European Union (EU)
This paper is about the EU, its major policies, the key objectives, legislations, instruments for implementing those policies, who the members are, and the institutions involved in the implementation of the trade goals.
Key word: European Union; Mission of the EU.
Introduction
The establishment of the EU intended to work toward common goals of European countries. This free trade zone or economic community was and is very successful which seeks special purposes such as political dialogue, free trade and freedom of movement, economic, financial, and cultural cooperation. Special attention was focused on the trade laws, regulations, and other issues (Kotler, 1999, p. 371).
The key objectives are to keep market open, ensure fair trade, enforce the legislation objectively and transparently, ensure trade partners respect WTO legislation, and promote improvements to the system (European Union). The EU provides sovereignty to its Members to act as independent ones on behalf of the EU or in other words to welfare and interest of the Union as a whole (European Union).
The integration of the EU after 2nd World War enabled the EU is to raise standards of living, build an internal market, launch the common currency - euro, strengthen the Union’s voice in the world. To realize these goals the EU has been implementing several trade defense instruments:
1. Anti – dumping policy
2. Anti – subsidy policy
3. Regulation on trade barriers
4. Protective measures.
The EU even uses a common currency, the euro monetary system which tend to make the trade zone more effective and compatible in the international market (European Union). The EU has such a structure that there are 5 institutions and each of them is responsible for a respective objective (European Union).
Today the EU is one of the influential and largest trade blocs or single markets that includes 15 member countries. Those 15 member countries totally have more than 370 million consumers and account for 20% of the world’s exports. The EU is going to enlarge and accept 13 European countries. The EU also intended to improve the relations with non-member countries and for this purpose it planed to develop special policies on trade with nonmember countries (Kotler, 1999, p. 371).
Nowadays, the EU is on the 5th place ahead of the US and Japan. The EU is the leading player in international market (European Union).
European Union
The European Union (EU) was established after 2nd World War. France officially undertook the establishment of the EU proposing to create “the first concrete foundation of a European federation”. On May 9, 1950 the EU was created and initially six European countries joint to the EU: Belgium, Germany, France, Italy, Luxemburg, and the Netherlands. Then 9 countries joint to the EU and today the number of the member countries is 15 (later joint Denmark, Ireland, the United Kingdom, Greece, Spain, Portugal, Austria, Finland, and Sweden) (European Union).
The EU today is preparing for the accession of 13 European countries – Bulgaria, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia, Slovakia, and Turkey. In order to join the EU, these countries need to fulfill the economic and political requirements, which in other terms called “Copenhagen criteria”. Those requirements are mainly related to the following:
1. Member countries must be a stable democracy, respecting human rights, the rule of law, and the protection of minorities;
2. Member countries must have a functioning market economy;
3. Member countries adopt the common rules, standards and policies that make up the body of EU law.
As these countries have not yet fulfilled all the requirements, they need financial resources or in other words they need money. The EU assists those countries providing financial resources to those countries The EU provides sovereignty to its Members to act as independent ones on behalf of the EU or in other words to welfare and interest of the Union as a whole (European Union).
All of these countries will integrate in order to realize the principal objectives of the EU. Those objectives are:
1. Establish European citizenship
2. Ensure freedom, security and justice
3. Promote economic and social progress
4. Assert Europe’s role in the world.
5. institutions implement all of these objectives:
1. European Parliament (EP) – This represents the will of 374 million European citizens’ and assembles pan-European political groups that operate in Member states. The overall task of the EP is to make and adopt the laws with Council, to adopt the budget at the end, and control/supervise all institutions. It is elected every five year.
2. Council of the European Union – This is the most influential institution in decision making process. The main functions of this institution is to exercise the issues related to the legislation, to suggest and monitor the international agreements, implementing foreign and security policy, monitor the budget of the EU with the EP and finally to coordinate the activates of the Member States.
3. European Commission (EC) – EC play the leading force in the Union’s institutional system. It is mainly responsible for creating the initial outline of legislation, implementing the legislation to assure that law is property applied, and representing the EU in international scope and signing trade and cooperation agreements.
4. Court of Justice – This institution is responsible only the issues related to the justification. It justifies the disputes that arise among Member States, EU institutions, businesses, and individuals. They check whether laws are in the accordance with the justice or not.
