’s largest national economy in the next decade. China has recorded an impressive and consistent GDP growth rate of an average of 10 percent and minimal inflation of less than 2 percent in the last decade. The economy enjoys a current account surplus due to its net exports and growing domestic consumption that is propelled by the high population (OECD 2013). China financial system is capable withstanding financial shocks as evidenced by the 1997 Asian financial crisis when the country mobilised its foreign currency reserves and refrained from currency devaluation (Knight and Ding 2012). Meanwhile, China is focusing on growth policies that enhance research and development, improve competitiveness of small and medium sized businesses and enhance the overall foreign direct investments (Golub 2013). China enjoys high economies of scale in its production processes that have reduced the long run average cost of production and enabled the Chinese companies to attain efficiencies in their production process. The country has invested in modernising infrastructure through expanding sea ports, expanding the road network in Mainland area and improving the capacity of the airports. China has a higher technical economies of scale, high labour specialization and research and development economies of scale. On the other hand, EU has experienced declining economies of scale due to high control, inadequate cost control and standardization of the products. (Source: World Trade Organization) (Source: World Trade Organization) China’s rise in GDP since economic reforms (Source: World Bank). Export Trade surplus (Source: general administration of customs of china) 3.0 Current EU economic policy measures The EU has failed to stringently impose a prudent criteria for membership or enforcement of member state obligations regarding the national economy soundness such as the public debt requirement and GDP growth rate. In this case, some member states have accumulated high ration of public debt to GDP thus risking the competiveness of the entire EU region and credit rating of the single market (Gelauff, Grilo and Lejour 2008). Another weakness that is inherent in the current polices is the low degree of cooperation and collaboration among the national regulatory agencies in attaining common goals of economic growth, high foreign direct investment, trade surplus and high employment (Stajano 2009). 4.0 Alternative economic policies to counter the threat to EU economy There are several alternative policy measures that EU commissioner should consider in order to improve the competitiveness of the EU economy and counter the threats presented by emerging economies such as China (Golub 2013). Even though EU 2020 strategy has outlined the need to achieve sustainable and inclusive growth, it is clear that the policy measures contained in the strategy will not counter the current economic and financial challenges facing the EU and possible loss of overall competitiveness to new global players like China and India. The alternative polices aim at improving economic output, increasing employment, enhancing innovation, attracting high foreign direct investments and improving the net exports (Stajano 2009). 4.1 Bail out struggling member states Countries like Greece, Spain and Portugal have spread a financial risk contagion in the region thus leading to lower credit rating of the region. The best solution of helping the struggling countries is to write-off their sovereign debt and provides grants that will enable the countries to support growth of medium companies that will in turn create more employment opportunities in those countries (Golub 2013). The EU must increase the funding by stabilisation fund that will ensure countries that experience economic shocks are able to quickly access grants and loans in order to prevent further adverse impacts on economic growth, exports and unemployment (Golub 2013). (Source: World Trade Organisation). 4.2 Enhance research, development, and use of innovative technologies Research and development activities must be geared at discovering innovative production processes that reduce the costs of production through efficient use of raw materials and renewable energy sources. The EU Council must focus on competitive and innovation framework programme (CIP) that seeks to improve the use of information communication technology, enhancing the level of enterprise formation and implementing innovative solutions to emerging problems. The agencies that are tasked with ensuring competitiveness must channels funds to green technologies that aim at addressing the high cost component of energy in the manufacturing process (Chai and Roy 2006). 4.3 Improve liquidity of the financial markets and enhance access to capital The high inflation rates prevailing in some countries such as Spain and Greece has hindered the access to low cost capital by the medium sized enterprises. In addition, the sovereign debt crisis have led to lowering of the credit worthiness across European Union by the e international lenders thus leading to low access to credit in the economies. In this case, the European Council must work at measures of improving the liquidity of the national financial markets in order to enable the entrepreneurs to easily access business finance (Chai and Roy 2006). Accordingly, it is essential for the Council to implement measures that will test the tolerance of the domestic financial markets to international financial shocks like the recent financial crisis that have spread to most of the European domestic markets due to interdependence and integration of the global financial markets. This is an essential measure since the domestic banks and other financial institutions will prevent instances of holding high-risk assets that may lead to collapse of the banks (Golub 2013). 