European Macroeconomic Policies and Risks

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Entrepreneurs intending to invest in new territories need to consider a number of factors before venturing into new markets. Although these factors vary, entrepreneurs who are interested in investing within the European Union need to examine macroeconomic policies and risks carefully and determine their effects on business.

New entrepreneurs need to consider key macroeconomic factors such as aggregate demand polices, aggregate supply policies, fiscal policies (for example, EU single monetary union), and the policies for the integration of the macroeconomic factors with the European social model. Suffice to state that the EU macroeconomic policies expose enterprises to certain risks.

For instance, the EU single currency polices impinge on business flexibility. In addition, the single monetary union is at risk of falling into a severe debt crisis, among other risks.

However, these risks can be curtailed through several measures, including inflation targeting, controlled budget deficits, and reduced national debts. All these are aimed at promoting equitable and sustained economic growth within the Eurozone. This has a direct impact on business growth and development.

European economists hold conflicting views regarding the role of aggregate demand policies. However, this should not negate the relevance of aggregate demand polices in trying to stabilize the economies of EU member states (Baily 2010). Most of the aggregate demand policies within the EU mainly focus on the business growth and stability of employment.

Most economists see active demand policies as risky in the following manner: to begin with, critics of active demand policies argue that increase in demand leads to high inflation rates. Secondly, economists see the risk on monetary stability leads to increase in interest rates However, the EU control on inflation complicates fiscal and monetary policies (Begg and Ward 2006).

In addition, aggregate demand is at risk of falling if active aggregate demand polices are not strictly adhered to (Gazier and Lechevalier, 2006). However, active aggregate demand policies focus purely on economic growth. Additionally, policymakers dissociate active aggregate demand from policies on pricing of commodities and the attainment of financial stability.

As Begg and Ward (2006) have noted, developing inappropriate pricing strategies diminishes the prospects of realizing profits. Thus, pricing and financial stability are the concerns of fiscal policies, rather than macroeconomic policies on aggregate demand (Radulescu n.d.; Watt and Janssen 2005).

Additionally, Baily (2010) while modeling along Keynesianism explains that the European aggregate demand policies in most of the EU member countries encourages the development of safety nets that ‘automatize’ stability of the demand-supply mechanism. This protects the existing businesses from collapse.

Additionally, Begg and Ward (2006) explain that prices and demand have a direct relationship to changes in prices affecting demand. In this case, entrepreneurs need to understand the European consumer dynamics so that they can develop appropriate pricing strategies.

Both, aggregate demand and aggregate supply, have an effect on the overall economic growth. Aggregate supply within the European Union has a direct relationship with economic growth.

Aggregate supply determines the level at which the GDP is at equilibrium. As such, an increase in aggregate supply results in economic growth since such an increase results into corresponding growth in the GDP, and this keeps inflation rates low. Since economic growth has a direct link to changes in aggregate supply, governments within the EU protects aggregate supply from falling.

Aggregate supply high leads to competitiveness, which spurs and sustains economic growth. As such, entrepreneurs who want to invest in the EU know that government controlled aggregate supply protects the business environment. With regard to aggregate supply, governments offer incentives to manufacturers to boost manufacturing competitiveness.

Governments give manufacturers incentives to invest in human resources and manufacturing technologies, and this improves production efficiencies. The attainment of production efficiencies leads to manufacturing competitiveness, resulting in positive implications on both the economy and businesses. Production efficiency leads to growth of business, as well as increasing employment opportunities.

Furthermore, manufacturing competiveness allows governments to sustain a healthy (and not surplus) balance of payment, since growth in manufacturing industry allows governments to fund imports. The main reason why the EU has opted for a healthy rather than a surplus balance of payment is to support the production capacities (resulting to increased exports) and the ability to finance imports (Begg and Ward 2006).

One of the major objectives for the formation of the EU is to promote a single market. To facilitate a single market structure, the EU was converted into a monetary union with a single currency, the Euro (Motamen-Scobie 1998). This has a number of advantages for businesses. For instance, businesses do not have to worry about the risks associated with exchange rates.

Additionally, this ensures a stable business environment as well as enables increased competition, which is good for business (Farina & Tamborini 2008).

However, while such a monetary union creates the relevant environment, business growth by reducing legal and financial bottlenecks, it also exposes the EU to the risk of falling into a major debt crisis (JPMorgan Chase & Co. 2011). Currently, members of the EU are at loggerheads on how to operate and manage the current debt crisis.

Meanwhile, while the management of the debt crises threatens the sovereignty of the EU member states (Sandoval, Beltran, Ulziikhutag and Zorigt 2011), entrepreneurs are encouraged by the fact that members states adopt austerity measures aimed at cutting government spending, increase taxation, lower interest rates and thus stabilize the current debt crisis (Longbottom 2011).

Economists are aware of the risks posed by a single currency as opposed to maintaining currency autonomy by EU member states. A single monetary union is at risk of experiencing widespread inflation rates due to reliance on a single currency.