5. Court of Auditors – Its major function is to check whether all the Union’s revenues and expenditures are going in a regular manner, according to the EU budget.
Today European Union is the leader in the international trade and with its member countries it makes up the fifth of the world trade. The EU had 4 trade defense instruments, which enables the EU to achieve its objective related with economic and social progress. Also this will lead the assertion of the EU’s role in the world. Those instruments are the followings:
1. Anti-dumping policy, which had the meaning of taking steps to stop the process which enables the exporters to bring goods at such a price which is lower compare with the prices of the goods in the domestic market.
2. Anti-subsidy policy that intended to restrict or fully eliminate the imports of those goods that in the third country of origin had low prices. Those prices are artificially kept low by public subsidies.
3. Regulations on trade barriers – above mentioned policies resulted reinstating temporary custom duties on the imports that are in the question.
4. Protective measures – if the amount of the imported goods increases very rapidly which hurt the national producers, there should be undertook protective measures such as restricting the imports.
The EU to make the integration more efficient uses these trade defense instruments. Since today they achieved stability, peace and economic prosperity. These resulted in the raise of living standards, building an internal market, launch the euro, and the strengthening the Union’s voice in the world (European Union).
Today the EU has 15 members counting more than 370 million consumers, which account about 20% of the world exports. Later on the EU’s mission is to enlarge and include more nations. Today there are 13 candidate countries that will increase the number of Member countries to 28, which will have totally 450 million consumers (Kotler, 1999, p. 371).
Anticipated Analyses and Conclusion
Although the EU is the fifth major trade bloc in the world, there are some weak sides the EU should consider very carefully. At first the EU has to set special policies concerning the trade with nonmember countries to avoid or secure from expected outsiders’ barriers. Instead the EU can enact such policy that will deepen the relationships with nonmember countries. As soon as 13 countries enter into this free trade zone or bloc, the EU will become more successful and will increase exports to support member countries’ consumers. Yet, however much nations and regions integrate their trading policies and standards, each nation still has unique features that must be understood. A nation’s readiness for different products and services and its attractiveness as a market to foreign firms depend on its economic, political – legal, and cultural environments. The EU became driving force into the international market for member countries. Such kind of economic communities are needed to increase today’s economic growth and make countries better off.
Most rapidly developing fields are thought to contain at least two types of persons, those who are “with it” and those who are not. Managerial economics is no exception to this very general rule.
Those who are considered to be “with it” in managerial economics, or operations research as it is often called today, can be identified in part by their age (youth is thought to be a necessary, if not a sufficient, condition for vitality) and in part by their facility with computers and predilection for applied, operational problems. Other characteristics that set the new breed of operations research specialists apart from more conventional managerial economists include an almost evangelistic elan, a belief in the quantifiability of social, economic and technological relationships, relatively strong mathematical backgrounds, and a contempt for the paraphernalia that surrounds, if not for the concepts that underline, classical economic theory. Terms such as “marginal revenue productivity,” “opportunity cost,” and “returns to scale” seldom occur in the professional jargon of operations researchers, although other terms that embody identical concepts are essential elements of their growing professional vocabularly.
Economists have played a prominent role in developing many of the operational techniques that are so familiar to operations research as we know it today—and with good reason. For whatever its application, operations research finds its raison d’etre in the optimal allocation of scarce resources. Whether one’s objective is to maximize a strategic nuclear capability, the profitability of a manufacture’s product mix, or to minimize the number of highway fatalities per year, the cost of transporting goods from factories to warehouses, or of blending a wide variety of materials to create animal feeds or gasolines or sausages, the problems remain the same. Scarce resources committed to one use necessarily are withdrawn from another, and benefits obtained from one output may be enjoyed only at the cost of benefits foregone from others. Management’s function, again, is to choose from among the (perhaps infinite) set of attainable input-output combinations, or marginal tradeoffs, that which is, in some sense, most desirable. Accordingly, an operations research specialist’s function is to employ his analytic skills to assist responsible decision makers in the often-difficult tasks of:
1. Accurately defining and quantifying the set of outputs attainable from an organization’s (necessarily limited) pool of productive resources;
2. Quantifying to the extent possible, the organization’s, or decision maker’s, criteria for choice among these outputs; and
3. Deriving from 1. and 2. the operational implications of the firm’s objectives and output possibilities by solving for an optimal solution to its resource allocation problem.