4.4 Focus on economic reforms The EU economy needs economic reforms that will address the economic challenges such as reduction in overall output and contraction of the exports (Stajano 2009). Concrete measures must be implemented to improve the growth potential from the current 1 percent to 2 percent in the next four years (Chai and Roy 2006). In this case, the economic reforms must focus on industry expansion, economic diversification and development since EU region relies on the traditional industries such as motor manufacturing, food processing and steel industry. The countries must invest in technology industries and tourism in order to stop the over-reliance on the dwindling (Golub 2013). Accordingly, the poor performing economies must implement reforms in transport, energy, research, industry, competition and internal markets while at the same time ensuring pubic administration reforms in tax collection agencies in order to avoid reliance on public debt in GDP financing. Some areas of reforms include the common agricultural policy that has limited the export of agricultural products within the EU region and the rules of origin that limit regional trade (World Economic Forum 2011). The EU must also enhance the formation of bilateral trade agreements with Asian countries such as Japan, Korea and South American countries in order to counter global players economic influence in those markets. All member state must remain committed towards low carbon economy and implement measures of attaining the 2030 emission targets such as subsidy schemes that will avoid distorting of the single market protocol (Golub 2013). 5.0 Recommendations The competiveness of EU region is threat by emerging global competitors like China and India. From the economic analysis, it is evident the EU is experiencing stagnating economic growth, declining research and development investments, lack of economic expansion and limited economic diversification (World Economic Forum 2011). On the other hand, China is a threat to the EU since it is experiencing sustained economic growth, increase in global export volumes, high investment in research and development and economic diversification. In addition, China is a threat to the EU since it has a higher economic of scale of production that has attracted foreign multinationals and impressive infrastructure that has reduced the overall business costs. China is also a threat since it has large skilled and cheap labour force and has signed numerous bilateral agreements with emerging economies in the Asian region. The EU should implement alternative economic policies that will ensure 10-year sustained GDP growth, high investments and increase in global exports in order to attain inclusive growth. The EU must invest substantially towards research and development activities that will lead to green manufacturing technologies and reduction in the overall costs of production. In this case, China is a threat since it has attained 10-year consistent and impressive economic growth and significant investments in innovation. The EU Council must be stringent on national regulatory agencies in order to ensure member states remain committed to reduction of public debt, inflation rates and high investments in their national planning strategies. EU Council must implement measures that will lead to development of good network of infrastructure, diversification of the industries and investment in education and technology sector (Golub 2013). In this case, China is a threat due to the huge reserves of foreign exchange, budget surplus and trade surplus that has enabled the country to invest in new infrastructure and economic diversification. The EU must improve access to information on lucrative and unexploited export markets such South American countries and Africa. At same time, the single market must form bilateral trade agreements with other countries and align EU product standards with the WTO standards in order to ensure greater trade linkages at the international markets level (Nello 2011). The EU economy should refrain from political rhetoric and mere threats that may lead to disintegration of the common monetary union thus hindering the attainment of global economic competiveness. In this case, the Union must support member states that are faced with sovereign debt challenges and political discontent through grants and bailouts that aim at stimulating the economic growth and ensuring growth of new enterprises that will create employment for the citizens (World Economic Forum 2011). In this case, China is a threat due to the current political stability and commitment to economic-oriented foreign policies that foster bilateral agreements. 6.0 Conclusion The EU has not attained sustainable and inclusive economic growth due to weak economies of member states and negative impacts of the recent global economic turmoil. Emerging global competitors like China have remained resilient in their economic outlook and poses serious threat to competitiveness of the EU in global markets. The EU is faced with high sovereign debt default risks, slowdown of economic growth, high inflation and rising energy costs. EU must invest in innovative technology, diversify the national economies, create liquid financial institutions, improve access to global markets and ensure labour market efficiency in order to remain competitive. 7.0 References: Baily, M.N and Kirkegaard, J.F. 2004. Transforming the European economy. Washington, DC: Institute of Internal Economics. Chai, J.C and Roy, K.C. 2006. Economic reform in China and India: development experience in a comparative perspective. Cheltenham: Edward Elgar Publications. Dressel, M. 2007. The EU and the knowledge economy: how increasing interaction puts an end to European integration. Munich: GRIN Verlag. Eichengreen, B.J. 2008. 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Competitiveness, social responsibility and economic growth. New York: Nova Science Publications. Stajano, A. 2009. Research, quality, competitiveness: European Union technology policy for the knowledge-based society. London: Springer. World Economic Forum. 2011. Eastern Europe and South Caucasus 2011: competitiveness outlook. Paris: OECD. Read More