Impact Of Global Recession On European Union Economy Economics Essay

The financial turmoil which had hit the world in 2008 made a huge impact on all economies because of a contraction in the global demand. Amid this sharp slowdown in global demand, the growth in the European Union region had fallen drastically despite the easing of the policy and other measures which were taken by governments and the other members of the EU.

For almost all the member states of the EU, the crisis led to various consequences such as contraction in the global trade volumes, weaker investments across industries, decrease in export volumes, drop in the demand of commodities, weakening of capital flows and weakening of currencies.

The Lisbon Strategy was formed around 9 years ago to turn the European Union into the most competitive and dynamic knowledge-based economy worldwide by 2010. A number of targets were set such as achieving the average economic growth of 3 percent per annum and an employment rate of 70 percent. But if we see the economic condition of the European Union today, it presents a contrasting view as compared to what everyone had 9 years back.

Till mid of 2008, analysts had conviction that the EU would be relatively less impacted from the downturn due to various reasons. This continued till October 2008, when Hungary had to call IMF to avoid a currency crisis followed by Latvia. A recession is defined as negative movements in GDP in two successive quarters. EU’s GDP experienced a 0.2 % reduction in GDP in the third quarter of 2008, which was followed by a reduction of 1.5 % in the last quarter of 2008-09 (European Commission Report on Impact on retail trade, 2009). The member states of the European Union have experienced significant impacts in various contexts during this economic crisis. These impacts have ranged from the shrinking of the GDP to rise of unemployment. This analysis will look at these impacts and what are the measures that the governments and the regulators have taken to counter them.

The analysis of the impacts of global recession on the European Union economy will primarily bring out the areas which have experienced these impacts. These areas are not exclusive to the negative impacts but are a part of the larger ecosystem called the economy which as a whole took a hit. The impacts have not remained restricted to organizations or businesses but had trickled down to the normal public in form of a sharp rise in the unemployment rates.

The authorities (governments and regulators) had taken reactionary measures to control the damage that the crisis has done to the region in order to avoid such events in the future. Though the policymakers has responded with expansionary policies (both monetary and fiscal) and stimulus packages, in most of the cases such measures will only help to mitigate to a certain extent, and not overcome the crisis operating in their economies

The economic crisis has left its marks on the EU-27’s economy and it will take considerable effort and time to completely come out of it. A major thing which will fail to take final shape because of the crisis was the Lisbon Strategy. The strategy had defined goals and objective for the European Union’s economic developments since 2000 and the strategy will come to an end in 2010. As its end is not too distant, the timeframes which were decided to achieve the Lisbon goals need revision because of the shift in the economic landscape.

Another area of concern, which was also the focus of the European Economic Recovery Plan would be to ensure that the member states of the EU work collectively towards bringing the region out of the crisis rather than taking individual protectionist measures which can sustain and improve upon the economic condition currently prevailing and also to build a robust financial system whose principles make it capable of handling such of such events.

Problem Statement

The basic problem which will be answered in this discussion is to analyze the ways in which the European Union economy has been impacted by the global recession. It also covers the initiatives which are being taken by the governments to stabilize the economies with increased internal spending and at the same time controlling government deficits.

Aims & Objectives

The primary objectives behind studying the subject will be to analyze the:

Economic crisis and its impact on the European Union as a whole and also on member states

Steps taken by European Union to help member countries and to counter the crisis.

Approach employed by the governments/regulators at the national level to find a crucial path out of the recession.

Rationale/Justification

The recent global economic recession has neither occurred for the first time nor the last time. In the future to come, we can surely expect more of such adverse and turbulent economic developments given the state of policies followed by countries and the way in which the financial systems are designed.

It is for this reason that the European Union should prepare itself to counter such events in the future and try to minimize their impact to the smallest possible levels. This study will help in the cause of identifying actions/measures that can be proactively taken by the European Union economies.

Brief literature review

Generally speaking, financial crises in the developed countries are financial institution integration and linkages. In the developing countries, it is through factors such as trade; capital inflows in terms of FDI, tourism industry revenues etc. In the case of European Union also, such developments and transactions in the different member states had together led to a recession.

The recent economic crisis started with the so-called subprime mortgage crisis which first hit the United States in 2007. It spread over around the world, via debt obligations and the financial markets around the world which had links with the financial markets of the US were impacted. In the European Union, advanced financial markets such as that of the UK, France and Germany were hit by the sub-prime crisis. The resulting lack of liquidity in the markets caused major disruptions in the markets, which in turn affected lending in general. This hugely impacted individuals and also businesses; as credit availability became a problem. This decline in the availability of credit increasingly affected the consumption level in economies, contributing to a large number of business failures.

When the overall GDP growth of the European Union declined, it served as an indicator of the fact that the financial crisis which started in the form of a sub-prime mortgage crisis was turning into a severe economic downturn.