Operations research, then, shares the classical economist’s emphasis on optimization but adds to this an emphasis on the quantification of underlying structural relationships, resource limitations, managerial objectives (or choice criteria), and solves for their operational implications in very precise and practical terms—so many units of X and so many units of Y should be used to maximize the profitability (or minimize the cost) of producing units of good A and b units of B in such-and-such a fashion. In addition, a creative analyst will attempt to measure the sensitivity of this problem’s solution to the many assumptions that have gone into its specification. How important is it to an organization, for example, to employ exactly X and Y units of resources to produce goods A and B in exactly the specified numbers? How much would be lost by producing a little less of A and correspondingly more of B? Or how much more could be obtained by relaxing one or more of the (physical, institutional, or financial) restrictions built into a particular problem’s solution? Information of this sort, concerning changes in the ground rules under which resource allocation decisions take place, often are of greater use to creative managements than specific solutions for a specific, short range production, inventory transportation problem. Mathematical programming is one of the basic tools that the operations researcher or modern managerial economist uses in meeting these responsibilities, as the greatly simplified but nevertheless typical problem in operations management presented in the next section serves to illustrate.
The core of managerial economics historically has been the application of marginal analysis to determine optimal solutions for specific managerial problems. Marginal analysis, and its related theory of the firm, have roots deep in the mathematical calculus. The basic concept, however, can be explained readily in nonmathematical terms.
The essential notion underlying all marginal analysis is that the search for an optimum or best possible position can be attained by trading, at the margin, one small additional quantity for another. Thus, assume that we want to maximize net revenues, what we called “net income after taxes (earnings)”. To do this for one given product, the business manager should continually compare the additional sales and revenues and costs he realizes or incurs by making small changes in the product’s output level. As long as small increases in output add more to the firm’s revenues than to its costs, marginal revenues can be said to be greater than marginal costs and additional units of output can be seen to be profitable.
Similarly, should labor or capital resources be transferred from the production of one good to another, marginal additions to revenue from the second good must be offset against marginal losses in revenue from the first. Should the additions be larger than the transfer is to increase the firm’s profitability. Similarly, should small amounts of one resource (such as capital) be substituted for small amounts of another (such as labor) to produce the same level of output, the additional costs incurred by increasing one’s use of the first resource must be offset against costs saved by reducing the use of the second. Again, should the cost savings be greater than the cost increases “at the margin,” the transfer will be profitable and presumably desirable; if not, the transfer should not be undertaken.
In general, marginal comparisons as these are not limited to specific, discrete choice at particular levels of output or specific resource combinations. Rather they are pursued continuously until all favorable transfers or tradeoffs have been adopted and optimal output levels or resource combinations have been obtained. For example, if a product’ marginal revenue is greater than its marginal cost at a particular level of output and a production increase is profitable, then a further increase at the new margin may be desirable, and again at a still higher output level, until finally, marginal revenue no longer exceeds marginal cost and further increases in output no longer add to the firm’s profitability.
One could, if he wished, visualize this decision process of trading at the margin as resembling that adopted by a myopic mountain climber (say Mr. Magoo) who doesn’t know precisely where or how far away the top of the hill (the optimum) may be and does not care. He is confident, however, that as long as he goes uphill, he will eventually get to the summit. For the business manager, the hill’s height is measured in units of profit rather than distance above sea level; its gradient is called marginal profit (which, in turn, is the difference between marginal cost). As long as marginal revenue is greater than marginal cost, of course, their difference
marginal profit = marginal revenue – marginal cost
is positive, and the course of action of our myopic decision maker is well defined—output should be increased. When finally he reaches the summit there is, of course, no place else to go. His profit gradient is zero; marginal cost and marginal revenue are identically equal to each other (by definition), and an optimum output level has been obtained.
The basic concept is very simple and very general. However, in rough terrain containing more than one peak, or local optimum, it is potentially misleading. Then one faces the problem of deciding whether one is at the highest of attainable summits or just on top of a foothill. Fortunately, there are simple mathematical tests for making this determination. But they need not detain us here.
