Introduction
The current crisis in the European Union can be a basis for revisiting macro-economic factors affecting the region. The operation and running of businesses in the EU region is faced with many challenges given the current situation. The banking sector and other financial lending institutions are faced with a hard time in financing businesses in the region.
This has been necessitated by their reckless lending of finances that eventually led to the current financial crisis. Given the high inflation rates and high unemployment rates in the region, it is very hard for business and people to operate in the EU at the moment.
The paper bases its arguments on the various macro economic factors affecting businesses in the region. The objective of the report is to use the macro economic factors within the EU region so as to understand their impact on business operations.
Analysis of Economic forces in EU with impacts on firms
There are numerous economic forces that impact on the operation of firms in the EU region. The ability by firms to operate successfully depends a lot on the economic activities taking place in a region.
The economic activity is bound to increase annually and this is often determined by the economic forces prevailing in the market. For instance, when the economic activity fluctuates then the production costs incurred in the production of goods and offering of services also increase. This is usually caused by such economic forces like the increase in labor costs, capital stock, and advances in technology.
Given the current situation in the EU region where the market has been hit by high fluctuation rates, firms are bound to find it hard to carry out businesses. This is because the labour costs, in effect resulting in an increase in the cost of production. Because of this scenario, firms in the region are finding it very hard to sell their products, and this has forced many companies to cut down on their production costs.
A reduction in production means that fewer goods and services are produced, and this reduces the real GDP, among other economic measures (Mankiw 2012, p.423). The potential result of this scenario is an economic recession that has been witnessed since mid 2008 in Europe.
The economic fluctuations that arise from on a year basis are usually caused by various economic forces. Some of the countries in the Europe which are members of the EU are worse off compared to others. This makes it hard for firms that operate in this region. This is because they have been adversely been affected by the short economic fluctuations are a result of the economic crisis that led to recession in the region.
During the recession, the GDP of an economy falls (Manwik 2012, p.424). This contracting period during the business cycle negatively affect business. During this period, the firms face dwindling profits and declining sales as it has been experienced in the region. Most of the firms operating around this region have not been operating in profits and other has been forced to close up their businesses.
During this period, the levels of investment declines and the rate of unemployment levels rise. Based on this argument it is imperative to note that economic activity determine the success of business.
When the recession hits an economic setting as is the case of EU, international and national trading partners are also affected negatively. For instance, fall of real GDP in the recession time leads to decrease in corporate profits, business margins, industrial production, investment level and consumer spending among others macroeconomic quantities (Mankiw 2012, p.322).
This leads to low consumer surplus as the firms and business are not in a position to produce surplus goods and services. However, governments and other financial lending institutions like the IMF and the World Bank can assist in rescuing the states. Recession in the EU has pushed some of the international companies out of the market because of the increased production costs in the region and low profits.
Economic fluctuations have been persistence around the EU region (Gadzinsk & Orlandi 2004, p.6). This has adversely affected the business operations around this region for a short time. The effects trickle down to firms which operate under these market and economic forces. High levels of inflation affect the busyness ways of operation negatively.
For example, when the inflation rate increases the level of consumers income decreases. This affects the purchasing power of consumers. Low purchasing power means that the firms operating in that region are not in a position to make adequate profits. This effect also affects the aggregate demand which has negative influence over the GDP.
The aggregate demand and supply are essential tools that are applied in the measure of the short run fluctuations. The model of the aggregate demand and supply is basically based on the behaviour of two common economic variables (Mankiw 2012, p.324). These are the economy output which is measure in GDP and the price levels measured by the use of the consumer price index (CPI). These components determine the level of business operation in a region.
Fall in the aggregate demand leads to the increase in prices of goods and services. This is turn increases the prices leads to decrease in the consumption rate which affects firms as most of their goods are not consumed by the targeted population (Mankiw 2012, p.20). To balance this scenario the government is forced to increase its taxes with the aim of raising the falling economy.
Since Aggregate demand involves the relationship between inflation rate and GDP, then it is clear that high inflation affects the ability by firms to operate competently during these economic situations (Taylor & Weerapana 2010, p.302).
Most of the firms in the EU are net exporters with markets in US. Both EU and the US have been adversely affected by the financial crisis. Therefore the level of exports from the EU are deemed to be low given the increasing inflation
According to (Radulescu n.d, p.41) the effects of the inflation and financial crisis in EU are currently affecting global investors. This is because most of the investors depend on financing to supplement their businesses operations. However, with low aggregate demand, the interest rates have increased. This affects the investors and consumers as there will be no extra finances to lend out to borrowers.
