Business Economics of Europe - Essay Example

BUSINESS ECONOMICS The single currency proposes great opportunities for the s to improve their internal economic and political operations and protect their economies. This transformation of western European capitalism is reflected in the process of European integration as it experienced from the mid-1980s with the Single European Act (SEA) and the treaty of Maastricht, paving the way for the completion of the internal market and monetary union respectively. This new development of the single currency follow in five steps: (1) a stronger role for the European Council; (2) a common acceptance within the monetary Community of the goals of each national monetary policy; (3) a coordinated intervention by the European Central Banks to defend a country under pressure by speculative capital movements, either by loans or by sharing the burden of interest rates; (4) more stringent common decisions on the distribution of safety clauses for the member states; (5) a common standing by the EC in its international negotiations, particularly with the United States and Japan. Free trade is one of the main benefits of euro. With this 'relaunching', the European integration process has become increasingly biased in favor of deregulation and the free play of market forces, establishing the primacy of negative integration (market liberalization) over positive integration. European integration thus has come to be bound up with a restructuring of Europe's socio-economic order (Barnard 2007). The acceleration of European integration on the one hand, and the rise of neo-liberalism in Europe on the other, have become intertwined inasmuch as the relaunching of Europe went hand in hand with the reconstruction of the post-war order of European capitalism along predominantly neo-liberal lines. The free market has always needed the state for both its emergence and its maintenance. In political economy, the market is not a 'spontaneous order' (Barnard and Scott 2002), but rather a social and political construction, hence, in this sense, as is also stressed by the new institutionalism in economic sociology, the economy is always embedded in society (Barnard and Scott 2002). Euro is defined as a single European accounting currency and an official currency of the European Union. "The role of the euro as an international investment currency, anchor currency and reserve currency is inseparably associated with its internal stability" ((Barnard and Scott 2002, p. 54). Today, this is an official currency 15 Euro states and Eurozone. Euro was introduced in 1999, but practically launched only in 2002. Critics admit that: "the euro has a good chance of becoming a lastingly stable currency, respected by the markets and the population alike. Domestic stability is at the same time the best contribution the euro can make to a sound, viable and stable global financial system in which the financial market players can act in a spirit of responsibility" (Barnard and Scott 2002, p. 54). The advent of a single European currency, alongside enlargement and the growing international role of the EU, as codified in the SEA, TEU and Amsterdam Treaty, gives rise to questions regarding the type of actor the EU constitutes for external partners at the start of the twenty-first century. In this respect, debates over the EU's future parallel some of those which preoccupy Japan in the post=Cold War world. Euro makes possible a higher level of competition for the EC as well as increases its economic growth and ability to face international competition. Clearly, the EC's internal market is also affected by the scope of its commercial transactions. Compared to the United States and Japan, where international trade accounts for only 6 and 13 percent of the GNP, foreign trade is much more important to the economies of the EC (Bieler and Morton 2001). Besides, the internal market reinforces the significance of trade between the members, which is already around 55 percent of the Community's foreign trade. This increase of the EC's foreign trade results in a double challenge for the private companies in the Community: to compete in euro as well as in the international marketplace where they contend with the United States, Japan, and other industrialized Asian countries. In order to succeed, EC enterprises have to reach a size corresponding to the role that they want to have. Today, they are rarely sufficient in size to compete with American or Japanese firms. The firms that produce the most advanced technology are also handicapped by the remaining technical barriers and the currently split internal market. These enterprises need much investment, but cannot always obtain the needed venture capital because the national banking systems lack dynamism and a sense of competition. Mainly, they cannot improve the profit-making capacity of their investments by means of large-scale production because the lack of common technical specifications makes competition difficult. In order to sell a product, it must be adapted to national criteria, a unique sales network must be established, and a different organization put in place in each state. This lack of common ground considerably increases the financial burden of production, which in turn results in higher prices for the consumers. In short, euro would allow Community enterprises to benefit from economies of scale, to increase the value of their specialties, to improve their relative advantages, and to regain the capacity to compete with American and