For our present purposes, it is necessary to note only that the marginal or incremental evaluations provide us with a decision rule for evaluating the possible tradeoffs available to a firm between different courses of action. As long as the marginal relationships between different tradeoffs are not equal to one another, it benefits a firm to make some changes. Thus, if one additional unit of output increases costs, it pays the firm to increase its level of output. Similarly, if the wage costs associated with an increase in labor inputs are less than the capital costs required to increase to increase output by an identical amount, it pays the firm to use more labor and less capital to achieve any increase in production. Or if marginal revenues obtained per unit of cost from one product are greater than those obtained from another, it pays the firm to transfer resources from the production of one good to the other. At the margin, therefore, a firm’s operations are optimally balanced only when such favorable tradeoffs no longer exist, that is, when these marginal tradeoffs are equalized all around.
The key terms, then, are tradeoffs and equalization of margins. And the purpose, stated once again, is to achieve an optimum, either in the form of maximum net profits or minimum costs. To develop these marginal concepts further, we shall next consider two illustrative applications commonly encountered in business: the pricing decision and inventory management.
Conclusion
The uses of marginal analysis in business problem solving are hardly exhausted by the illustrative pricing and inventory problems. Indeed, the basic concepts of marginal analysis underlie almost all optimization procedures used by managerial economists or operation researchers today.
The study of managerial economics begins with developing an awareness of the environment within which managerial decisions take place. It is a complex environment. Considerable disagreement exists, for example, as to what managerial goals should even be. In large measure this disagreement serves a great many diverse interests: those of stockholders, employees, the local community, the larger society or nation within which the firm operates and finally, of course, the interests of specific members of the management group itself. Furthermore, management can be a highly diverse group; new managerial trainees may view the firm very differently from middle level executives, who, in turn, may have different perspectives than top-level management.
Ask an executive to define his goals for the firm and a whole set of partially contradictory answers may well be forthcoming. He might, for example, cite alternatively the maximization of profits, or sales or the value of the firm’s assets as his goals; in addition, he might discuss stability of employment, managerial control, employee and community welfare, customer satisfaction, or the minimization of costs. Difficulty in defining goals is not limited to businessmen, however. Bentham’s “greatest good for the greatest number” satisfied countless generations of intellectuals before someone finally realized that it contained one “greatest” too many. Moreover, businessmen may be well aware that their proclaimed goals are less than fully, or even comfortable with one another. Quite properly, they feel often that one of management’s key responsibilities is reconciling or arbitrating divergent views and interests. Consequently, managers, like politicians, may think of their objectives in terms of service to, or tradeoffs between, diverse and sometimes bitterly competitive interests and interested parties.
The absence of a single well-defined objective usually creates analytical problems when a decision is being made. Actions that are rational in terms of one objective (maximizing profits, for example) may be largely inconsistent with another goal (such as maximizing employee welfare). All of this suggests that conflicts are almost bound to arise in the situations modern managers confront. These conflicts must be reconciled somehow—and quite often at the highest levels of management. But no general solution or resolution is now at hand. It is important to recognize, however, that conflicts exist and must be dealt with, for analysis, or choice, presupposes criteria or goals.
Within these pages, we will largely “beg the question” of conflict and conflict resolution. We shall simply assume that managerial goals or objectives can be specified. Indeed, we shall go even further and assume in most instances that a firm’s primary goal is profit maximization, or maximization of the present value of the firm’s expected future earnings. We shall define these terms more precisely in subsequent chapters. At this point, a rough translation for such a statement is that a firm’s primary objective is to maximize the firm’s market value to its owners. We would not want to defend this assumption to the death. But we can point out that managerial economics is built largely on the presumption that profit maximization is the dominant goal of management. And even if it is not, the analytical techniques built on that assumption could still be very helpful in analyzing certain limited problems.
To satisfy his firm’s goals, however these may be specified, a business manager today has at his disposal certain resources in the form of people and capital (plant and money to finance his operations). He also has available a growing body of knowledge regarding utilization of these resources to meet objectives. Basically, this book treats some of the particular analytical tools that make up this body of administrative or managerial knowledge. However, to apply any analytical techniques one needs information. So before discussing the analytical techniques themselves, let us survey a few of the more basic data generated by and available to business managers, specifically those summarizing the financial position and achievements of the firm.
