Western Europe and the Global Financial Crisis

Introduction

The global financial crisis, which started in 2007 with the collapse of the US sub-prime

mortgage sector, affected Western Europes financial systems through its exposure to foreign

financial assets with high levels of risk. As conditions deteriorated rapidly in September-October

2008, bank failures became a dangerous possibility, requiring government intervention and bail-

outs.

Western Europe is among the regions worst hit by the 2008 global financial crisis, with

almost all major economies facing recession in 2008-2009. Unemployment, consumption and

exports are set to deteriorate. Inflation is easing to the benefit of consumers as the world

economy slows, yet the risk of deflation (a decrease in price levels) is a growing concern.

A positive sign has been governments ability to coordinate monetary and fiscal policies

in response to the crisis, despite the regions political and economic diversity. Western Europe is

expected to return to growth in 2010.

Background

The global financial crisis has tested more than lending institutions, stock markets and the

nerves of investors everywhere. It has put the bold notion of European unity under the

microscope again, where critics say it once more has been found wanting. Half a century ago,

the European Union was born on the ideal of close cooperation between countries torn by war.

Since the formal adoption of a common currency, the euro, European leaders have pledged tight

coordination of financial policies and promoted new steps toward political integration as well.
 Western European trade is mostly conducted within the region with 80.0% of exports

destined to European countries in 2007. 7.6% of exports were destined to North America and

Australasia, which are also facing downturns;

Some economies are highly dependant on exports. In 2007, exports as a share of GDP

amounted to 61.3% in the Netherlands, 40.0% in Germany, and 37.2% in Sweden. France, Italy,

Spain and the UK were far less dependant on exports, which contributed less than a quarter of

their GDP.

Start of the Crisis

The global financial crisis, which started in 2007 with the collapse of the US sub-prime

mortgage sector, affected Western Europes financial systems through its exposure to foreign

financial assets with high levels of risk. As conditions deteriorated rapidly in September-October

2008, bank failures became a dangerous possibility, requiring government intervention and bail-

outs.

The precipitating factor was a high default rate in the United States subprime home

mortgage sector. The expansion of this sector was encouraged by the Community Reinvestment

Act (CRA), a US federal law designed to help low- and moderate-income Americans get

mortgage loans. Many of these subprime (high risk) loans were then bundled and sold, finally

accruing to quasi-government agencies. The implicit guarantee by the US federal government

created a moral hazard and contributed to a glut of risky lending. Many of these loans were also

bundled together and formed into new financial instruments called mortgage-backed securities,

which could be sold as (ostensibly) low-risk securities partly because they were often backed by

credit default swaps insurance. Because mortgage lenders could pass these mortgages (and the
 associated risks) on in this way, they could and did adopt loose underwriting criteria (encouraged

by regulators), and some developed aggressive lending practices. The accumulation and

subsequent high default rate of these mortgages led to the financial crisis, and the consequent

damage to the world economy.

Manifestation

Consumption is falling as consumers tighten their belts:

Unemployment in the Eurozone rose to 7.7% in October 2008, compared with 7.3% a year

earlier. Spain was worst hit with 12.5% unemployment. The UK had in November 2008 the

sharpest rise in unemployment in 16 years to 5.8%;

As consumers fear job losses, they reign in spending, especially on discretionary purchases. In

the UK consumer expenditure fell by 0.2% in the third quarter 2008 and in France consumer

expenditure fell by a monthly 0.4% in October 2008;

Consumers with high levels of household debt are more exposed to the recession, as job losses

could result in defaulting on mortgages or other loans. Countries which went through housing

bubbles typically have high levels of consumer indebtedness;

Consumer confidence has fallen sharply as Western European consumers brace themselves for a

recession which could be the worst in decades. Between December 2007 and November 2008,

the consumer confidence indicator fell in the UK from -5.0 in to -26.8 in; in France from -9.8 to

-29.3, and in Germany from 2.1 to -14.7. Similar worsening in consumer confidence was

recorded throughout the continent;

 Monthly consumer confidence in the UK, Italy, France and Germany: 2007-
2008

Softening consumer demand will affect exports as most Western European trade is conducted

within the region:

Some economies are highly dependant on exports. In 2007, exports as a share of GDP amounted

to 61.3% in the Netherlands, 40.0% in Germany, and 37.2% in Sweden. France, Italy, Spain and

the UK were far less dependant on exports, which contributed less than a quarter of their GDP.