Japanese companies. The costs of research and development will only lead to profits if the enterprises can create an economic playing field without barriers (Deeg 1999). "The major criticism of regulatory competition is that unfettered regulatory competition would lead to a "race to the bottom" where regulators, competing for constituents, minimize their regulations to such a degree that their regulations provide less than adequate regulatory protection" (Pan 2003, p. 499). Euro brings new opportunities for the small and medium enterprises (SME) as well as the risk of fatal dangers. Because of its scope, the SME could be in worse condition compared to larger enterprises in three sectors: information, adaptation to new regulations and financing. The Community legislation is changing and it is essential to have adequate information. Although more vulnerable to a change in the rules, SME frequently resist any management change which makes their tasks more difficult and require additional formalities. They do not have specialists in Community affairs available who are knowledgeable about the judicial and economic complexities of the EC. The removal of technical borders requires adaptation to new regulations. To be compatible with those requirements implies frequently a change in the makeup of the products and their means of manufacturing. For a SME, this leads to a major reorganization if not bankruptcy of the firm (Menz 2005). The opening of the internal market requires better organization, including the acquisition of new technology and investing. Additional sources of funds are therefore necessary. The SME have fewer financial facilities at their disposal than major companies. The SME are frequently handicapped by lack of capitalization and by greater difficulty in obtaining risk capital (Pan 2003). Euro only makes sense if it reinforces competition between enterprises. If it only leads to the creation of oligopolies entrenched in each state of the EC and sharing the Common Market in splintered national markets, euro will achieve a result contrary to what was expected. This brings up again the problem of Community legislation of competition and of corporate legislation The Community policy with regard to competition applies mainly in two directions: the control of enterprises (mergers leading to dominant positions, agreements on market share or prices) and the control over the member states (national subsidies). Regarding company legislation, the Commission for too long attempted to mesh the laws of commercial enterprises relating to accounting, advertising and reorganization. The White Paper presents a proposal for a European Company Limited. This is intended to facilitate the formation of an alternative judicial framework on the scale of the Community and to become an instrument for the necessary industrial cooperation in a unified internal market (Barnard 2007). Because of the rules of origin which bring with them bureaucratic complications, products coming from European Free Trade Association (EFTA) are under more severe control when they cross the border into Community territory than those from the EC. The formalities are more involved, since the actual origin of the product must be established as well as national content. Finally, the rules are so complex and unclear that they discourage exporters. Another issue that must be examined is the problem of the passive improvement of textiles which permits merchandise partially made in Morocco to be considered as originating in the Community. The Swiss manufacturer cannot benefit from this clause, which allows part of a product to be made in regions where the cost of labor is cheap. The EC's new approach is based on the principle of mutual recognition. From the moment a product is approved in its country of origin, it does not have to be registered again in the country to which it is sent (Barnard 2007). Facing the impossibility of harmonizing the hundreds of millions of rules, the EC preferred to develop the idea of compatibility. Producers in the EC will be able to make a product according to their national regulations without having to modify it to fit the laws of other states. Conversely, the producer will have to continue to meet the regulations of all twelve markets. The EU will not be able to achieve economies of scale. "If the EU enlargement and the constitutional changes that the EU is currently undergoing "lock in" the tensions inherent in socialist redistribution, the EU will fall apart amid economic decay and recrimination" (Tupy 2003, p. 179). Observations made over the last few years show that the probability of being refused incorporation is relatively small, but the lack of guaranties creates a handicap all the same. It's like being able to use a country club without being a member only because you are friends with the manager. "But one day the rules could be more strictly enforced because of too many similar kinds of abuse and you'll be left outside" (Tupy 2003, p. 179). Single currency can protect the EU countries against the destabilizing effects of foreign exchange speculation and thus "would strengthen democracy in the Union by restoring decision-making to elected representatives rather than unelected speculators". (Barnard 2007, p. 43). During the Maastricht negotiations Delors in vain pleaded for a 'political roof ' for eurp which would consist not only of a common foreign and security policy but also of a Community fiscal and social policy carried out by a reinforced 'European government' that could