The Current Global Financial Crisis In Eu

Published Date: 02 Nov 2017

Figure 1- Pressing Problems of Companies

Figure 2- Portugal Consumer Spending

Figure 3- Spain Consumer Spending

Figure 4- Companies’ use of Internal and External Financing in the Past Six Month

Figure 5- Loan Rates in Europe

Figure 6- Currency Trend EUR/USD from 2009

Figure 7- Currency Trend EUR/GBP from 2009

Figure 8- Annual Currency Trend EUR/USD from 2010

Figure 9- Annual Currency Trend EUR/GBP from 2010

Figure 10- Annual Growth Percentage of GVA of EU SMEs by high-and low-tech manufacturing and high- and low knowledge-intensive services, 2009-2012 (estimates)

Figure 11- Annual Growth Percentage of employment of EU SMEs by high-and low-tech manufacturing and high- and low knowledge-intensive services, 2009-2012 (estimates)

Figure 12- Government Debt to GDP Ratio, Q3 2012 in Percentage

List of Appendixes

Appendix A- Analysis of Possible Consequences of EU in the Future

Introduction

The reason of writing this essay is to assess the influence of the current global financial crisis in terms of the Governments, companies and consumers. In the analysis, it is evident that, although the global financial crisis aggravated the economic situation of European Union (EU) member countries, it did not solely determine the crisis. Furthermore, it is argued that the crisis has been undervalued in the first two scenarios and described correctly as collapsing house. Also, the economic system of European Union is fundamentally flawed. However, if the European Union could successfully solve the issues, rebuild the confidence of the world and stimulate the integration of EU member states, the system would be more complete and the European Union would be more interdependent.

In this essay, first of all, in the section which assesses the current global financial crisis, an overview of the current global financial crisis as a form of European debt crisis will be briefly discussed. Then, it will discussed the consequences of the crisis on business and companies in European Union member countries, including difficulty in finding customers, access to finance and currency risks. After that, the relatively less influences on high-tech and knowledge-intensive industries will be succinctly discussed. Next, the assessment of the proposed scenarios and the implications on companies in European Union will be analysed. In this section, after a brief mention of the correct descriptions in the first and second scenarios, the Scenarios three will be focused on and key components in this scenario will be discussed in details. For instance, it will prove that the EU member countries have been suffering from their fundamental issues, including lagging industrial reform, unstainable social welfare system, unreasonable single monetary policy and lack of common treasury. Besides, in response to the crisis, some policies have been adopted by governments in member states in relation to including increasing tax revenue, reducing deficit, recovering economic growth and stimulating industrial reform. Besides, strategies such as reducing cost, creating competitiveness and diversifying investment have been adopted in order to survive in the crisis. Eventually, consumers tend to be less interested in new products, purchase less and purchase cheaper products online or overseas. Finally, a conclusion will be drawn to recap the remarks, limitations and reflection of this essay.

Assessment of the Current Global Financial Crisis

Overview of the Current Global Financial Crisis in EU

Because of the global financial crisis (GFC), most countries, companies and consumers are all over the world influenced in a way or another. In Europe, several countries have been involved first and at the same time aggravated the situation of other EU member countries as so-called European Sovereign Debt Crisis. As will be discussed in this report, the economy of the EU countries has been damaged to some extent, especially those PIIGS countries, as a form of economic recession, high unemployment rate and so on. As a result, some policies have been established in order to offset the negative consequences on a state level. Also, the business sector, as an engine of the economy, has been particularly influenced. For instance, as shown in Figure 1, according to a survey conducted by EC and ECB, the most urgent problems that the small and medium entrepreneurs in EU member countries are experiencing are the difficulty in finding consumers and access to finance. Consequently, although Naidoo (2010) argued that many firms could have survived through some marketing innovation and business strategies, a number of companies eventually went bankrupt. However, some industries in EU remain a relatively high growth compared with others during the recession.

Figure 1- Pressing Problems of Companies

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\ML6R7G}28YS%_F[HN93J[_U.jpg

(Source: EC and ECB, SMEs’ Access to Finance Survey 2011 Analytical Report (7 December 2011).)

