Contemporary Management Issues essay
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The countries in Europe came up and formed the European Union that served as a single market and came up with a single currency for its members. The union has had a successful economic time in the past and its member countries have enjoyed low inflation rates, increased market access, low interest rates in the lending sector and increased employment opportunities. During this time, the membership grew and most of the countries in the union derived different economic and political benefits. The countries in the union have a higher chance of maintaining and increasing their macroeconomic hold in the markets. However, this changed and the countries now face economic problems that threaten the survival of the EU (Maier, 2005 p.65). The economic crisis in Europe started as a sovereign debt crisis about four years ago, but it is now an economic issue that has manifested into a euro currency problem, and now it is facing full-blown economic problems with the public and governments not believing in the capabilities of the European Union to fully recover from this economic crisis.
The economy is facing inflation problems, unemployment and most of its members like Greece are deep in public debt. The major problem that faces the EU is on making the decision on whether it is right to help bail out their member countries like Greece who are so deep into debts and help restore them to their previous economic status or leave them to solve the issues on their own. The other issues come from individual countries that use the euro as their national currencies. They are in a dilemma on whether to go back to using their currencies or continue with the falling euro. There are differences among the member countries with Germany being the most popular and are seen as the most prosperous and hardworking among the countries in the EU. This is why countries like Greece receive all the negatively publicity with their leaders receiving minimum respect from the other leader in the Union. The challenges facing the Union include deep recession affecting the countries that are highly dependent on the import and export sector. This is the dropping of the economic strongholds of the member countries (Malfliet, Verpoest & Vinokurov, 2007 p. 98).
These are evident in how the major industries like the motor industry in the region collapse making the countries dependent on the EU for investments to fall into deep economic hardships. The other economic problem facing the EU is the rising rates of unemployment seen in most of the countries under its membership .the union no longer has the abilities to create and guarantee employment opportunities in some of the member countries and this is worsened by the return of migrants to the member countries. The other problem is huge debts in a number of the member states. There are many reasons for the increasing government debts among the member countries like the aging population, which is no longer as productive as it was before and recession that hit Europe in the past few years. The other economic problem facing the EU is the deflation in the asset prices caused by the property ownership bubbles bursts. The currencies in most of the countries that do not use a common currency are depreciating. This causes many problems especially when it comes to solving the debts. This is because some of the member states do not readily accept some of the currencies. The banking system is not an exception when it comes to the problems facing the European Union. The banking system has very huge debts from both the government and business people or investors. It is difficult to pay off the debts making them suffer in the economic times. This makes it difficult for the EU to solve the economic crisis, as the banks do not have the capability to lend money. The FDI and other major investments no longer trust the EU economic capabilities and this has resulted in withdrawals of investments and low level of investor turnout in the recent years (Unceta & Arrinda, 2010).
Case study on the Greece Economic crisis
The Greece began using the Euro in 2001 and left its drachma in preference of the Euro. The reasons for Greece joining the EU varied, but mostly it was for the economic benefits they seemed to derive at that time. The first reason was to gain the transparency of a single currencies used in the market. This is because the country had imports and exports similar to those of the members of the EU. It was therefore, the best option to join the EU and use the same currency in an effort to improve their exchange rates and reach wider markets. The benefits of joining the European Union also benefited investors who wanted to import goods from other countries. Using the Euro instead of the drachma as a common currency did not put businesses at risk if one of the currency’s values went down. This is what they termed as a no exchange rate risk, which comes from the differences in the values of the currencies used during transactions (Unceta & Arrinda, 2010).
The benefits of the transparency in the prices ensured that the products made in Greece received a good market reception in the countries they exported their finished products to. The reason for this is that the countries importing products from the European union zone were confident in the currency used and therefore had no objection buying goods or any member country (Landesmann, 2004 p. 34). This way Greece had a secure export means and this gave them a guarantee in the international market. The investors would not incur loses form their investments increasing the returns to the country hence securing and improving the country’s economy. The transparency of the currency benefited different sectors from the hoteliers, to manufacturers and those in the shipping markets. This way it was getting income from different sectors increasing the country’s GDP and GNP. The Greece government and market sector enjoyed the privileges of operating under the EU for most of the years since it joined the group. This may be because of the high demand of the euro in the countries using the currency, the high spending of governments during the Olympic and the high spending rats of its citizens. This led to an expansion of the country’s economy in the same rate as that of Germany, which is considered the powerhouse of the EU currently.
There was minimum concern for the small country from the economic giants in the EU as they never fore so the country causing any imbalance in the EU’S stability. The country only contributed to a minimum of 4 percentage of the total GDP in the Euro zone. The problem never really manifested until the world financial crisis hit the EU zone. This is when it became evident that there were some countries like Poland, Greece and Ireland that were in deeper financial problems than expected earlier (Ho%u0308sli, 2002 p. 78). Many institutions in the EU had been spending a lot of money and borrowing excessively. This is however, was not a major concern as what really counted was the ability of the countries and the firms to pay back the debts.
Greece had taken debts to over 140 percent of the national income. This was not the case in the other countries in the union who had debts to about 80% of their national income. This was a major problem for Greece as a countries ability to pay and service debts depends on the percentage of the debts and its national income. The other problem with Greece’s ability to pay off the debts comes from its shrinking national income sources. The GDP keeps falling and the country is so deep in debt with the debt burden scale rising continuously. The government makes his worse with their continuous borrowing and these piles the debt to unimaginable debts.
The countries in the EU have to step in at some point and help the country through the European Financial Stability Facility, which is the second time the program is used to bail out Greece. The creditors also need their money, but luckily, for Greece, they agree to cut down 50% of what they owe to prevent Greece form defaulting on the terms of payments. Greece was under the Illusion that it was safe under the umbrella of the EU, but there are many problems with having huge debts and being a member of a strong union like the EU. The problem comes from the setting of the exchange rates, which have to be similar with those of the other member countries. The European Central Bank sets the exchange rates and Greece has no control over its monetary independence. The country cannot take advantage of the falling values of some of the currencies in an effort to increase their income or lower their interest rates (Fo%u0301ti, 2006, p. 65).
Greece can do nothing to change the economic growth when it comes to the macroeconomic sector because it has no control over the exchange rates or the lending rates. Therefore, it only options is the micro economy. The workers can volunteer to work for free and help pull their country out of the economic crisis. This happens when the workers work free and the productivity increases making the goods competitive in the euro market. This way there will be a decrease in the real exchange rates in Greece and this will increase the demand of goods and services from Greece in the other EU markets.
The economic crisis in the EU and especially in Greece has really affected the other countries in the union. However, countries like Italy who are also in the same crisis as Greece hope that the politicians in Greece manage to keep their country in the EU because it protects them against escalating interest’s rates on their international debts. This is because they are in a lot of debt and if Greece pulls out of the union, the lenders will assume it will be the next to leave the union hence increasing their lending rates. The countries have to come to the aid of their member states that are in crisis in order to prevent a word financial crisis that will occur if Italy pulls out of the EU considering that it contributes to over 18% of the GDP (Farrell, 2001 p. 89).
Greece being a member of the EU is an advantage on their side as they are able to borrow money and settle off some of its debts. This is a positive thing on the country that is facing tough economic times. This is because the country has security over their debts and the EU negotiates on its behalf when it comes to settling the debts. If it was operating independently, it may not be able to provide minimum services to its citizens because no one would want to lend their money and the creditors would not be as lenient with them as they are with the EU backing it up.