counter-balance the new European central bank. Thus, all large SMEs nowadays have a so-called foreign exchange or FOREX department through which they trade in the global money market to insure themselves against currency fluctuation risks. In sum, the industrial capital 'represented' by the Roundtable is therefore far from completely separated from financial capital. Indeed, some of the European Round Table (ERT) members - through their directorships at financial institutions, or through their double position as head of both a financial and an industrial firm, or because a part of their company is in fact active in the financial sector - should be regarded not as industrialists proper but as finance capitalists. As with a single currency, the risk of currency fluctuations will be much less, which will cut costs and promote economic growth ((Barnard and Scott 2002). Both transnational banks and transnational corporations would thus strongly favor euro. This was therefore, then, also certainly the case for a section of the ERT; however, support was especially strong among those still heavily focused on the European market and less among those companies much more oriented to the world market. Those who did strongly favor the single currency, mostly within the Europeanist camp then, often did so in a language that still had some neo-mercantilist undertones. Thus, next to the transaction cost argument, another often heard argument was that Europe also needed a single currency because this would strengthen Europe vis-'-vis the USA, whose dollar dominated the world economy (Barnard 2007). In general, the implementation of social and regional policies as well as the necessary research activities is expensive, and the financial system of the Community had to be modified to supply new financial resources. Secondly, in reference to political problems, it can be noted that certain states attempt to reinforce their power and influence by means of an apparently minor discussion of a technical problem (Menz 2005). For instance, beyond the legitimate complaints of the British government about its contribution to the budget, the frequently challenging attitude of London tends to indicate the will to have its viewpoint respected and at times to impose its political concepts and philosophy, less inclined to state interventions (Barnard and Scott 2002). Euro helps to establish the unity of the European transnational capitalist class, but it is a gradual process taking place through struggle. The political ambitions of the twelve member states are not the same. Formidable economic interests are in play. The greater role conferred upon the Parliament complicates and continues to burden the decision-making process. Monetary union became of course the heart of the Maastricht Treaty, and its failure or success the linchpin around which the integration process presently revolves (Barnard 2007). The main threat of joining Euro is possible economic crisis affected Europe. Europe economy is unstable influenced by political and social changes. In the case of the Euro, however, the change is not going to be a simple decimal shift, but a change that will involve five significant places, a truly barbarous fraction, in moving from Euro to national currency, or back again (Minford n.d.). When it happens, it will be deeply unpopular. It is a master stroke, to leave this shift in national currencies into Euro notes and coins for several years, until the operation of Euro wholesale markets and the central monetary and macro institutions for the ESCB had already fully bedded down. The Euro, in effect, would be a fait accompli, before the implications of the change would seriously affect the ordinary person in the street. Indeed, the whole EMU process is both fascinating and unique; never before in history have a number of separate national, sovereign countries agreed to pool their sovereign control over money within the adoption of a single federal monetary system. There are only two allowed methods for paying off debt (Barnard and Scott 2002). The first is by raising net tax revenues, relative to expenditures; the second is through a form of inflation tax. Consequently, under this theory, if there is no political will to raise the primary surplus, then the inevitable way in which the existing debt is effectively reduced must be through an inflation tax. Even when the money stock is tightly controlled, equilibrium can only be achieved by reducing the level of debt, to that which people are prepared to hold, through some measure of inflation. So, inflation has to be the equilibrium outcome (Barnard 2007). The key assumption, however, is to rule out any possibility of another way of dealing with excessive debt, which is direct default. Given the lack of will in certain cases to raise the primary surplus, the decision whether to default, or to allow a massive inflationary tax, would not necessarily go in favor of the latter. Moreover, markets, faced with the prospect of either being defrauded by inflation or by direct default, would raise interest rates in advance of either event so rapidly and so fiercely that governments would rapidly be faced with the impossibility of raising more debt on such markets, and should monetary growth still be controlled, (as it would be by the ECB in EMU), would then be forced into default ((Barnard and Scott 2002, p. 54). The market process would seem much more likely to drive excessive deficit countries within the Eurozone into default than into hyperinflation, given the