Consequences of the Crisis on Business and Companies in Europe

To begin with, because of the crisis, it is difficult for companies to find consumers and sell their products. Basically, due to the crisis, the price of most raw materials as input went up, which ultimately increase the price of the end products, leading to a deceasing demand. Besides, some consumers who have been unemployed during the recession time are likely to reserve their money instead of spending them. Even for those consumers who have not been seriously influenced, they are likely to reserve their money too because the future economic situation is uncertain. As shown in Figure 2 and Figure 3 shown below, there is a sharply decreasing trend in consumer spending in Portugal and Spain. The companies, as a result, found it difficult for them to sell their products due to less consumer spending. Logically, this is proved to be a negative endless loop because if companies continuously find it difficult to sell the products may tend to hire fewer workers and as a result the unemployed workers tend to purchase less, and damage the companies’ profit in return.

Figure 2- Portugal Consumer Spending

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\HKJ%J$]H(4Q3[B1M}5{0E{K.jpg

(www.tradingeconomics.com | National Statistics Institute, Portugal)

Figure 3- Spain Consumer SpendingC:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\{8AZ`[60ZB_D2OV%UXVZSRJ.jpg

(www.tradingeconomics.com | National Statistics Institute, Spain)

Furthermore, the reducing accessibility to finance also damage companies in EU member countries. Since the crisis, there has been a constantly tightened credit standard, which made it difficult for companies undertaking debt financing (Cappiello et al., 2010). It is evident that the SMEs in European countries normally use external financing, such as bank overdraft, trade credit and bank loan (Figure 4), than internal funds financing (Hernández-Cánovas and Koëter-Kant, 2011). A tightening credit standard ultimately reduce firms’ accessbility to finance and therefore reduce the firms’ vability durding a crisis. As shown in Figure 5, there is a drastical difference with regard to the loan rates in EU member countries. The loan rates remained low in countries where unemployment rate was low and economy was relatively strong such as Germany, Netherlands and France. On the contrary, the loan rates reached over 5 percent for those countries with high unemployment rate and troublesome financial crisis such as Spain, Portugal, Cyprus and so on. For firms in those countries, they had limited accessbility to finance because it became expensive for them to repay the interest of their loan. In brief, it became more difficult for companies in some EU member countries to access to finance due to the crisis.

Figure 4- Companies’ use of Internal and External Financing in the Past Six Month

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\%~PR28Q8[[email protected]

(Source: EC and ECB, SMEs’ Access to Finance Survey 2011 Analytical Report (7 December 2011).)

Figure 5- Loan Rates in Europe

http://s.wsj.net/public/resources/images/OB-WY682_EURATE_E_20130405145250.jpg

(Source: http://blogs.wsj.com/economics/2013/04/05/euro-zone-lending-rates-differ-drastically-by-country/?mod=wsj_streaming_stream)

Moreover, because of the crisis, euro became an extraordinarily volatile currency and influenced EU member countries in three senses, including enhanced competitiveness, repayment to their debts and more currency risk. To begin with (Figure 6, 7, 8 &9), with the constantly decreasing value against other strong currencies, the exporters in EU member countries might find it easier than before to sell their products globally. However, in this case, the companies owing debts overseas may find it becomes more difficult for them to repay their overseas debts because they have to pay more with Euro. Finally, because of the floating currency exchange rate, it becomes more uncertain for firms to predict what the Euro will be worth. Under this circumstance, it is difficult for firms to predict future cash flow and budget for future business activities.

Figure 6-Currency Trend EUR/USD from 2009

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\TA(ATL5)V8(CA`~X8_30LSA.jpg

(Source: http://www.oanda.com/currency/historical-rates/)

Figure 7-Currency Trend EUR/GBP from 2009C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\7(OK%SR@S5%$YZQC1ZI2J]G.jpg

(Source: http://www.oanda.com/currency/historical-rates/)

Figure 8-Annual Currency Trend EUR/USD from 2010

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\{[R(MU[$E@W7U@T3]4]2Z$L.jpg

(Source: http://www.oanda.com/currency/historical-rates/)

Figure 9-Annual Currency Trend EUR/GBP from 2010

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\T8WXELS5S`}T7HKUB`T]N}M.jpg

(Source: http://www.oanda.com/currency/historical-rates/)

Eventually, although some companies went bankrupt, some survived with relatively high growth rate. As is known, the labour-intensive industries were mostly influenced in the crisis during which several laws have been revamped in order to save companies and, ultimately maintain employment (Ball, 2013). Nevertheless, as mentioned before, countries such as Germany have maintained a relatively stable rate of unemployment rate and economic growth. Some argued that the major reason for the remarkable sustainability of these countries is that they have higher portion of technology- and knowledge-intensive SMEs. As shown in Figure 10 and 11, the high-tech companies remained a higher growth while the high-tech knowledge-intensive companies provided more employment opportunities. Hence, it could be concluded that the crisis has less influences on the technology-intensive and knowledge-intensive companies.

Figure 10- Annual growth percentages of GVA of EU SMEs by high- and low-tech manufacturing and high- and low knowledge-intensive services, 2009-2012 (estimates)

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\HOYQ9V~@V{2HV@ZA`JRE`AN.jpg(Source: Source: Eurostat/National Statistics Offices of Member States/Cambridge Econometrics/Ecorys)

Figure 11- Annual growth percentages of employment of EU SMEs by high- and low-tech manufacturing and by high- and low knowledge-intensive services, 2009-2012 (estimates)

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\CFFNNH}@VZYLR_VUB%M}B7Y.jpg

(Source: Source: Eurostat/National Statistics Offices of Member States/Cambridge Econometrics/Ecorys)

Assessment of the Proposed Scenarios and the Implication on Companies in European Union

Scenario 3 as the Most Correct Description of the European Debt Crisis

In the three scenarios, the scenario three best explained the global financial crisis in Europe and the other two partially explained it. To begin with, the first scenario described PIIGS countries, namely Portugal, Italy, Ireland, Greece and Spain, as leaky pipes in the global financial crisis (GFC) in Europe and it outlined the ineffectiveness and inefficiency of money that flow from lender to debtors. Secondly, the scenario two expressed that the massive government intervention and loose monetary policy failed to solve the crisis. Because of high level of and high dependency on public debt, sudden lack of credit leaded to difficulty in refinancing by rolling over and the low interest rate made no room for expansionary monetary policy to react (MATHERON et al., 2012). However, the problem of the crisis in Europe has been undervalued in these two scenarios. What is worse, they failed to indicate the systemic problem existing in the European Union.

In the third scenario, the European Union has been correctly described as a collapsing house with widespread credit crisis and high level of average budget deficit to GDP. Basically, as stated in the text, the front half of the hurricane attacked the European Union in 2009, followed by massive injection of capital as a form of government loan, government invention and emergency measures from European Union as stabilizer (Buerkle, 2012), and it came to the ‘eye’ of hurricane. However, failure to reform the system quickly leaded to the second half of the hurricane in 2011 (Kozlowski, 2012). In addition, rather than just focusing on PIIGS countries, Scenario 3 described the economic system in the European Union as a collapsing house. In this case, except the famous the issues in PIIGS countries, it is evident that the crisis itself has been extending throughout most member countries in the European Union, including leading economies such as France and Germany. For instance, except of the credit crisis and continuously reduction in the credit rating valued by Statistical Rating Organizations including Moody’s, Standard & Poor’s and Fitch Group, the average budget deficit to GDP remains a high level at mote 4 percent in European Union’s member countries within which Estonia, Sweden, Bulgaria and Luxembourg and Latvia are the only countries reached the standard of 3 percent (Nick, 2013). At the same time, the average debt to GDP ratio reached a high point at over 85 percent in 2012 (Figure 12). Moreover, flight of capital overseas also influenced the liquidity in the European Union (Shmuel, 2012). In brief, the crisis has become widespread and, as mentioned in Scenario 3, the Western economic system might be fundamentally flawed.

Figure 12- Government Debt to GDP Ratio, Q3 2012 in Percentage

C:\Documents and Settings\Administrator\Application Data\Tencent\Users\199290328\QQ\WinTemp\RichOle\PLD_5$DS5D6TQQ((TX%5KV2.jpg

(Source: Eurostat, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23012013-AP/EN/2-23012013-AP-EN.PDF)

Besides, Scenario 3 outlined the possibility of some fundamental flaws, such as lagging industrial reform, unsustainable social welfare, unreasonable single monetary policy and lack of common treasury, behind the surface phenomenon. On one hand, on a state level, the most influenced member countries by the crisis have a weak economy with high dependence on labour-intensive manufacturing exports industries or tourism. With the development of globalization, the European countries are losing their advantage compared with emerging countries such as China, India and South Africa in terms of labour-intensive industries (Pomeranzt, 2002). Also, based on a global recession, the tourism industry has also been affected (Dhaka, 2011). On the other hand, on the European level, unsustainable social welfare system and lack of common treasury are root causes. First, the social welfare of some European countries is financed with debt, along with low government tax revenue caused by expansionary policy in response to the slow growth during the crisis (Samuelson, 2011), contributing to a popular but weak and unsustainable welfare system. Second, the economic differences among the European countries greatly vary and therefore a common monetary policy only targeting controlling inflation is unreasonable. In order to create more flexibility in European Union, a common treasury is required. Nevertheless, the European Stability Mechanism established in 2012 (Asian News Monitor, 2012) has been expected to be a substitute of a common treasury. In conclusion, Scenario 3 successfully implied some root causes behind the crisis and considered them as fundamental flaws.

