Europe's response to the changing economic environment

Research Paper (postgraduate), 2014

19 Pages



1 Introduction

2 Major transformations in the international economic environment

3 Italian and German economies: two distinct approaches to change

4 Conclusions



1 Introduction

Biology and economics are closely related disciplines, as they share a large number of concepts and ideas, such as competition, scarce resources and equilibrium.

One of the most interesting and famous examples of cross-contamination between these sciences is Darwin’s theory of evolution by natural selection. In his autobiography, the English scientist reveals that he drew inspiration from An Essay on the Principle of Population by Malthus, who argues the tendency of populations to grow faster than available resources and deems high mortality a necessary check to restore the balance between them. Several economists, in turn, have subsequently been influenced by Darwin’s thinking. For instance, in The Theory of the Leisure Class published in 1899, the American economist Thorstein Bunde Veblen claims that upper classes engaged in economically useless practices of “conspicuous consumption and leisure” are doomed to disappear. Similarly, Darwin assumes that parasites exploiting their hosts excessively end up destroying themselves.

Darwin’s theory of evolution still represents an important analysis tool in economics, because it helps to understand complex change processes and their effects.

This research analyses the European economy’s evolution from a new perspective and explains why some EU countries have adapted better than others to the current international environment. Germany and Italy are used as case studies, because they have responded very differently to the major transformations observed over the last few years. Two obvious questions now arise: what are the reasons for these diverging performances? What features are essential to stay competitive in the new world scenario?

This paper aims to answer these questions through a brief analysis that goes beyond the traditional boundaries of economics to examine cultural and sociological factors.

2 Major transformations in the international economic environment

Over the last twenty years, major shifts have reshaped the global economic map and marked the beginning of a new historical period.

Complex dynamics and events, such as the globalisation of markets, the introduction of the Euro and the 2008 financial crisis, may be considered the main drivers of this transformation process, since they have emphasised each country’s strengths and weaknesses and amplified the result.

Such changes have been widely discussed, but their interaction should be investigated in further detail, in order to understand how and to what extent it has impacted on Europe and contributed to the creation of a new environment.

The globalisation of markets may be primarily viewed as the rise of a new trade order, displaying an ever-increasing cooperation and interdependence among countries. Two main factors have driven this evolution: the first one is the liberalisation of trade, through the progressive removal or reduction of tariff and non-tariff barriers; the second one is technology, that has significantly improved transport and communication systems and made them accessible and affordable to the wider community. As a result, people are connected, both physically and virtually, like never before; they can exchange products and services and share any kind of information regardless of their location.

In order to adapt to the new environment, some companies have adopted strategies aimed at meeting local demand, thereby differentiating their offerings by country or region. Other companies have launched the same products or services worldwide, to benefit from current trends in consumer demand or to influence it.

Globalisation also means competing on a global scale and dealing with the problems and opportunities that go with it. Over the last two decades, emerging economies, such as India and China, have met this challenge by drawing on their strengths. Low cost labour has been and still is an important competitive advantage for these countries, but it is not the only one, as they compete fiercely with developed economies in a wide range of advanced industrial sectors, requiring modern infrastructures and a high level of expertise.

In assessing the impact of globalisation on Europe and its business system, both qualitative and quantitative research methods lead to partial and controversial outcomes. However, it is possible to identify some general trends through a brief analysis based on three key factors: industrial production, exports and imports. As for industrial production, several Western Europe’s firms have offshored some activities, mainly low value-added productions, to developing countries, in order to leverage cost advantages.

This phenomenon has raised deep concerns in Europe about deindustrialisation, loss of employment and competitiveness. Some companies have rejected criticism by claiming that manufacturing offshore is necessary to stay competitive and there is no alternative. It would be unwise to take a positive or negative stance towards offshore manufacturing, given its various forms and implications. Nevertheless, it must be recognised that unskilled and labour-intensive processes carried out in emerging and developing countries are sometimes complementary to advanced tasks performed in Europe.

An opposite process, known as onshoring, has been observed in the last five years: numerous European firms have moved their manufacturing activities back home as a result of the lower cost competitiveness of emerging countries. Offshoring is not as convenient as before, because wages have risen fast in strategic offshore locations, like China, and higher oil prices have boosted transportation costs. In addition, the global financial crisis and the resulting economic downturn have deeply impacted consumer demand in Europe and led companies to review their business strategies: consumers consider their purchases much more carefully and seem to be very sensitive to the concepts of customisation and quick response. In order to meet these needs, some companies have decided to be closer to their customer base and hence manufacture in Europe. Another factor should be taken into account to understand this ongoing trend: some European countries, such as Italy, France and Germany, have an advanced expertise and well-established reputation in various industrial sectors (e.g. fashion, food and mechanical engineering). As a result, several products manufactured in these states are often considered to be high-end goods. Their perceived quality has proved to be attractive to an increasing number of consumers not only in Europe and other mature markets, but also in emerging countries, where the upper classes purchase such products to signal their social status and wealth.

