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

Solution No. 4 (by Sudhakar Joshi-B16054)

Archetype 1:  Limits to Growth

Management Principle:  Do not push growth; remove the factors limiting growth.

This archetype depicts the European debt crisis in one the most apt way. Instead of trying to find out the factors that were limiting their growth, the European economies decided to push growth. To force growth Germany decided to impose a set of measures collectively known as Agenda 2010 Reforms.  These reforms brought down the wage rates, implemented easier rules to fire employees, encouraged short-term and part-time job creation and reduced welfare measures and provisions. This fuelled the German growth by means of reduced unemployment and lower wage rates bringing down the total cost of production. Also, Germany followed a policy of low public spending which is required to maintain the desirable infrastructure. These policies led to stagnation in living standards and a deteriorating infrastructure.

Also, since Germany was not spending in its own infrastructure, it loaned out the excess capital it had, to other countries in the Euro zone. These countries again tried to fuel their growth by means of high debt which was available at a lower rate from Germany and garnered a very high debt to GDP ratio. In order to arrange for the repayment of these debts, countries like Greece kept on taking even more loans. The tactics of pushing growth without addressing the limiting factors by these economies led to an unstable Economic model in the Euro zone, ultimately causing the crisis.

Reinforcing loop: Since Germany was running a huge trade surplus, it should have engaged itself in building more infrastructures and increasing the wage rates, which would have led to a demand in imports to which other European countries could have tendered.

Limiting Factors: The policies pursued by the peripheral countries of Europe (GIPICS) to fuel internal growth primarily by means of cheap debt available should have been avoided .These countries needed to build a capability to generate revenue by means of exports as well.

Archetype 2: Shifting the burden

Management Principle: Beware the symptomatic solution

The symptoms in the Euro crisis were that some member nations had garnered huge debts to facilitate high wages and infrastructure growth in their respective countries. However, some of these countries like Greece did not had manufacturing facility so were not able to indulge in exports and were dependent only on avenues like tourism to generate their revenue. As it came to picture that these countries were not able to pay off their debts, the symptomatic solution that was applied was to give even more loans in form of bailouts to these already struggling nations. These bailout packages were given so that the countries would use these to foster growth and be able to pay off loans.

But as it turned out, the already struggling economies were not able to put these packages to use effectively and were even further debt laden after these packages. This led to many countries like Belgium and Italy entering the crisis with Debt to GDP ratio of over 100. Also, when the information about Greece surfaced that it had been understating its borrowings, the condition worsened even further. It was also brought to notice that the bailout packages by institutions like IMF were not given entirely with an altruistic intent. The aim of these bailout packages was also to help the banks in America to recover their bad debts with Greece.

Archetype 3:  “Fixes that Backfire”

Management Principle:  A continuing series of fixes to a stubborn problem improves only momentarily.

Euro crisis had impact on every European nation as they were interlinked via Euro currency. Germany had given out huge loans to many GIPICS nations and Germany had a strong hold in controlling the Eurozone economics; it saw the crisis as a result of government profligacies. Even though it might have been true in context of Greece but it was not universally true. There were countries like Belgium and Italy that had a Debt to GDP ratio of over 100 but did not required the Troika Bailout and some countries like Ireland that had a Debt to GDP ratio of just 40 and ended up using the Troika Bailouts.

But the German government saw the situation as a result of government profligacy and applied new fiscal policies so that every Eurozone country followed Austerity. The solution prevented consumption and investment by Eurozone economies and led to fall in the Eurozone GDP by 4% in 2013.

Archetype 4:  “Tragedy of the Commons”

Management Principle:  A continuing increase of use of a common resource will eventually overstrain the resource until it crashes.

Before entering EU many peripheral countries had access to a very limited capital in the form of loans from rest of the world. These countries were only deemed eligible for small loans at high interest rates.

When the European Union was formed, it was seen as a strong coalition of nations. It was believed that even if one country defaulted on its loan, other country from the Union would pitch in to bail out the nation. As a result these peripheral countries got the right to get huge loans at very low rates. Even the banks that lent to these countries did not maintain the required capital to cater for the possibility of bad loans. As it turned out, these countries indulged in heavy spending and did not collected enough funds in the form of taxes or generated enough revenue to pay off these loans. They kept on using the common resource, i.e., the goodwill of the European Union to get insurmountable loans and ultimately when they started to default on their loans after the crisis; it affected the whole European Union.

Archetype 5:  “Accidental Adversaries”

Management Principle:  Understand your partner’s needs, see if you are unintentionally undermining them, and look for ways that support each other

After adopting a common monetary policy as part of European Union Germany started to follow Euro. This was in Germany’s favor since Euro was cheaper than Germany’s original currency and hence in a way, this lead to devaluation of Germany’s currency which in turn made its exports cheaper. But even after all this; Germany’s Economy was largely stagnant between 2001 and 2004. This was due to low industrial competitiveness and high unemployment rates in Germany. After 2003, Germany implemented reforms to reduce wage rates and weakened the labor protection laws in Germany. It also improved its manufacturing infrastructure and started large scale manufacturing.