The recession had a major impact on all the financial markets in Europe. Almost all the capital markets were disrupted. The lack of liquidity led to hindrance in the operation of financial institutions leading to special focus of the governments on the economy. The housing sector, especially in the UK had experienced huge losses and all these factors had combined significant consequences for the EU.

After the Second World War, the recent recession was the most significant economic crisis in Europe. The region has faced highly devastating effects of the crisis and some figures which can explain the level of destruction are mentioned below:

Industrial production in EU took a dip of 11.5% in 2008-09 (Eurostat, 2009).

For the same period, GDP fell by 1.3% (Eurostat, 2009).

The impact felt by the various member states of the EU has been based differently upon the varied declines in the GDP of those states. For instance, in 2008-09, the GDP of Estonia fell by 21%, that of Sweden by 18.5% while some member states had a relatively milder impact on their GDP. Example: – Germany experienced a downfall of 2.1% and Italy’s economy shrank by 1.8% (Eurostat, 2010). As an effect of the recession, the unemployment rate in the EU grew by 1.2% in the last financial year.

The negative trends which had been hovering over the region led to a significant increase in the restructuring activity, which included closure of many businesses. The job losses which came out as a result of restructuring significantly outnumbered the number of jobs created in the region, especially in the chemical, metal and machinery, food and beverages and the textile & leather sectors (World Bank, 2009). In March 2009, the unemployment rate in the European Union had reached 8.3%, which was 1.6 percentage points higher than the previous low of 6.7% in March 2008 (European Commission Report on impact on employment, 2009). Demographically speaking, the unemployment has risen significantly for the youth in the region.

Looking at the member stated of the EU individually, OECD and the European Commission data tells that the countries which were the most affected by the decrease in the employment were Spain and the United Kingdom (European Commission, 2009). Spain also faced restrictions in having access to credit which also alleviated the problem of the declining housing market in the country. The financial services sector in the United Kingdom was extensively impacted by the crisis and a resultant lack in the facilities of inter-bank lending led to a credit crunch for businesses and individuals. The impact on the housing market of the UK was one of the biggest when compared to the other EU countries.

Other countries like, France, Germany and Italy were also severely hit by the decreasing employment.

The industrial sector which experienced the largest impact across all EU; member states that the construction and manufacturing sector had to face the largest collapse in the investments made. Export based sectors also faced consequences due to the sharp decline in the demand for exports. The biggest economy in the European Union is Germany and during the recession Germany faced significant issues due to the loss of regional and international export markets. Being the biggest economy in the region, problems with the economic ecosystem of Germany had a trickling effect on other economies in the region.

If we try to look at the impacts of the crisis on different segments of the population, we see that the male workforce was significantly affected in the construction and manufacturing sectors, as these sectors faced a sudden collapse in the investments in most of the EU member states. The automotive sector was also one of the most impacted sectors by the crisis in most of the countries (European Commission report on Output measures, 2009).

The resultant changes in the consumption pattern in the economy also led to declining transport volume for passengers and freight also led to a decline in the transport sector (European Commission Report on Output Measures, 2009).

To counter the impacts that were being faced by the countries, their respective governments had started providing recovery packages by taking internal measures from as early as 2008. The attributes of an effective economic recovery package are that it has to be comprehensive, inclusive and futuristic. The recovery program should be able to create new jobs everywhere and also address the needs of the citizens who are pushed nearer to poverty. It should also strengthen the economic linkages across economic boundaries. It also has to be futuristic to ensure the long term economic growth and development by building physical infrastructure of states.

Some of these measures which were taken in the EU region to attain the attributes mentioned above were to boost government expenditure on infrastructure projects, to support their banks and other financial institutions which in some cases led to increased government deficits which was again a problem as countries in the Euro Zone have a constraint on their deficits (IMF, 2009). Though many measures were taken by governments, financial institutions etc. economic analysts were never sure about the long term effectiveness of such measures.

One thing which the European Commission has made clear during the crisis was that the Single Market will not be sacrificed while the respective governments were trying to stabilize their economies (European Commission, 2009).

In the second half of 2009-10, the EU economy started showing clear signs of recovery but the forecast for 2009-10 as a whole remains dim because of the strong downturn at the end of 2008-09 and also at the start of the current year.

As discussed above that the European Union as a whole and the individual member states were hugely impacted by the economic crisis, it is important to look at some of the primary statistics which would verify the stated impacts that the global recession has had on the EU.

Firstly, looking at the GDP growth rate figures for EU as a whole given below, we can see the drastic dip that EU-27’s GDP took. The drop in the GDP is a result of all the factors which have been discussed earlier like contraction in demand and decrease in exports.

GDP growth

2006

2007

2008

2009

2010(f)

2011(f)

European Union (27 countries)

3.2

2.9

0.8

-4.2

0.7

1.6

(Eurostat, 2010)

If we try to look at movement in the unemployment rates in EU as a whole in the year 2009, we can see a sharp rise in the unemployment rates month on month. This indicates the restructuring activity that still persists in the economy. Many businesses which were affected are still trying to gain stability by taking cost cutting and efficiency improvement measures, and some of them are leading towards greater unemployment in the region.