inability to control monetary growth for such a debt-raising government body. It is against this background that the limitations on the ability of member countries within the Eurozone to increase their debt without limit by raising deficits above 3 per cent of GDP should be seen (Barnard 2007). Exchange rate policy for the euro has been a matter of debate. "It is true that differences in inflation are now small but that has been so now for at least a decade and a half; this has not stopped very large swings in the exchange rate due to these other reasons which affect the 'real exchange rate' (that is, the exchange rate adjusted for relative inflation.)" (Barnard 2007, p. 43). The experience of German, French and Japanese ministers is an example of monetary policy. German, French and Japanese ministers of finance have called for exchange rate targets between the euro, the U.S. dollar and the Japanese yen, while the President and the Vice-President of the European Central Bank, the Chairman of the Federal Reserve Board and a US Secretary of the Treasury have opposed the idea. (Central bankers tend to dislike exchange rate fixing because it constrains their room of maneuver, and, shortly before elections, incumbent politicians may need their support.) They have stressed the well-known instability of adjustable peg systems. But the theory of optimum currency areas is also relevant (Barnard and Scott 2002). If Britain joined EMU, regulatory competition would suffer as well. Financial regulation of the City of London is known to be liberal - more liberal than regulation on the continent. Up to now, the regulation of banks has remained in the hands of the national institutions. But the President of the ECB has called for the centralization of banking regulation in the hands of the ECB. If Britain joined EMU, reserve requirements could easily become more stringent (Barnard 2007). The main disadvantage of this currency is financial instability and inflation. Many countries do not invest in Britain because of its monetary policies and the unstable exchange rates of the pound. Because of its current policies, Britain lost its influence in Europe and around the world. The search for a new way of conceptualizing power and international responsibility continues in Europe, within the framework of an international discourse that is already familiar to both ((Barnard and Scott 2002). This contemporary discourse is one in which previous questions of 'high' versus 'low' politics have to some extent been replaced by a debate over the types of issues that have to be confronted in this new international environment. Critics admit that joining the Euro will help the country to increase standards of living and maintain financial stability. Europe is the largest market it deals with. Without a single stable currency, many companies cannot operate effectively in Europe. Economists admit that since 1999, The EU's attitude towards this kind of security debate leads to the promotion of international cooperation through preventive diplomacy, confidence-building measures, peacekeeping and the management of regional crises, which are all characteristic themes of civilian power discourse. However, despite the presence of 'neutral' states in Europe, the role of the military is seen to be fundamental to securing stability, and to actions that are consistent with political, economic and humanitarian aspects of European crisis management. If Britain joins the Euro, it will overcome economic crisis and improves its economic and political position in Europe and around the world (Barnard and Scott 2002). In sum, euro entails the removal of all those barriers and factors which inhibited free movement. Thus, the challenge of integration is that nation-states are against enlargement outside the EC. Externally, euro is meant to strengthen EC competitiveness in world markets, especially against the United States and Japan. But it can weaken internal market and lead to economic crisis affected the EU member states. It is possible to say that the main challenges of euro are political. As for political movement on the domestic front, the capstone of progress is to be national identity of the nations and their self-identification, with the commitment by the member states to a transformation of 'the whole complex of their relations into a European Union before the end of the present decade. There is little indication of how economic cooperation would transform itself into political union. The overarching concept of political union remains undefined, sufficiently vague to be acceptable to all the member states without presenting a threat to any. Bibliography Barnard, C. 2007, The Substantive Law of the EU: The Four Freedoms. Oxford University Press; 2Rev Ed edition. Barnard, C., Scott, J. 2002, The Law of the Single European Market: Unpacking the Premises. Hart Publishing,. Bieler, A. and A.D. Morton (eds). 2001, Social Forces in the Making of the New Europe, Basingstoke: Palgrave. Deeg, R. 1999, Finance Capitalism Unveiled, Ann Arbor, MI:University of Michigan Press. Menz, G.2005, Varieties of Capitalism and Europeanization: National Response Strategies to the Single European Market. Oxford University Press. Pan, E. J., 2003, Harmonization of U.S.-EU Securities Regulation: The Case for a Single European Securities Regulator. Law and Policy in International Business, 34 (1), pp. 499-501. Tupy, M. L., 2003, European Integration, 1950-2003: Superstate or New Market Economy' The Cato Journal, 24 (1), pp. 179-203. Read More