Pestel Analysis Of Various Factors Eu Matters Economics Essay

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 [1] ) for addressing EU’s global competitiveness.

Since the economic crash and subsequent global crisis there have been calls for closer monitoring of the financial system and better EU coordination. With the failure of the Lisbon Strategy outlined in 2000 (Wyplosz, 2010), many parties has urged a relook at the model particularly with the global economic crisis afflicting the EU. With the collapse of US investment bank Lehman Brothers in September 2008, there has been no shortage of politicians rushing to describe what is to be done differently in the financial sector in future (Dullien & Herr, 2010).

The financial crisis has made it clear that the financial markets are in clear need of reforms and a far more effective regulation to govern the future growth of the financial markets in the EU. While the topic has now focused on the Eurozone crisis, the financial market regulation at both national and EU level, has been experiencing a great deal of changes for which some of the important areas of the EU market regulation, ongoing process and most significant plans evaluated. The strength and confidence in financial markets will need to be re-established as pointed out by the Director General (2010).

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The European Commission has presented several draft directives that is undergoing evaluation by the decision making bodies around Europe. Unlike the US, the EU has had several attempts in harmonising the financial markets (through the Lisbon Process) albeit not entirely successful. While all the financial institutions in Europe are very closely linked to each other, there has been a lack of a uniform basic regulation for financial supervision as national governments tend to pursue those which is in the best interest of their country rather than the region. This therefore allowed institutions from neighbouring countries to enter into risky transactions in those markets with tight supervision but greater access of capital. The European Commission’s directives are now letting several of the directives be considered for legislative purposes.

Higher capital requirements for banks.

Establishment of an European ratings agency that independently evaluate securities of issuers.

New rules for Derivatives Trading and Securitisation

Creation of a European System for Financial Supervision with a Risk Board being set up alongside those issues mandatory instructions to national supervisory authorities.

This however will be a challenge to the EU as such measures would potentially affect the sovereignty of individual national governments to pursue internal policies, something which several European nations are not willing to give in as seen in the Greek crisis. Such directives are not expected to be introduced by end 2010 with expectations gathering that these directives themselves will be ‘watered down’ from its original form making it toothless for enforcement purposes (Dullien & Herr, 2010).

Business Cycles

Despite coming out of the recession in the 3rd Quarter of 2009 (European Commission, 2010), confidence in the industry is relatively low despite the positive growth generated compared to 2008. Current momentum suggest that recovery of economic activity will continue in coming months although the European Commission has cautioned on the fragility state (European Commission, 2010)

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Consumer sector wise, confidence improved from its decline in May 2010 with unemployment fears receding and a generally positive optimism on the general economic situation. This however remains below the long term average which reflect the cautious sentiment adopted by consumers.

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Beyond the rebound, recovery is proving to be slower than in past cases. The EU, like other developed economies will struggle with its aftermath for some time in the future (European Commission, 2010)

Savings Rate

Savings rate are generally higher amongst several EU nations as compared to US household in general (Harvey, 2004). There has been a decline in recent years as per researcher Tina Aridas (2010) from the Global Finance Magazine, the magazine hasd stated that between ‘2007 and 2008, the European Union’s household saving rate was lower than in the euro area, due mainly to the low saving rates in the UK and the Baltic countries. The US saving rate was low compared with both the EU and the euro area’. With the passing of the worst effects of the global crisis from 2008, EU households are again faced with the Euro confidence crisis that constraints the region’s ability to recover faster than other regions (as it struggles to with unemployment, high deficits and generally bearish economic prospects outlook) (IMF, 2010). The general household will now need to brace themselves for further cuts in income as major EU member nations embarks on tough public spending cuts (Traynor, 2010). Recovery European economies are expected to be gradual and uneven as most of the savings gain from budgets cuts is utilised for loan repayment for the past debts incurred.

SOCIAL

Demographics

Based on the latest 2008 projections done by the Commission of the European Communities (‘EUR-LEX’), the EU is facing unprecedented changes in the populations. This development would represent a challenge for the governments to review and adapt existing policies as it continues to shape the social structure of the EU population. Demographic ageing, i.e. the increase in the proportion of older people, is above all the result of significant economic, social and medical progress giving EU citizens the opportunity to live a long life in comfort and security which is not without precedent in the region’s history (EUR-LEX, 2006). This has become one of the main challenges for the EU as the following demographic trends observed throughout the member countries with various magnitudes.