As a result of the downturn, inflation is easing across Western Europe. This is a welcome

development but some fear that falling inflation could become deflation, i.e. a persistent decrease

in price levels. Deflation could have dire consequences:

Inflation in the eurozone eased from 4.0% in July 2008 to 2.1% in November 2008, as a result of

falling global commodity prices and softening consumer demand. The receding threat of

inflation enables central banks to lower interest rates to stimulate the economy. Consumers

benefit directly from the slowdown of inflation as their purchasing power is sustained;
 Yet some analysts fear that falling inflation could become deflation, that is, a sustained fall in the

price of goods and services. Deflation could have a negative impact on the economy. When

prices fall, consumers defer purchases in the hope for cheaper prices; similarly, businesses and

investors hoard money rather than spend or invest it. This in turn reduces demand, causing

prices to fall further and aggravating recession. While the chances for deflation in 2009 remain

low, this potential is a major concern.

While virtually the entire region is facing recession, some countries are expected to fare worse:

The eurozone officially sunk into technical recession in Q2 and Q3 2008, as two of its biggest

economies, Germany and Italy, shrank for two consecutive quarters. Sweden and Ireland have

also slipped into technical recession in 2008 and Spain and the UK are expected to enter

technical recession in the last quarter of 2008;

The UK is expected to be among the worst hit by the crisis, mainly due to its bursting housing

bubble, high household debt, a large government budget deficit and overdependence on the

troubled financial sector. The UKs problems have been exacerbated in Q4 2008 by the

depreciation of the Sterling. The currency depreciation increases the price of imports, thus

burdening consumers and businesses who are already suffering because of the recession. The

UK economy is expected to shrink by -1.3% in 2009;

Germanys economy, while in technical recession after shrinking -0.4% in Q2 2008 and -0.5%

in Q3 2008, remained less troubled by the mortgage crisis and consumer confidence is higher

than in other economies. Yet Germanys dependence on exports puts it in a weak position and its

economy is expected to contract by -0.8% in 2009;

France has managed to escape a technical recession so far, as consumer expenditure and business

investments remained strong in Q3 2008 and propelled the economy to growth of 0.1%.
 However, the French economy is slowing and expected to contract by -0.5% in 2009;

Turkey is perhaps in the best position to escape recession in 2009. Turkey is an emerging

economy so its less developed financial system and reforms since its 2001 crisis have prevented

it feeling the impact as severely as other Western European countries. Turkeys demographic

profile is considerably younger than other countries in the region and this supports consumption.

Turkey is expected to grow by 3.0-3.5% in real terms in 2009.

In November 2008, the IMF slashed growth predictions for all developed economies. All major

economies in Western Europe are facing a recession, while the UK is expected to fare worst by

shrinking -1.3% in 2009. France is expected to contract by -0.5%, Germany by -0.8%, Italy by

-0.6% and Spain by -0.7%;

Job losses are expected to be severe. In the UK it is estimated that unemployment could rise to

9.0% by 2010 from 5.8% in 2008;

A coordinated Western European fiscal stimulus could prove vital for economic recovery. In

November 2008 the UK put forward a stimulus package of 20 billion and Germany, the

regions biggest economy, announced a 23 billion package. Many, however, see the German

stimulus as insufficient and Germany indicated more steps could be announced in January 2009.