Month

Unemployment Rate (in %)

February, 2009

8.3

March, 2009

8.5

April, 2009

8.7

May, 2009

8.8

June, 2009

8.9

July, 2009

9.1

August, 2009

9.2

September, 2009

9.3

October, 2009

9.4

November, 2009

9.4

December, 2009

9.5

January, 2010

9.5

(Eurostat, 2010)

As a response to control the negative effects of the crisis, the European Commission published a European Economic Recovery Plan in late 2008. The main focus of the plan was on the need of cooperation at the EU level and at the same time between the individual member states. It stressed at not using protectionism initiatives as a response to the crisis, rather collective efforts were desired in the short term in order to increase demand, save jobs and for restoring confidence in the European Economy. The plan sought for smarter investments in the long term such as investments in R&D, infrastructure etc. to achieve higher growth in the future to come.

Another initiative which came into effect was the New Skills for New Jobs initiative. It aimed at identifying the skills needed by the labour market in order to focus on future employment demand. It was designed to help businesses improve their ability to defend themselves the crisis by maintaining labour at work.

Research methods

The study to be conducted which would involve studying the events that triggered the crisis and the consequences which followed thereafter will be done in the form of a research. The research would involve qualitative analysis of literature available on the subject and also, analysis of the economic statistics available for the European Union member states.

This kind of research would suit the study being performed as numerous subject matter; experts have constantly expressed their opinions on the events that have taken place around the world which led to the economic slowdown. Also, in order to establish a cause-effect relationship between the events and their consequences; studying literature on the subject will definitely play an important role.

The Research method basically targets secondary data which is widely available; the methodology proposes to find the impact on European economy due to Global Recession and the measures taken to control it. The measures taken are publicly available information which are in form of interviews, press releases, policy changes and hence can be collected also. There are no primary data collections necessary as the stakeholders and decision makers involved in the topic are key policy makers as interacting with them personally is not feasible. In future for my dissertation, I would select a sample of 100 companies affected merely or largely by the recession and will send questionnaire surveys based on my research. Through the responses received, I will justify my reasons and my research on how this global recession devil has devastated the European Economy.

The Analysis to be used is Meta analysis & content analysis. In Meta analysis, the literature is extensively reviewed and selected; based on quality criteria and avoid any publication bias. The discrete data is selected for differences and appropriate meta regression model is used. Among the three; simple regression, fixed affects meta regression and random effects meta regression, appropriate tool will be selected for various requirements in the research. However we have to be extra careful in the analysis as the sources of the bias cannot be controlled in meta analysis technique. For the technique to succeed, the research study should be complete in all respect. The disadvantage of secondary data being not accurate and not up to date is being offset by the collection of data from government sources, which are highly reliable and also the nature of topic makes the data to be up to date.

Methods of Analysis

Since the objectives desired from this study are purely qualitative, the method of analysis would also be restricted to qualitative analysis of literature and some economic statistics of the time period taken into consideration (i.e. the recent economic crisis).

The literature under analysis could comprise research done by other scholars, books/journals which talk about this subject, statistics released by various agencies/organizations or any other published literature which shares insights or facts on the topic being studied.

In this kind of a study, a primary research is not needed as most of the study revolves around the macro economic factors experienced in the European Union region during the economic crisis and their impacts on the various aspects of the economy. All the information containing macro-economic trends and the history of events which led to the economic crisis across the world have been frequently talked in various publications and it is for this reason that literature review and analysis of available statistics would be sufficient to reach logical and relevant conclusions.

As mentioned earlier, meta-analysis will be used to bring out maximum insight and best outcome from the study, which will shed light on the reforms being taken by government to boost economy and its success or failure.

Ethical Considerations

While the research is being done to achieve the objectives outlined previously, the confidentiality of any entity dealt with; individual or organization will be kept confidential, if so desired. Also, utmost care will be taken to avoid including any details in the study which misrepresent the facts.

Timescale/plan

The study will consider the economic environment which has been prevailing in the European Union region since the start of the sub-prime mortgage crisis. Studying events which happened prior to the European Union going into recession may help us understand in a better way the likely approach that should be applied by governments to avoid a similar turmoil in the future.

Resources/Costs

The primary method which will be used to do the study will be literature review, most of the information will be fetched from libraries (in form of books, journals, newspapers etc) and the internet. These will be the primary resources required for the completion of the project and so no other specific costs will be attached to this study.

Recommendation

The proposal for the study on ‘Effect of Global Recession on EU economy’ highlights the aims and objectives of the research to be performed. It also highlights the methods of research which will be employed to reach a logical conclusion on the subject. The areas covered in the brief literature review give an idea about the topics which the dissertation will touch upon and also, bring out clearly the way European Union economy has been impacted by the global recession.