Policies Adopted by Governments in European Union Member Countries

In response to the crisis, although there is yet no effective solution on a state level, there are some policies adopted by member countries, contributing to a more sustainable economy by increasing tax revenue, reducing deficit, recovering economic growth and stimulating industrial reform.

First of all, on one hand, member countries took action to increase their tax revenue in order to meet the repayment of debt. Since a long time ago, EU has maintained an expansionary monetary policy in order to stimulate the economic growth (MATHERON et al., 2012), which leaded to a low level of fiscal revenue as a form of tax revenue. Additionally, because of the impact of global financial crisis, the profitability of most industries has been influenced, which caused even less government tax revenue, aggravating the situation. As a result, EU member countries started to reduce the minimum threshold of income tax and at the same time introduce new types of tax (Lichfield, 2012).

On the other hand, it was also important for member countries to reduce deficit. It is known that EU member countries have an inadequate social welfare system with high government expense highly relying on debt instead of on government revenue. In this situation, governments of EU countries focused on fiscal austerity, cutting down the wages of government employees and remarkably reducing the portion of GDP spent on pension, health and the other social welfare (Monastiriotis et al., 2013).

Furthermore, while reducing government expense and increase government revenue could not be seen as an effective and efficient solution in the long-term, the most basic and effective measure is to recover the economic growth and boost the competitiveness. In this case, in terms of labour scarcity, member countries have raised the average age of retirement, especially an increase for female workers to reach a similar retiring age as male (Somaskanda, 2012). Besides, given a situation where some member countries have been experiencing labour scarcity while some others have high unemployment rate or skill mismatch, policies on labour migration has been adopted to encourage workers move across borders, helping meet some specific demand of the labour markets (Chaloff et al., 2012).

Finally, in order to prop up the economic growth and create advantage against emerging economies, member countries has established policies to stimulate industrial transfer from labour-intensive industries to technology-intensive and knowledge-intensive industries (Moravcsik, 2012). Because of the loss of competitiveness in labour-intensive industries compared with emerging countries, continuously focusing on these industries became an unsustainable path of future development. It is suggested that the member countries could take advantage of the positive impact of the crisis as an opportunity and start the process of industrial reform, which leads to a potential growth in the long-term (Bouis and Duval, 2011).

Strategies Employed by Companies in European Union Member Countries

Moreover, companies influenced during this period also have some strategies in relation to the crisis in the manner of reducing cost, creating competitiveness and diversifying investment.

To start with, influenced companies started to reduce their labour cost. As mentioned above, the whole European countries have been severely hit by the global financial crisis. There was a sharp decrease in consumers’ real income and therefore a backward purchasing power. Consequently, companies in EU member countries found it difficult to sell their products during the recession period, which meant that they had excessive productivity. Hence, when the fixed cost was unchangeable, the most effective and easiest way for them to reduce loss is to reduce their labour cost. As a consequence, companies used strategies such as replacing full-time workers by part-time workers, employing more female workers, asking for longer working hours without extra pay to reduce their labour cost (Bricongne et al., 2012). Last but not least, given constantly reducing demand, companies also used some marketing strategies to encourage consumers to keep purchasing (Grant, 2010).

During this period, it has been considered as an opportunity for companies to increase their competitiveness and gain more market share. As is known, sometimes challenges also mean opportunities. In European Union, because of the stable business environment, companies remained a dynamic balance with relatively constant competition. Companies became vulnerable in this situation where they are not likely to face the choice of survival or extinction. During the recession, not only small businesses but also huge businesses have been influenced and the only way to survive is to boost their competitiveness, producing more effectively and efficiently than competitors. In other word, in the industrial reshuffle, the failure of firms to increase their competitiveness causes bankrupt and therefore their competitors that successfully survived gain higher market share. Generally, successful survival in such a reshuffle automatically increases a company’s market power and competitiveness. Thus, in order to survive in the crisis, companies had to employ some strategies to increase their competitiveness, majorly by increasing their productivity and reducing their cost of production, such as undertaking research and development and hiring more advanced technology in production (Naidoo, 2010).