Solution

EUROPEAN RESPONSE TO THE CRISIS

Western European governments ability to coordinate their responses to the crisis is a positive

sign:

After initial confusion in October 2008, governments in Spain, Germany, Switzerland and other
 countries followed the UKs lead to recapitalise banks in order to prevent a financial meltdown;

Interest rates have been slashed across the continent with the Bank of England lowering its rate

from 5.0% in September 2008 to 2.0% in November 2008. Similar cuts were made by the

European Central Bank and Swedens central bank;

A coordinated fiscal stimulus was proposed by the European Commission in December 2008

amounting to 200 billion, mostly to be implemented through national budgets. Stimulus

measures vary between member states. Whereas the UK chose to cut taxes to encourage

consumption, Germany indicated that it will focus on investments in industry and infrastructure;

However, the proposed EU stimulus is much smaller than in the USA, where the

stimulus package is expected to exceed US$500 billion or Chinas stimulus package

of US$586 billion. Coordinated EU action and intervention may prove necessary to

prevent further deterioration.

Conclusion:

o Excessive borrowing affects the European union that lead to European crisis.

o We Conclude that the Consumer Confidence and high investment may lower the risk of

recession during the global financial crisis.

o Excessive borrowings of the European areas affect the European union.

o Spending habits is one of the main reason why does the crisis occur.

o Austerity Measure sets the limit of spending and borrowing.

Vocabulary Words:
Austerity Measure - refer to official actions taken by the government, during a period of adverse

economic conditions, to reduce its budget deficit using a combination of spending cuts or

tax rises.

Recession - a period of temporary economic decline during which trade and industrial activity

are reduced, generally identified by a fall in GDP in two successive quarters.

PESTEL ANALYSIS

Political Factors

Political and legal forces can influence marketing decisions by setting the rules by which

business can be conducted.

Economic Factors

The financial markets are the pivotal function of a modern economy. By aiming towards

an increased level of integration, there will be a more efficient allocation of economic resources

and long term economic performance (European Commission, 2005). It has therefore been the

EU's policy to complete a single market in financial services (being a crucial part of the Lisbon

Economic Process) for addressing EU's global competitiveness.

Economic environment can have a critical impact on the success of the companies

through its effect on the supply and demand.

Four Major Economic Influences

Economic Growth
Unemployment
Interest Rate
Exchange Rates
Social Factors

Demographics
2008- EU is facing unprecedented changes in the populations that will represent

the challenge for the government to review and adapt existing policies as it continues to

shape the social structure of the EU population.

Fertility Rate
Fertility rate at the last estimates for 2008 by EUR-LEX stands at just over 1.5

children with a growth forecast 1.57 by 2030 (2009, p.21). In all EU countries, the

fertility rate would likely remain below the natural replacement rate of 2.1 births per

woman that is needed in order for each generation to replace itself. A period of slow

growth and in most cases- actual decline in the population of working age in the region

will constraint countries ability to grow from within (due to human capital constraint).

Mortality Rate
The Life expectancy has been rising steadily since the 20th Century, with an

increase of two and a half years per decade in the countries around the world holding the

record of highest life expectancy (EUR-LEX, 2008). The EU projects that life expectancy

for male would increase by 8.5 years over the projection period, from 76 Years originally

in 2008 to 84.5 by 2060 (EUR-LEX, 2009). For the female, life expectancy at birth

would increase by 6.9 years, from 82.1 in 2008 to 89 in 2060, marking a narrowing life

expectancy gap between both genders. Most of these increases in life expectancy itself

(from birth) will come from recent EU member states (Estonia, Poland, Hungary,

Slovakia etc). Children in the EU today will face a high chance of living to their 80s or

90s in the long term especially if they are from Western Europe with mid-high socio-

economic status.
The EU projects life expectancy for male: 8.5 years from 76 years originally.
 Net Migration
Migration already plays a predominant role in population growth today: in many

Member States, the size of net migration determines whether the population still grows or

has entered a stage of decline (EUR-LEX, 2009). Annual net inflows to the EU are

assumed to total 59 million people, of which the bulk (46.2 million) would be

concentrated in the euro area. The trend according to the EUR-LEX study, assumes that

this will decelerate over the projection period, falling from about 1,680,000 people in

2008 (equivalent to 0.33% of the EU population) to 980,000 by 2020 and thereafter to

some 800,000 people by 2060 (0.16% of the EU population). Interviews conducted with

respondent concur with the migration trend noting that the continued need for foreign

talent to drive further economic growth in the EU. It is therefore only a matter of time for

EU to work towards a harmonized migration policy for its member states to consider for

ensuring a sustainable growth between its own EU citizens with those from outside non-

EU countries.

Education
Education and training have an important place in the Lisbon strategy for jobs and

growth (European Commission, 2009). EUR-LEX studies expect that the ratio of children

and young people to the working-age population will shrink over the coming decade.

Nonetheless, the education and training systems in the EU are generally improving. The

EU benchmark on mathematics, science and technology graduates was already reached

before 2005. New growth has been registered in math, science and technology graduates

which were more than the original target set. Although good, benchmarks on early school

leaving, completion of upper secondary education and lifelong learning were the opposite
 with literacy rate amongst young children on the decline. The respective countries will

now need more effective national effective to address this fall.

Entrepreneurial Spirit
The Commission defines "Entrepreneurship" as 'the mind set and process

[needed] to create and develop economic activity by blending risk-taking, creativity

and/or innovation with sound management, within a new or an existing organization'

(EurActiv.Com, 2004). SMEs are considered the backbone of the European economy,

providing jobs for millions of European citizens and are the basis for economic

innovation. Back in 2004, conditions for SMEs and start-up companies are not as

favorable in the EU as they are in the US making entrepreneurial initiative and risk-

taking less developed.

Lifestyle Changes
Recent evidence shows that in industrialized countries people do not only enjoy

longer life expectancy, but they are also experiencing better health conditions in old age

due to both healthier lifestyles and more effective pharmaceuticals allowing people with

chronic diseases to control the adverse effects of illness (European Commission, 2009).

Social Mobility
A simple meaning on the term 'social mobility' refers to the degree to which an

individual or group's status is able to change in terms of position in the social hierarchy.

Population with the greatest access to education and adopting a more tolerant, if not more

open attitude towards the society will tend to experience a higher level of social

improvement (Blanden et al, 2005). Historically, the EU social mobility are mixed based

on Blanden's research study (2005) and Breen (2004) as countries like the UK and

Ireland seen as generally more rigid with any mobility associated with parental income

and educational attainment.

Technological Factors

Internet
The further rapid expansion of the internet to new retail lines such as online

pharmacies or also known as mail-order pharmacy has enabled patients to consider a

cheaper alternative to purchase medicines. Such services would tend to promote generic

alternatives through offering of price and product range comparativeness when patients

access their websites. Whilst the cost and convenience aspects have long been an

attractive feature for the online aspect of this business, several worrying factors have

emerged as a result.

Counterfeit Medicine
This problem was first addressed in 1985 (Pharmaceutical Technology Europe,

2010) in the World Health Organization (WHO) meeting with experts. With the explosion

of e-commerce from the year 2000, the problem has increased substantially with the

magnitude difficult to access due to the variety of the information sources available

(WHO, 2010). While the European Commission proposed several features to be present

on the medicines (i.e. mass serialisation, seals etc) (British Generics Association, 2010),

counterfeit medicine remains a growing threat.

Patient data Protection

Usage of online purchasing for medicines by patients on illegitimate sites has

resulted in the risk of private and personal health information being disclosed publicly to

unscrupulous operators (Berstein, 1999). The issue of spamming has become a major

concern for most internet users as likewise for the sick and vulnerable patients that

choose to source cheaper medication which in this case, is the generic drugs available.
 New Products and Research and Development Expenditures
Increasingly, the R&D spending by the pharmaceutical industry has been on a

decline forcing leading drug manufacturers to rely on existing lines of drugs for revenue

generation (Kollewe, 2010). Based on a report by CMR International disclosed in The

Guardian newspaper, the level of R&D spending had slipped by 0.3% in 2009 following

a 6.6% drop in 2008, marking an increasingly difficult period as leading pharmaceutical

companies shows only 7% of sales originating from new drug launched in the past 5

years.

Preventive Health Care

As stated in an interview with Ms Angela Farrell (2010), preventive healthcare

would a normal trend as medical cost continues to increase. As with having more elderly

people in the population anywhere now in the EU at present, the prevalence of chronic

and serious medical conditions remains on the rise.

Drug Delivery System

An area that has become increasingly popular within the pharmaceutical industry

based on interviews with Ms Angela and Mr. Gregor. It is reported that at present, failure

of drugs clinical trial are mainly through the failure to deliver the compounds to the area

it is needed most without going through some interaction with the human body along the

way (Cientifica,2007). It is therefore considered a very valuable and important

development for any technology that enables direct delivery of drug compounds without

triggering any or no side-effects on the patients.

Biotechnology
With 20% of new drugs launched from market each year derive from

biotechnology (EFPIA, 2009), the biotechnology field has long been a promising

development for the medical and healthcare purpose.

 Incremental and Disruptive Technologies
To practitioners in the drug industry, incremental (or sustainable) technologies

will come in form of mostly new drugs for an existing class with similar action

mechanism but '...differ in features such as, therapeutic profile, metabolism, adverse

effects, dosing schedules, delivery systems, for example' (GSK, 2008). Incremental

technologies are this sense, is seen as innovation capacity, which is according to

Wertheimer & Santella, 'the lifeblood of the pharmaceutical industry' (2009). The current

issue surrounding this subject matter has largely pertained to criticism that the

developments of 'me-too ' drugs were time wasting and a drag of existing resources

(R&D, money etc) towards 'fleecing unsuspecting consumers' (Wertheimer & Santella,

2009) particularly as the patented drugs life is ending.

Environmental Factors

Waste Product
Growing awareness of environmental impacts and the need to conduct tests to

evaluate such effects are creating cost pressures for the pharmaceutical industry (EEA ,

2009). Our discussion with Ms Hilary - Pfizer, has stressed that the need for drug

manufacturers (generic or otherwise) to be well verse with the latest EU drug legislation

and best practices adopted by surrounding countries (i.e. Sweden) in order to compete in

the EU market.

Non-governmental Organizations
The role of NGOs will become ever more crucial as the industry serves to

maintain a social responsibility outlook with the various stakeholders. Patient rights

group and other public interest group can prove to be an effective barrier during the

decision-making process.
 Global Warming
Pollution Control
Conservation of Energy

Legal Factors

Labor Laws
Europe's legal system are largely founded on Roman Law and Germanic

customary law and therefore share a common linkage. These have been highly influential

in shaping national codes and have given rise to legal frameworks that rely less on case

law and 'precedent' cases occurring elsewhere for countries within the European continent

(FedEE, 2010).

Health and Safety Regulations

HS regulations play an important in the medical drug industry owing to the test

type and chemical process used in production facilities. European Agency for Safety and

Heath at Work imposes directives on EU member states under Article 137 of the

TEC [8] which ranges from workplaces and safety equipment, chemical agents exposure,

physical hazards, biological agents to sector specific provisions which is updated

regularly to reflect the current trends in the EU workplace.

Consumer Protection
Consumer protection is provided for under the EC's Consumer Policy for the 493

million EU consumers. The Consumer Policy supports the aims laid out in Articles 153

and 95 of the Treaty establishing the European Community, which promote the interests,

health and safety of European consumers.

Benefit System
Welfare benefits across EU Member states are largely generous with many

offering free / low cost medical care for its citizen upon reaching the legal retirement age.
 The continued development in the region resulted in many of the EU member states

boosting some of the best health care system in the world (Eurostat, 2010) as a testament

to the growing ageing demographics of the EU residents.

Anti-Trust Law
EU's antitrust laws represent an important part of the market integration efforts by

the EC as it seeks to regulate a free market trading environment. Given that there are

numerous national companies for each member states, antitrust laws for the EU are

particularly geared towards addressing this under Article 107 of the Treaty.