Europe’s Economic Woes

An average person does not believe that the European economy is facing any sort of crisis. In fact, the average person is quite optimistic about the present economic condition of the Eurozone. However, if we have a closer look at the facts, the first signs of a looming crisis are clearly visible. For instance, the earnings per share estimate of the Eurostoxx 50 has seen a negative revision of over 30%. Also, Germany, which is the largest European economy, has not seen any growth. In fact, the industrial output has shown signs of marginal decline. During this same period of time, inflation has been rising to unprecedented highs.

In this article, we will have a closer look at some of the woes facing the European economy.

Europe Has Not Recovered: After the 2008 crisis, the entire world was in financial disarray, and Europe was no different. However, post-2008, the world has moved on. America has seen its economy rebound and so have many other nations. However, Europe is facing one financial disaster after another. At first, Europe was facing the grim prospects of Grexit. As soon as that issue was sorted out, Britain decided to leave the European Union (EU) and Brexit became the new problem. The point is that European economy has never really gained strength. It is simply moving along from one crisis to another.

Out of Control Debt: It is no secret that the entire continent of Europe is heavily indebted. Portugal, Italy, Ireland, Greece, and Spain are known as the PIIGS economies. The debt situation is these countries are currently being managed by undertaking even more debt. Hence, it would not be far-fetched to say that these economies are fragile and may collapse any day. The problem is that so much debt has already been taken that in the event of a slowdown, Europe would not have any recourse. The international bond market would not be willing to lend any more money. Also, the other nations and central banks are likely to stay away from these overheated economies. Therefore, even the smallest of recessions or slowdowns in the world economy is likely to exacerbate the already fragile economic situation of this once prosperous continent.

Poor Education Infrastructure: The world has now become a knowledge economy. Countries like China, India and also Philippines are excelling on the global stage because they have skilled workforce. The European nations are lagging behind in this measure. There are very few graduates in the working age population. The percentage of graduates is 27%, 32% and a dismal 17% in Germany, France, and Italy respectively. This can be compared to more than 50% rates in countries like the United States. There is a gross misallocation of resources all over Europe. Very little money is being spent on educating the workforce of tomorrow. Instead, most of the money is being spent on making interest payments. When Europe finds itself in the middle of an economic crisis, the situation may become even graver considering the fact that most of the workforce will be unskilled and therefore not able to compete in the international market.

Lack of Entrepreneurship: The entrepreneurial climate in Europe is not very conducive at the moment. The high tax rates are a deterrent to any entrepreneur who would consider starting a business in Europe. Most small and mid-sized businesses are not efficient. A lot of these businesses are dependent on cronyism and government contracts. In effect, these businesses are created to embezzle public money in private hands. The European rates of capital accumulation and investment in fixed assets are one of the lowest in the world. This, along with an unskilled workforce, has led to one of the lowest worker productivity in the world. The average European worker works fewer hours and is also less productive during those hours! No wonder, entrepreneurs are willing to sell their goods in the European market but are hesitant to set up production centers on this continent.

Pension Systems: The European workers still believe in collective bargaining. This means that the labor laws in Europe are very strict. Workers are considered to be important stakeholders, and their decisions are considered to be important. Consider the case of Alitalia, which is an almost bankrupt airline. Although several private sector firms made attempts to buy the airlines, the bids were foiled by the worker union which believed in job security over efficiency. Almost all taxpayers in Europe are bearing the burden of paying very high pensions to former employees. These pensions were set by politicians in order to get votes. They are not economically viable and are being funded by raising huge amounts of debt.

To sum it up, the European situation is particularly bad. At the moment, it is just a house of cards, which is somehow surviving. One small jolt in the form of a recession and the entire economy is likely to come tumbling down. No amount of bailouts will be able to rescue an economy which has become riddled with so many complex problems.

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