Conclusion
The managerial function, to somewhat oversimplify, consists of utilizing and analyzing information so as to organize resources to serve a specified objective.
Managerial economics conventionally has stressed the concepts underlying these analytical techniques. To the best of its ability, managerial economics has focused on the development of tools for finding an optimal, or best, solution, given some specified objective. Defining that objective may not always be easy, but managerial economics presupposes that somehow or other the objective can be specified. Indeed, managerial economists feel most comfortable if the objective can be defined as profit maximization which, roughly translated, means making the most possible money for the owners of the firm, given the resources available. They recognize that this objective may not be the most socially responsible. Sometimes compromises and other objectives must be entertained. But managerial economists would argue that their analytical techniques, even given these limitations, make a contribution to improving the productivity or efficiency of their enterprises. Furthermore, they would insist, with considerable propriety, that by trying to be efficient, their firm would contribute more to the wealth available to all groups in society than if it pursued other, more ambiguous goals.
Industrial Assurance Agent.
The industrial life insurance offices and friendly societies employ representatives to call at the homes of their policyholders to collect the weekly premiums and hopefully to sell further policies. They are not intermediaries in the same way as the others. In this case the representative is employed by the insurance company but nevertheless he or she performs the functions of an intermediary.
SELF-INSURANCE
As an alternative to purchasing insurarice in the market, or as an adjunct to it where the first layer or proportion of a claim is not insured in the commercial market, some public bodies and large industrial concerns set aside funds to meet insurable losses. As the risk is retained within the organisation, there is no market transaction of buying and selling.
These organisations have made decisions to self-insure because they feel they are large enough financially to carry such losses, and because the cost to them, by way of transfers to the fund, is lower than commercial premium levels as they are saving the insurer's administration costs and profit.
REINSURANCE
Having decided on the maximum that it is prepared to lose in the event of a major loss, an insurer is faced with a number of choices. He may refuse the risk, agree to accept a part of it ("coinsurance") or accept it with the intention of reinsuring. What is important to know here is that an insurer is faced with the same pioblem as the insured - to share his risk so as not to suffer a loss that would be catastrophic. In the case of co-insurance, insurers share the risk (in the same way as Lloyd's underwriters share risks).
Co-insurance differs from re-insurance inasmuch as the insured has a relationship with every insurer whose name appears on the policy document. In re-insurance the insurer is himself fully liable to the insured because he (the insurer) has made arrangements for reinsurance and the failure of the reinsurer cannot therefore affect the insured.
Proprietary companies are owned by the shareholders whose liability for losses is restricted to the nominal value of their shares (basically that is the originally stated face value of the shares).
MUTUAL COMPANIES
Mutual companies have been formed by Deed of Settlement or registration under the Companies Acts. They are owned by the policyholders who share any profits made. The shareholder in the proprietary company receives his share of the profit by way of dividends, but in the mutual company the policyholder owner may enjoy lower premiums or higher life assurance bonuses tha would otherwise be the case.
It is no longer possible to tell from the name of a company whether it is proprietary or mutual. Many companies which were originally formed as mutual organisations have now registered as proprietary companies.
There are other ways of classifying insurance companies.
(a) Specialist companies- are those which underwrite one type of insurance business only, e.g. life companies, engineering insurance companies.
(b) Composite companies- are those which underwrite several types of business.
INDUSTRIAL LIFE INSURANCE
(HOME SERVICE INSURANCE)
These are proprietary companies transacting "industrial" life assurance and increasingly, "ordinary" life assurance as well. Their activities in industrial life assurance are controlled by the Industrial Assurance & Friendly Societies Acts. Premiums are collected weekly, fortnightly or monthly. Collectors are employed to call at the homes of the policyholders and new business is also transacted in this way.
Ordinary Branch life assurance premiums are collected quarterly, half-yearly or annually, or paid by Direct Debit monthly. If the premiums were physically collected more frequently than every two months the policies would be considered to be Industrial Life Assurance and subject to the appropriate laws.