However, other than the austerity measures presently being undertaken, the EU members currently undertake widespread structural reforms, which allow for a flexible management of EU fiscal and monetary matters (Gazier and Lechevalier 2006).

Additionally, to understand the risk posed by a single currency, Begg and Ward (2006) liken the EU single currency to boats in a harbor. In this case, the Euro is symbolic of a strong metal rod that would hold all the boats together. This is risky since, a boat only moves when allowed by others.

On the other hand, maintaining currency autonomy is compared to a rope that connects all the boats, which provides the boats with sufficient flexibility of movement. This implies that a single currency curtails financial flexibility. However, the EU’s monetary policies minimize these risks, resulting in the attainment of stable interest rates.

Through the European Central Bank, a single interest rate is set for the entire Eurozone. Despite the fact that the EU allows member states to retain independent nominal rates of interest, change the exchange rates, compensate any differences that arise. Additionally, the EU monetary policy requires that each of the member states attain budgets deficits of at most 3 % of the DGP.

Moreover, the EU requires member states to mange national debts equivalent to 60% of DGP or lower. This stabilizes the EU economy and ensures that equality in economic growth and development is attained across the Eurozone.

As such, for new entrepreneurs, the European monetary policy tends to achieve sustained as well as equitable economic growth (Begg and Ward 2006). Thus, the EU is a favorably stable investment destination.

the EU governments also actively target inflation rates, mainly through monetary policies. The governments guide monetary policies to achieve the desirable inflation rates. However, the intention is not to lower inflation rates but to keep it at desirable levels. In this case, monetary policies control inflation by either lowering or increasing rates.

This is referred to as inflation targeting and it has an overall effect on economic growth, since it stabilizes economic activity. The main reason for inflation targeting is to manage the GDP through stable prices, as well as spurring economic activities. This further stabilizes inflation, with significant effects on firms and consumers.

A stable inflation impacts prices of goods and services directly, and results in what Begg and Ward (2006) refer to as price transparency. Price transparency allows consumers to recognize subtle changes in prices of alternative goods, which encourages price-based competition.

This has a corresponding effect on business growth as it offers incentives for innovations, lower prices, and product differentiation. Thus, overall economic growth is achieved. Additionally, a stable inflation stabilizes economic activities since interest rates remain constant.

As such, future prices are also likely to remain constant. Thus, entrepreneurs have the confidence to invest in this market due to the assurance of stable interest rates and prices of commodities in future. As explained earlier, this stabilizes economic activity. In total, inflation targeting is a prerequisite for successful investing (Begg and Ward 2006).

The European macroeconomic policy also focuses on the social economic aspects as parts of its economic stabilization efforts. European macro-economic incorporates the European social model through increased employment opportunities, as well as through wage control as a way of maintaining economic growth. This is attained through integrating the European monetary policy in the European social welfare model.

Economists argue that this is likely to discourage banks which support businesses that adopt this model since the model only guarantees short term gains (Martin 2004).

However, entrepreneurs venturing into the EU need to realize that integrating social welfare model within the EU’s macroeconomic policies is important for a long term economic growth since high employment rates encourages social inclusion. Integration practices encourage employers to invest in people for sustainable social-economic growth. Thus, a vibrant business environment is realized (Mayes n.d.).

The European macroeconomic policies primarily target accelerated and sustained economic growth. The monetary policies, aggregated demand policies, aggregate supply policies, as well as inflation targeting combinedly work together to reduce the economic risks to member states, consumers and businesses.

Additionally, these policies have a direct impact on business, and as such entrepreneurs need to evaluate how they affect their business before investing in the EU. This cushions them against associated risks. Nevertheless, the EU macroeconomic policies guarantee future economic stability. As such, the EU is a safe investment destination for long term investors.

Reference List

Baily, M., 2010. European Macroeconomic Policies. McKinsey. Web.

Begg, D. & Ward, D., 2006. Economics for business. London: McGraw-Hill Education.

Farina, F. & Tamborini, R., 2008. Macroeconomic policy in the European Monetary Union. London: Routledge.

Gazier, B. & Lechevalier, A., 2006. The European employment strategy, macroeconomic policies, institutional regimes and transitional labor markets. Web.

JPMorgan Chase & Co., 2011. The debt crisis in the European Monetary Union as seen by a 9-year old, and US recession risks. Web.

Longbottom, W., 2011. After the battle of Athens: Greek PM reshuffles government in desperate bid to force through austerity measures. Web.

Martin, A. 2004. The EMU macroeconomic policy regime and the European social model. Web.

Mayes, D. Social exclusion: a challenge to macroeconomic policy. Web.

Motamen-Scobie, H., 1998. European monetary union: the way forward. London: Routledge.

Radulescu, M. Monetary and fiscal policy should support aggregate demand in the European countries during the crisis. Web.

Sandoval, L., Beltran, E., Ulziikhutag, S., and Zorigt, T. 2011. The European sovereign debt crisis: responses to the financial crisis. Web.

Watt, A. & Janssen, R., 2005. The high growth and innovation agenda of Lisbon: The role of aggregate demand policies. Web.

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European Macroeconomic Policies and Risks

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