Globalisation has had a positive impact on European exports, thus becoming a powerful growth driver for the Continent as a whole and particularly for export-oriented nations, like Germany. Emerging economies have hugely contributed to this expansion, as their GDP per capita growth has generated an increase in demand for European products and services. The global financial crisis has prompted European firms to focus even more on such markets and to identify China as a primary target. Indeed, the Asian giant has come out of the global financial crisis remarkably well, whereas Europe has experienced a deep and long-lasting recession resulting in a sharp drop in domestic demand. EU exports to China have dramatically increased in the past five years, to reach € 148 billion in 2013. Following this steady growth in exports, China is now the European Union’s third largest export destination. It is also the biggest source of European imports, before Russia and the USA. China supplies a wide range of goods and services and it is likely to become market leader in advanced industrial sectors in the coming years given sizeable R & D investments. In general, it is expected to further strengthen its position in the world economy, though it has been growing at slower pace than before and some macroeconomic indicators raise some concern about its future prospects.

It is worth noting that the globalisation of markets has enabled a financial crisis begun in the United States to spread rapidly to the rest of the world and thus to become a global threat. As previously stated, this crisis, in turn, has significantly impacted the dynamics of international trade and triggered an economic recession unseen since the Great Depression.

The triggers of the crisis are well known: easy credit conditions in the USA led several people to take out loans and buy properties that they could not afford. In 2006, the number of defaults and foreclosures on subprime mortgages rose drastically and spread to the overall U.S. mortgage market. Banks, hedge funds and other financial operators all around the world that had invested in the U.S. housing market through subprime mortgage-backed securities[1] were hard hit.

The subsequent collapse of Lehman Brothers in 2008 sparked a chain reaction, that destabilised the world economy as a whole: stock markets suffered heavy losses, large financial institutions and businesses failed and consumers’ wealth declined dramatically. In 2009, GDP slumped by 4.5% in the European Union, which entered a deep and long-running recession phase.

Indeed, most of Europe has displayed high unemployment rates, weak domestic demand and rising levels of public debt over the past five years. Fears of sovereign debt defaults have led international investors to demand higher interest rates from European states experiencing serious financial problems. Higher interest rates have made public debt harder to bear and prompted some countries, like Greece and Ireland, to ask for bailouts.

In response to the crisis, the EU authorities have taken a wide range of measures aimed at enhancing financial stability and fostering economic growth. They include: European Semester, Euro Plus Pact, Six Pack, Two Pack and Fiscal Compact. The European Semester is a new instrument for ex ante coordination of national economic policies. To implement such coordination, each year the European Commission analyses all member states’ budgetary and economic plans and provides recommendations. The Euro Plus goes beyond the European Semester, as it commits the 23 signatory member states[2] to carry out a list of reforms designed to improve competitiveness and convergence. Another important step forward is the Six-Pack, a set of measures on economic governance, aimed at strengthening the Stability and Growth Pack (SGP) and preventing and correcting macroeconomic imbalances. The Two Pack complements the previous act, by improving budgetary coordination and economic and financial surveillance in the Euro area. Perhaps, the most famous and controversial piece of the EU macroeconomic architecture is the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, also known as the Fiscal Compact. The treaty, entered into force in 2013, aims to strengthen fiscal discipline through stricter rules for participating member states[3]: the annual structural government deficit cannot exceed 0.5% of nominal GDP[4] and the member states whose government debt is above 60% of GDP must reduce the excess of their debt ratio over this reference value at an average rate of one-twentieth per year as a benchmark.


[1] Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans.

[2] Eurozone states plus Denmark, Latvia, Lithuania, Poland, Bulgaria and Romania.

[3] The treaty was signed on 2nd March 2012 by all member states of the European Union at the time, except the United Kingdom and the Czech Republic.

[4] If government debt is significantly below 60% of GDP, structural deficit can reach at most 1% of GDP.

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Europe's response to the changing economic environment
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Angelo Arcuri (Author), 2014, Europe's response to the changing economic environment, Munich, GRIN Verlag,


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