COLLECTING FRIENDLY SOCIETIES
These societies are run on a mutual basis and are formed by registration under the Friendly Societies Acts. They transact industrial life assurance and, in some cases, personal accident and sickness cover.
Friendly societies can issue specially attractive life assurances subject to an overall premium limit of quite a low level; this premium limit does not apply to Industrial Life Assurance companies.
CAPTIVE INSURANCE COMPANIES
Captive insurance is a method of transacting risk transfer which has become more common in recent years among the large national and international industrial compahies. The parent company forms a subcidiary company to underwrite certain of its insurable and sometimes otherwise uninsurable risks.
Indeed the incentive to form a captive company for many large industrial concerns was that the insurance market generally was not prepared to write particular risks or provide full cover (an example would be insurance guaranteeing a product's performance).
MUTUAL INDEMNITY ASSOCIATIONS
Mutual indemnity associations differ from mutual companies in that the latter will accept business from the public at large, whereas an indemnity association originally would only accept business from members of a particular trade. Over the years many of the associations have had to accept business from members of the public in order to have greater financial stability and spread of risk and have been reformed as mutual or proprietary companies.Examples of trades which had such associations at one time were pharmacists, farmers, furntiure manufacturers and shipowners.
LLOYD'S UNDERWRITERS
There are just over 26,000 members of Lloyd's grouped into approximately 400 syndicates. The trend seems to be a reducing number of richer members (names) grouped into larger syndicates. These syndicates can be made up of only a few members or in some cases more than a thousand.
We should note that the "names", the underwriting members, are not normally insurance professionals. They come from many walks of life including the professions, the world of entertainment, the aristocracy etc. Each underwriting member is, however, fully and personally liable for all the business written on his behalf by the underwriter of the syndicate.
In view of this unlimited liability it is essential that strict regulations apply to any person wishing to become an underwriting member. For example UK member must nowadays provide evidence of minimum means of 250,000 pounds and also deposit a proportion at Lloyd's.
INTERMEDIARIES
The intermediaries in the market are insurance brokers, agents, consultants and a variety of oiher people operating with differing titles. In some respects they all vary slightly in what they do, how they do it and in their responsibility for their actions.
Agent.
An agent in law is one who acts for another but in insurance the term is usually reserved for the individual or firm whose main occupation is in another field.
Broker.
A broker is an individual or firm whose full-time occupation is the placing of insurance with insurers.
There are two categories of brokers:
(a) Lloyd's brokers: they are the only persons permitted to place business at Lloyd's.
They a)so place business in the company market;
(b) other brokers (just termed "brokers").
Both categories are full-time professionals who must be registered in accordance with the Insurance Brokers (Registration) Act 1977.
They normally act as agents for the insured (Lloyd's brokers always so), and are generally remunerated by a higher rate of commission than agents. By calling themselves "brokers" they are holding themselves out to be experts in the field of insurance and have a higher duty of care to their clients than agents.
Insurance Consultant.
Another category of intermediary is the insurance consultant, who may act in a similar manner to an insurance broker.
The term 'market' denotes a place where people buy and sell goods. There is, of course, no good reason why services should not also be sold in a market. For many years Lloyd's of London was the only place where representatives of buyers could meet sellers face to face but there are now similar markets in the United States.
Most insurance today is arranged by intermediaries acting on behalf of clients. Their job is to arrange insurances on behalf of people who ask them to do so but also to encourage people to insure in respect of needs which the intermediary - being experienced in insurance and risk - makes them aware of.
The diagram shows the general structure of the insurarice market. The buyers in the market are the public, industry and commerce as well as some local government and nationalised enterprises. Obviously there is a difference in the sizes of risks offered ranging from the contents of very small flats insured against fire, to large office blocks in the centre ot a big town.
The people who offer insurance cover are the insurers who may be proprietary companies, societies, mutual indemnity associations or Lloyd's Undenvriters. Insurance may be bought directly from companies at their branch offices or through their represeptatives. Most insurance, however, is arranged through intermediaries who are approached by prospective insureds or bring the need for insurance to the notice of their clients.
Intermediaries are brokers and agents who act on behalf of their clients but are usually paid in the form of commission by the insurers.