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.

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 harmonised 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.

Net migration flows are assumed to be concentrated in a few destination countries: Italy, Spain, Germany, and the UK. Making full use of the global labour supply through net migration will be increasingly important and requires ensuring that immigrants are effectively integrated into the EU’s economy and society for today and the future.

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 [2] on mathematics, science and technology graduates was already reached before 2005. New growth has been registered in maths, 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 organisation’ (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. EU citizens are almost evenly divided in their preference for being self-employed or having employee status with many still preferring the comfort of being a salaried employee (European Commission, 2009). In general results showed that from 2007 to 2009, EU citizens view on entrepreneurs are mixed with almost all countries more likely to agree that entrepreneurs are only concerned with profit or that they exploited other people’s work to their own benefit. The population in general prefer to either save the money or use it to buy a house or to repay their mortgage rather embark on risk taking ventures that threaten their way of life.

The high level of migrants from countries to particularly wealthy EU Member States will however serve to showcase the entrepreneurial spirit in the economy. As many arrive with the intention of making a better life for themselves and their families, the majority of the SMEs arising comes mainly from this group of people, there will certainly be no lack of such entrepreneurial spirit in the EU in the near future.

Lifestyle changes

Recent evidence shows that in industrialised 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). The continuing improvements of the population’s healthy ageing in the EU reflect the desire for a sustainable lifestyles, healthy environment amongst the people moving forward. With the Maastrich Treaty, the explicit mentioning of public health as an area of competence of the EU reinforces the expectation that having a sustainable, healthy lifestyle will be the way forward for the EU. Clearly, pharmaceutical drugs (patent or otherwise) will continue to provide a vital service to the EU population.

Changing household and family trends need to be taken into account as the number of low income, single parent families’ increases. As a result of the higher involvement of woman in the work force (either due to higher education or contribute to existing family income), the economic crisis along with the spending cuts instituted at present is expected to create a more prudent, budget oriented household as the situation forces families to rein in their spending for essentials. Healthy lifestyles will become a more viable daily practice as a preventive measure against sickness as compared to incurring medical bills in the household due to illness.

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. Over the years since the formation of the EU, the mass migration of citizens with different social background has presented a difficulty task in further upgrading their mobility within the society. With the economic crisis, the younger generations in EU member states will now struggle to scale upward especially with the loss of family income and limited government support marking a risk that any cycle of poverty that an individual household will face is repeated. This is more so as essential cost such as health care becomes more costly towards a household attempts toward improving living standards while aiming to scale towards a better way of life for themselves.

Altitude towards generics vs patented drugs

Our interview with Dr. [David Lu] and subsequent research revealed that the acceptance of generic drug by patients throughout EU are different. Since the mid-1990s, dispensing of generic drugs has been largely different amongst member states of the EU with countries like UK, Germany, Sweden and Netherlands having a wide acceptance of generic medicines dispensed in its healthcare system (WHO, 1997) as compare to France, Italy and Belgium. Based on our discussion, these were due to the perception build in patients mind on the generics effectiveness and reimbursement incentives given to doctors and pharmacists for sale of these products. This has remained a barrier by many in the generic business towards successfully penetrating the market. Researchers have pointed out on the need for a harmonised pricing mechanism to help generics manufacturers obtain higher market share (Burgermeister,2006). All interviewees are however, sceptical of such standardisation and are in agreement that such step by the EU will be unlikely owing to the different political, social and cultural environment that EU members are. Generic drug manufacturers will need to continue tailoring different marketing strategies to increase patients trust in their products accordingly and not adopt a standard approach for the member states if it intends to compete effectively for the market share.

TECHNOLOGY

Recent Technology Developments:

In this modern age, the pace of technological changes is accelerating at a rapid pace. The generic drug industry is of no exception with the following technological factors that currently in the limelight.

