Platt Perspective on Business and Technology

Globalization and the economics-model paradigm

Posted in macroeconomics, outsourcing and globalization by Timothy Platt on December 23, 2011

According to standard received wisdom, and for both businesses and economies, bigger is better. Anti-monopoly laws are passed and enacted to limit if not prevent the type and degree of overall restraint of trade that a single market-dominating business can wield. International trade and cooperation agreements are organized and joined with a goal of giving member nations a larger and more effective voice through joint action and from mutual support. At least in initial analysis, one expected consequence of globalization would be aggregating reorganization whereby initially smaller marketplace participants, and initially smaller countries would come together into a limited number of larger and more collectively powerful entities. And this brings me to the European Community (EC – also called the European Economic Community) and the Eurozone. And increasingly, any discussion of them has to include discussion of the Eurozone sovereign debt crisis.

On the face of it, the EC and Eurozone should be examples of how coordination of action and the assembly of larger and more economically powerful entities creates sustaining value for all member participants. So what has gone wrong there? My contention as at least partial answer to that, is that the countries of the Eurozone found a disastrous middle ground, neither effectively coming together nor remaining effectively separate, and that the way they did this set them all up for eventual failure.

• These countries are bound together by a commonly held currency and a European Central Bank that is responsible for printing it, and for managing the overall amount of Euros in circulation at any one time. And in principle and by charter this bank manages the overall monetary policy for the 17 member nations of the Eurozone as a group.
• But each of these 17 member nations still retains its own separate national government and its own economy and economic policy. And when some of these member nations have much weaker economies, and when they spend beyond their fiscally prudent means, that creates problems for all, and problems that extend well beyond the borders of the Eurozone itself.
• So stronger economy members such as Germany and France find themselves supporting weaker members, and an increasing number of them as the debt crisis proceeds; Ireland and Italy, Greece and Portugal are simply the best known for economic weakness, and for contributing to the debit and deficit side of this crisis.
• And here is where the Euro as a shared common currency complicates matters. If a country such as Greece was still based economically on its own separate currency – the Drachma for Greece and this specific example, the government in Athens could devalue its currency to keep its value more realistically tied to the actual level of economic strength of the country. With the Euro, that and other more traditional mechanisms for managing a national economic downturn are unavailable.

Should the Eurozone and the EC be broken up and should its members go back to having their own separate currencies and economies again, and with both complete control and complete responsibility for them? The most likely result of that would be a catastrophic failure of all of their government’s economies and a global depression. As it is, every problem in the Eurozone and every piece of bad news that comes out related to that causes a spasm downward in the stock and bond markets worldwide and spasms in global currency valuations.

• All nations, with only a few exceptions (principally countries such as North Korea) have economies that are collectively globally interconnected.
• By way of example, the People’s Republic of China has some one trillion Euros in its cash reserve making that its second largest foreign investment (with holdings of approximately two trillion US dollars as their largest.)

What should the EC member nations do at this juncture, and if simply stepping away from a problematical union together would only make matters worse for all of them and for everyone else too? They could either try following through on a system and a level of connection and coordination that has led to their current problems and to their being so intractable as is. Or alternatively, they could look at their charter and at the Maastricht Treaty that brought them together to see where they can and should, with member safeguards included, strengthen and complete their union.

• Where do gaps in the EC organizational structure allow and even encourage inefficiencies and discrepancies that would with time all but inevitably lead to the types of problems they face now?
• What specific steps should the EC and its members take to both learn from their current crisis and limit the likelihood of a recurrence, while hastening the positive resolution of this instance?
• The one approach that is certain not to work is for the EC and its members to simply stay the course as things are now. The German government recently posted a bond sale to raise cash and some one third of their bonds offered did not sell – no one wanted to buy them with the risk they entail. That should be viewed as a dire warning for what might follow.

If Germany’s economy were to flounder or even appear to be at credible risk of doing so, the entire EC and Eurozone would face crisis at a whole new level and be in danger of collapse. That, as stated above, would adversely impact on all.

As a final thought here, China has started making overtures to the EC of offering it economic support – in exchange of long term considerations that will only start with preferential trade agreements. In this, China is seeking to both safeguard its economic stake in the Euro, and also build a bridgehead to a future in which its plays a much more dominant role in both the EC and global economies. I have stated that what happens in Europe has impact everywhere else too. The next coming years are going to show how true that is, and both as the United States and China respond to the Eurozone sovereign debt crisis and to each other as they each separately respond to Europe’s challenges. I am certain to have more to add to this in future postings.

You can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. This posting is in many respects a continuation of Globalization and the Business Model Paradigm. [Note: I wrote and uploaded this on November 25, 2011 and the situation in the EC is likely to change rapidly and particularly given concern about long-term German economic stability.]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: