Management Principle: Do Not Push Growth; Remove the Factors Limiting Growth

...

As Germany’s Export grew, its deficit kept on improving. The major consumers of Germany’s exports were Euro zone economies themselves since they had access to imports from Germany at very low cost and didn’t required to pay the taxes which they needed to pay, had they imported from outside Euro zone.

[pic 1]

The wage rates in economies other than Germany kept on increasing and Germany had the lowest wage rates. Also, Germany did not invest the money in infrastructure & loaned out the capital to other countries which made it easier for them to pay for their imports. The cost of product in their own country was more than importing the goods from Germany. Hence, the exports of Germany kept on growing while these countries kept becoming debt laden. Germany’s strategy to growth undermined its neighbor’s prospects.

Archetype 6: “Success to the Successful”

Management Principle: Should the success of the successful spell failure of the failed? Break this vicious zero-sum game cycle.

This archetype talks about two cycles; one in which the things keep on getting better and better for some and the other vicious cycle in which things keep on getting worse. If a country was unaffected by Euro zone crisis, it was Germany, the unemployment rates in Germany fell during the Eurozone crisis. The exports remained robust due to demand from countries like China. However, things kept on plummeting for Greece. The country was under huge debt and the bailout packages were not sufficient to come out of the depression. Austerity measures were imposed and its sovereignty was also threatened.

[pic 2]

In a situation like this Germany could have held hands with Greece and helped it to come out of the recession. An increase in inflation and wage rates in Germany can significantly help other nations. If the wage rates rise then a growth for the demand of imports could be used to grow economies of other debt laden countries of Eurozone. Germany can also write off significant portion of debts for Greece since Germany is also responsible for the situation of Greece in some capacity.

Archetype 7: “Balancing Process with Delay”

Management Principle: In a sluggish system, aggressiveness produces instability. Either be patient or make the system more responsive.

The heavy credit lending by banks of Spain, Ireland and Greece supported by German and French banks to finance property growth led to a housing inflation in these peripheral countries of Eurozone. This is also popularly called as the housing bubble. Cheap loans were provided to property builders and house buyers. Property prices were highly overvalued around 2009 and when the housing bubble burst the property prices fell to 1/3rd of their market value. Before the collapse, the banks thrived on a heavy borrowing by the property sector. The collapse of property sector meant that the value of the asset on which the loans were based fell down and the debtors struggled to pay back their loans. Also, to finance these loans some banks took money from international market rather than from local saver, which again put these banks under further pressure.

In many of these cases there were early signs of imbalance and a proactive action could have been taken to prevent the market crash, had the measures been taken on time. For example- In Ireland, the Central bank in November 2005 had stated that it was aware that the property was overpriced by almost 20 to 60 % but it failed to take any action.

Archetype 8: “Growth and Underinvestment”

Management Principle: If there is a genuine potential for growth, build capacity in advance of demand, as a strategy for creating demand.

One of the reasons cited for Euro crisis is under investment by the core nations in their respective countries. During 2000–2007, the global pool of fixed-income securities increased from $36 trillion in 2000 to $70 trillion in 2007. These ready to invest securities were then provided by the core nations to the peripheral countries and was used to fuel their financial bubble. These bubbles later busted and even though the price of assets went down considerably the value of these debts remained same and the interest rates kept on surmounting.

Also the countries that took loans failed to apply these loans to build an efficient system. Countries like Greece spent the money imprudently on pensions and wages for public sector employees with the latter doubling during a period of 10 years. Ireland spent extensively on building property bubbles.

Archetype 9: “Escalation”

Management Principle: Look for a way for both sides to win, or to achieve their objectives

As discussed, in Eurozone there was heavy capital outflow from the core nations (Germany, France) to the peripheral nations like Greece, Portugal, Spain and Ireland. Most of this capital got invested in the non-traded sectors like housing. This led to the creation of various financial/housing bubbles in peripheral nations. Some of these strategies especially by Germany were to gain competitive advantage in exports over every other European country. About 40 percent of German GDP came from exports.

These conditions led to an imbalance in the economies of these peripheral nations and when these financial bubbles busted, the peripheral nations were not able to pay off their loans, austerity measures were imposed on these nations. These methods have made it even more difficult for these debts hit nations to recover since the governments now have a constraint on their spending. Thus, we need to follow an approach that would allow recovery of these nations and ensure a win-win situation for both sides. Germany maintains a position that the conditions in the Euro zone are not due to its faults, but if it will write off debts for some of these nations so that the debts can come at a manageable rate say around 180 % of GDP, it will ensure the sustenance for these countries as well as the whole European Union. This would ultimately benefit Germany as well. Measures like Austerity may look viable in the short run but imposed fiscal policies can also be seen as a challenge to the sovereignty of a nation.

Archetype 10: “Eroding Goals”

Management Principle: Hold the vision; do not compromise established standards for short-term gains.

One