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 Organisation (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. Currently, counterfeiters tend to focus on expensive patented drugs rather than generics but as global acceptance on online purchasing increases, counterfeit drugs are increasingly being detected in the supply chain marking a issue of concern for generic manufacturers as any products discovered as counterfeit can easily harm patient confidence in the generic brand besides endangering lifes. As over 50% of the medicines purchased online are found to be counterfeit (WHO, 2010), monitoring of counterfeit drugs particularly those purchase from cyberspace has become a necessity for the pharmaceutical industry.

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. Private health and financial information (i.e. credit card numbers) can be compromised to criminals that puts the pharmaceutical companies with bad publicity should anything occurs.

New Products and Research & Development (‘R&D’) Expenditure

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. A decline in the success rates for new drugs to be introduced into the market is a major factor as the industry faces a “patent cliff [3] ” for which generic manufacturers will increasingly benefit. In recognition of this, pharmaceutical groups have embarked on M&A routes with smaller firms, joint development with academic institutions / commercial competitors for new drugs while reducing costs incurring activity. Introduction of blockbuster drugs such as Pfizer’s Lipitor has been stagnant with generic drug makers from India and China crowding the pharmaceutical scene making it tougher to incur healthy margins that finances R&D expenditures for future drugs.

Preventive Healthcare

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. It is therefore no surprise that this becomes an area for further focus by the state government that seeks to control its existing healthcare budget (Hewitt Associates, 2010). Unlike the US healthcare system, EU states adopts a universal provision of heath care with at least, the basic terms of heath care, provided free to its citizens (Przywara, 2010). Therefore the WHO has pointed out that ‘if not successfully prevented and managed, they will become the most expensive problems faced by our health care systems’ (WHO, 2010). Because several diseases such as cardiovascular diseases, cancer, diabetes and chronic respiratory diseases – are linked by common preventable risk factors, healthcare authorities around the world (including EU) has found it more cost-effective to put preventive practices into action rather than continue with responsive-oriented healthcare. Other than providing information, education, programmes and support to those in ‘risk-groups’ and the general population, Ms Angela has provided us several useful insights into the other developments in this segment.

Genomics testing

Since the discovery of DNA and the associated study of it, this has been marked as one of the major breakthroughs in genetic testing (Amgen Scholars, 2009). Utilising technological advances over the years, genomics testing allows for a more-accurate diagnosis of genetic diseases and therefore facilitates early treatment at an earlier stage. It also provides patients with both an understanding of possible risks for certain diseases and possible preventive measures long before the diseases even forms within a human’s body. Genomics testing in Europe however, suffers from a lack of widespread acceptance as compared to the US (Ramanathan, 2008) owing to the protection laws governing the genetic data obtained from such test. The processing of genetic data in Europe has been subjected to stronger protection as provided in the in the Directive 95/46/EC and the national laws of the EU member states implementing it (Ramanathan, 2008). However, as EU residents healthcare cost mounts, the development of an integrated knowledge base combining the insights of sciences, humanities and social sciences will be required to inform policy and to plan for the rational implementation of new healthcare services. EU health communities has recognised the benefits of genomics testing for healthcare prevention with the need for a strong integrated, interdisciplinary European links to manage the sheer volume and complexity of this emerging genomic knowledge, and the speed of technological development (EUPHA, 2010). The EU themselves has viewed genomics in a more positive manner as seen in one of its main theme for the Sixth Framework Programme (that funds research work on genomic studies on diseases) to exploit this knowledge to human health besides economy growth benefit (CORDIS, 2009). Genomics testing will continue to grow as more benefits are uncovered from researchers in the EU with long term plans by the EC being provided towards nurturing such growth.

There are multiple benefits for both pharmaceutical and generic makers as pointed out by Philips et al (2004). According to the research carried out, genomics is likely to provide a ‘multitude of new drug targets, enable the development of drugs that avoid problematic genetic variants in drug-metabolizing enzymes, and increase the development of preventive interventions for patients identified as being at higher risk for future disease’ (Philips et al, 2004, p.428). Interviewee, Ms Angela has pointed out the interest of many in the medical field to create a more targeted form of treatment. Genomics allows this as it allow drug therapies with greater efficiency and safety, which of course leads to higher price due to the added value it brings to patients. Genetic profiling in patients enrolled during the early testing phase for drugs will allow for shorter testing time that can increased approval chances with the health authorities. Drugs that previously were unsuccessful can be re-examined by targeting them to patients with specific genetic profiles i.e. ‘niche drugs’. Generic drug makers will eventually benefit as such avenues open wider markets for patients upon expiry of patents or if possible, spurn development of ‘niche drugs’ rather than reliance on original drug makers.

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. One of the EU market focus is currently on the nanotechnology-enabled drug delivery system for patients. While there are delivery system using laser, injection, spray being practiced, nano particles are receiving particular attention owing to more development going on in this field. Drug development is a very costly affair for patent holders especially with the decline of new drugs being uncovered each year. Many new scale biotech companies have become acquisition targets owing to keen interest towards this subject.

The future of nanotechnology is in a completely uncharted territory. It is almost impossible to predict everything that nanoscience will bring to the world considering that this is such a young science field today (Nanogloss, 2009). The field however is viewed as a revolutionary advancement but potentially controversial with its ability to bring materials to life. Religious and ethical issues aside, scientist are hoping that the further understanding of this technology would contribute towards improving population heathcare globally in future. If successful, pharmaceutical companies would view it as its next line of income as existing drug making expertise dry up.

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. Areas such as pharmacogenomics, nanotechnology, stem cells and gene therapy are becoming part a growing emphasis by medical professions. With a vision of improving design and production of drugs within a human’s genetic makeup, this has become a new alternative for medicine as previous reliance on convention drugs (through use of chemical reactions) for treating illness have become scarce and increasingly difficult to produce. Using biomedicine, which create drugs based on the living molecules that are associated with specific genes and diseases, EU scientists under the JRC-EU [4] in 2007 has pointed out encouraging responds towards treatment of genetically inherited diseases such as hepatitis B, cancer and diabetes. JRC further pointed out the human medicine and heathcare are the most prominent field for modern biotechnology with a high share of publications and patents targeted towards this sector (2007).

The direct and indirect elements of R&D works for biotechnology would add towards EU’s GVA [5] and improving state of heath for EU citizens as part of the context of the EC’s objective of making the EU “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” (JRC-EU, 2007, p.5). Numerous researches suggest that biotechnology can offer patients more and better healthcare choices. The biomedical healthcare industry is viewed as the pharmaceutical industry’s external R&D centre and source of product innovation (EMCC, 2005).

However, the strength of the biomedical healthcare industry differs widely between European countries. As of 2003, the UK is considered to have the most mature industry as compared to other EU states (EMCC, 2005) but this has narrowed as other EU states nurtures their own industry. This is due to availability of more resources (both human and capital) increases over the years.

At this time, there has been a lack of attempts towards producing generic versions of the biotechnology drugs. Many of these drugs are very expensive because they are so difficult to produce owing to complex molecules involved (Montgomery, 2009). Furthermore, regulatory guidelines are still lacking on existing bio-medicines due to the different arrangement governing both the US and EU member states (Manley, 2006). However as expertise and experience continue to grow (especially with the campaign by EGA’s biosimilar drugs), it would be a matter of time before biotechnology because part of the patient healthcare in the EU and the world.

Incremental & 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 [6] ‘ 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. Generic manufacturers in the US and Europe has been particularly vocal towards this practice as it alleges pharmaceutical companies uses this to extend patent lifespan through introduction of small changes that deprives generic manufacturers access to such drugs (and therefore an anti-competitive practice). It is therefore a contentious issue as both individual corporations such as GSK and its trade representative in EU, EFPIA continues to debate this publicly and with the European Commission.

Other incremental technologies that serve to complement the medical drug industry arises from rapidly improving testing, diagnostic, and other technologies (Brill & Robbins, 2005) which allows better and more targeted drugs in the heath care sector thus ensuring the continued relevance of conventional medical drugs in the market.

Disruptive Technology here is both a worry for patented and generic manufacturers as witnessed by the continued interest in biotechnology as the new alternative in medical discovery. With the continued dearth in significant creation of ‘blockbuster’ drugs from conventional pharmaceutical research, EU policy makers has continued to show further interest in biomedicine thru policy development initiatives such as funding (EFB, 2010). Pharmaceutical giants too, has gradually increased R&D capacity in this field with many companies embarking on M&A activities with existing biomedical companies (i.e. Pfizer’s acquisition of Wyeth) besides growing internal re