Also, some companies realized that it is dangerous to put all eggs in a same basket. As a result, they started their process of diversifying their investment, which remarkably increase their chance of survival during a sudden crisis (Hart, 2010). As mentioned, not only the crisis itself, but also the high labour cost reduced the competitiveness of companies in EU member countries for exporting their products, which became one of the reasons of the movement of production overseas. In addition, with the significant development of emerging economies, in order to take advantage of inexpensive labour cost and growing market, recent years saw an increasing number of companies investing and setting up production in developing countries (Gereffi and Frederick, 2010).

Choices of Consumers in European Union Member Countries

As the most basic part of an economy, consumers had to make some choices in response to the crisis as well. Basically, a reduction in real income and purchasing power, along with an uncertainty of future discouraged consumers from purchasing. In this case, except restricting themselves from purchasing, consumers tend to be less interested in new products and purchase cheaper products online or overseas.

First, consumers chose to restrict themselves on purchasing. The most powerful disadvantage of the crisis is that there was a sharp increase in price of raw materials as essential inputs of production. As a result, it actually increased the price of output because firms eventually passed the costs to consumers. In this case, consumers may find that the cost of living is becoming higher and higher and they have less purchasing power than before. Along with the fact that consumers have negative future expectation in terms of decreasing real income and retrogressing social welfare, they might choose to buy less and save the money in case of a further crisis in the future (Tiongson, 2010).

Second, they may have less interest about some new products. As mentioned above, consumers started to reserve their money when there was a high level of uncertainty in the future. New product, such as fashionable cloth, phones and computers, are normally much more expensive than the old ones. Given the situation where consumers became cautious on money they spent, consequently, it reduced their interest towards some new products (Tatsiramos, 2009a).

Third, purchasing cheaper products from emerging countries became a trend of consumption in EU member countries. Logically, when consumers are experiencing two similar products with different prices, normally they choose to purchase the cheaper one. Similarly, on a global level, consumers in EU member countries are choosing between similar products with different prices produced locally and overseas, and they intended to purchase those from overseas. Meanwhile, the significant development of global transportation and e-commerce provided an essential platform for global purchasing (Pavlínek, 2012). Although overseas purchase may be slow in time, however, it is becoming a trend that people purchase what they need overseas via internet except for those products needed immediately (Naseri and Elliott, 2011), which is a trend of market globalization in the future.

Conclusion

In conclusion, the current global financial crisis and proposed scenarios and the implications on companies in European Union have been analysed. In the analysis, the Scenario 3 most correctly outlined remarkable influences of the global financial crisis in Europe on member countries, companies and consumers in the European Union. However, it has also been evident that the fundamental causes of the European debt crisis are the systemic flaws rather than just the issues in the financial sector. As a result, it requires systemic revamps to solve the issues as a form of lagging industrial reform, unstainable social welfare system, unreasonable single monetary policy and lack of common treasury on a Europe-wide level. Besides, firms in European Union member countries struggled to survive by employing strategies including reducing cost, creating competitiveness and diversifying investment. Finally, consumers made their choices to reduce purchasing, to be less interested in new products and to purchase online or overseas for cheaper prices because of decreasing purchasing power and increasing uncertainty about future.

There are some limitations in this report, it failed to analyse how the issues interact with economy, the political influences of policies and the future trend of the European Union. Firstly, for example, in order to meet the payment of the debt owed and therefore reduce the debt to GDP ratio to a healthy level, governments had to levy more tax and reduce their deficit via fiscal austerity. However, fiscal austerity ultimately results in a further recession, which is not sustainable for the economy in the long-term. Secondly, fiscal austerity, which includes cutting down the funds spent on pension, health and the other social welfare, may lead to social unrest. Finally, the future trend of what the European Union will be is difficult to be predicted at this stage.

In terms of reflection, after all the researches done, it is found that the situation in the European Union is complex with several possible consequences in relation to the crisis. On the one side, every country in this union is likely to be selfish and is not willing to help the other unless it eventually damages its own benefits. As a result, it is difficult for the European Union to implement and adopt policies that may help certain countries with some costs of the other’s benefit or simply benefit them in long term at the costs of short-term benefit in its member countries. All these issues discussed in the essay existing as systemic flaws interact with each other and further aggravated the economic situation of the whole European countries. Finally, although the crisis has serious negative consequences, it could be an opportunity not only for creating a more interdependent European Union but also for accelerating the development of companies and the process of globalization in the long-term (See Appendix A).