Because of the inflation the aspects of the labour have also been affected. Low investments capacity implies that a huge percentage of population will remain unemployed for the better part.
This will affect the GDP of the member states as some will have to be bailed out. Other than global investors facing constraints in getting finances, the small and medium enterprises as well as households will be having constraints in accessing financing from banks and other lending institutions (Radulescu n.d, p.40).
This is because the banks are deleveraging wheelie the capital markets are slowly developing. In this case, the economic growth and aggregate demand will be slowed down as they are positively related to level of investment.
Because of the low investment levels, the current employment rate around the Euro area is estimated to be 10.3% (Eurostat 2011, p.1). Based on the statistics the unemployment rate has increased by 0.2%. This has been caused by the current crisis. Given that the EU member states operate using the same currency, the risks is usually spread across the region.
To normalize the condition in the EU, government of the member states are trying hard through fiscal and monetary policies to restore the situation. According to (Radulescu n.d, p.41) most of the members states of the EU have become concerned at the extent of the downturn as well as the limits they would move in checking the economy through adjustments of the monetary policy.
In fear of collapsing of the national economies and with the aim of stimulating the economy, the governments have turned to application of fiscal policy to stimulate the aggregate demand (Radulescu n.d, p.41). Other member states have initiated discretionary stimulus packages like in the case of UK and Germany.
The moves by the monetary authorities have been carried to restore confidence to members’ states trading partners and global investors. By preserving liquidity and trust in the EU financial markets, the aggregate demand is deemed to increase. This would increase the GDPs, lower inflation and increase the level of employment and investment.
Fiscal policy is concerned with the manipulation of “the balance between the government expenditure and revue so as to influence the aggregate demand in the economy” (El-Agraa & Ardy 2011, p.159). For the fiscal policy to be effective it has to interact with the monetary policy as well. However, because of the asymmetric shocks in the Euro zone region, the situation is likely to persist.
This is because the different member states operate using the same monetary policy controlled by the European commission Bank. It also has different member states that have different fiscal policies and federal government debts. However, the debt belongs to the nationals and can easily be repaid through the expansion of the domestic money supply (El-Agraa & Ardy 2011, p.160).
This means they can be manipulated by the ECB like the case of Greece thus raising the aggregate demand which leads to increase in GDP and national economic growth. This would promote the business operating platform and attract global investors in the EU.
The aggregate supply plays a great role in determining the production in an economy. Given that the EU continues with the connected manipulation of the monetary and fiscal policies, then the aggregate supply will be boosted. Increase in the capital markets stock in an economy promotes production of goods and services (Mankiw 2012, p.333).
This leads to decrease in the level of prices, increase wealth through global investors, increasing the consumer spending levels, reduce interests’ rates, increase investment spending thus increased exports. This creates a consumer surplus which is currently lacking in EU. With consumer surplus, the GDP and aggregate demand would be boosted thus restoring the economy.
Lastly, although some of the member states have not been hit much as others, the trading exercises in the region has been affected as a whole. However, the EU and IMF are trying their best to improve the situation. This would help in checking the macroeconomic issues that are controlled by the economic forces.
Conclusion
Base on the analysis of the current situation in the EU and the macro economic issues that it faces, then it can be concluded that organizational have a role to play. Because of the financial crisis in Europe, the rate of inflation and unemployment has drastically increased. This has affected the economic growth and productivity as the level of investment is very low.
Low investment levels have been necessitated by the increased interest rates that have pushed away global investors and other SMEs. It has also been concluded that the consumer surplus in the region is low given that the production of services and products is also low. This has pushed the consumers to spend more in food and housing since the prices of these two has been increased.
The inflation rate in the EU has been as a result of recession and the economic downturn that has hit the region very hard. Lastly, firms operating in these regions are faced with high production costs, low production, low demand of their goods and services.
And because of the debts most of the firms and financial institutions have been bailed out while others have been closed down. A high debt is the major hindrance to further economic growth.
Reference List
El-agraa, A. M., & Ardy, B., 2011. The European Union: economics and policies. Cambridge, Cambridge Univ. Pr.
Eurostat., 2011. Euro area unemployment rate at 10.3% EU27 at 9.8%. Web.
Gadzinski, G., & Orlandi, F., 2004. Inflation persistence in the European Union, the euro area, and the United States. Web.
Mankiw, N. G., 2012. Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.
Radulescu, M., n.d. Monetary and fiscal policy should support aggregate demand in the European countries during the crisis. Web.
Taylor, J. B., & Weerapana, A., 2010. Principles of macroeconomics: global economic crisis edition. Mason, OH: South-Western Cengage Learning.