Topic B: Resolving
EU Existential crisis;
whether the EU
should continue to
exist in its current
format
SALMUN 2013
European Caucus
Chair: Gabriella Freeman
Vice-Chair: Júlia Fávero
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BACKGROUND INFORMATION & POSITIONS:
WHAT & WHY
The current European and global economic crisis is the first crisis on the
current economic model that didn’t precede a war. The last great crisis that the
capitalist model of the modern world faced was during the 1930’s, the Great
Depression, which had its origin in United States. Both crises have some
similarities and differences; the main similarity is that the excess trust on the
government caused a decline in the national economy, which stimulated loans
consequently generating several debts and that resulted in the need of state
intervention. The main difference is that, the Great Depression was post World
War I and the current crisis has no catastrophes directly preceding it.
WHO & POSITIONS
In the European crisis, the protagonists of this issue are the citizens, the
banks and the governments. The market was strong; Europe and United States’
economy didn’t seem to have any problem at the time, which leads people to
trust it and start asking loans from the most powerful banks in Europe and in the
United States. Normally, every bank has its reservations to avoid any adverse
situation; however, the crisis happened because the private banks believed that
no catastrophe – such as natural disasters or terrorist attacks - would occur in
this period of time. With this, banks started accepting the requests for loans
asked by a massive number of citizens, however, most of them were not able to
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afford to pay it back. The banks didn’t realize that the people that they were
lending money could not pay back and didn’t realize that its funds were almost
gone. As a market strategy, in order to avoid a greater damage, the banks
declared bankruptcy, which forced states and central banks to buy the banks in
order to don’t let economy collapse. Northern Rock in England, Wachovia and
Bear Sterns in United States, Roskilde Bank in Denmark, Fortis in Netherlands,
and several others asked for federal intervention and the states accepted it by
buying the banks.
HOW
The states that purchased the banks, could not sustain its economies after
the great expenses on the acquisitions and with all the money that people owed
to the banks, they couldn’t resist, and started to fall. The crisis got even bigger
with this, because before, only the private sector was compromised, but now, the
states are also damaged. Now several states such as Greece, Spain and Portugal
asked for loans from other states, from the IMF (see key terms section) and from
the Euro-zone, which lead to a domino reaction, which lead to a major global
economic crisis, with its main effects in Europe. The crisis spread worldwide due
to the fact that the number of countries that depend on Europe’s economy is
bigger than the number of countries that depend on United States or China and
the number of countries that are on the European economic block is about 30.
One of the aggravating factors the lack of fiscal union, which left the EU leaders
with no reaction to the crisis.
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WHAT HAS BEEN DONE TO TRY AND FIX IT
In October of 2008, it was held in Washington D.C, the first G7 (see key
terms section) meeting about the economic crisis; however, because of political
issues between some members and different perspectives, no consensus was
reached. In 2009, two meetings of the G20 (see key terms section) were held in
Europe; measures were taken, but have not proven to be effective yet. One of the
major decisions made on those meeting was that the administrator of the
economic crisis would now be the G20, not G7 anymore. The UN also passed
resolutions on the economic crisis the resolution 2011/37 (see Key Terms
section) and resolution 63/277 (see Key Terms section), but none of those had
sufficient impact on the worldwide economy to make any changes.
The beginning of 2012 was marked by the huge protests against the
economic crisis in Europe and the leaders of the countries involved on it. All over
Europe, the number of unemployed citizens grew; the number of thefts also
increased and people gathering in streets to protest is much more common. In
Kiev, Ukraine, the national suffered a devaluation of 50% of its value six months
ago. This diminished the quality of life of the people and lead to a massive wave
of protests. The IMF is trying to save these leaders by a $16 billion rescue
package.
RESULT
Certain countries are not showing any proof that they can recover from
the crisis, such as Greece and Spain that accepted several long-term loans, which
lead those to a recession, disabling those two countries of paying their full depts.
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In Spain, since 2009, the national economy recessed about 7.2% of its total GDP
and in Greece, the number is more than 15%, which exceeds the 3% allowed by
the EU. However, countries such as France and Germany, which are managing
their financial problems, required that even with all those problems, Spain,
Greece and all the other countries that own great quantities of money, pay their
debts.
The European Fund of Economic Facility (EFEF) and European Fiscal
Compact (EFC) have been created in order to increase the investments in Europe
by €750.000 million in order to stimulate economy and make Europe and all its
dependents rise up again. The European Central bank and the European
Investment banks have helped the E.U by purchasing private banks, investing in
countries and offering loans to countries that can’t keep their economy alive by
themselves; however, it has not been enough to pay the whole debt which
Europe is sunk on and new measures are still having to be considered to end the
crisis.
TIMELINE:
2007 – April, New Century Financial Corporation, the largest U.S. subprime
lender, declares bankruptcy following a series of bankruptcies at smaller
subprime loaning firms.
August, Banks all around Europe and U.S are declaring that they cannot
keep in market. France’s government starts considering purchasing French
private banks to avoid a crisis. Central banks coordinate to inject liquidity into
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credit markets for the first time since 9/11. The U.S. Federal Reserve, the
European Central Bank, and the Banks of Australia, Canada, and Japan all inject
money.
September, Northern Rock, one of the major banks in U.K, requests
emergency funds from Britain’s central bank.
2008 – March, Bear Stearns, one of the largest U.S. investment banks, announces
major problems and is granted a twenty-eight-day emergency loan from the New
York Federal Reserve Bank.
June, Treasury Secretary Henry Paulson unveils a rescue plan, which aims
to use $700 billion of U.S. taxpayer assets to stabilize markets. It also proposes a
plan to buy troubled and difficult-to-value assets from the country's largest
financial firms, value them, and resell them, in the hopes of restoring confidence
in credit markets.
October, Ireland approves an assurance of bank deposits, setting off criticism
from EU partners of unfair competition. Meeting of G7 in Washington, no
agreements are reached between all to cease the crisis.
2009 – January, Iceland government collapses; it unleashed other collapses’ of
government in Europe.
October, Greece's new government promises to repair its finances after
declaring that the 2009 budget deficit will be 12.7% of GDP, which exceeds the
EU's 3% limit.
2010 – May, 2nd the EU and IMF announce a $146 billion financial rescue
package for Greece to address its sovereign debt crisis in exchange for the
country enacting strict measures. 9th, EU approved a rescue packet of €750.000
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million to ensure the financial stability by the creation of the European Fund of
Economic Facility.
November, The EU and IMF agree to provide Ireland with a $114 billion
rescue package.
2011 – May, the EU and IMF agree to provide Portugal with a $116 billion rescue
package. August, The European Central Bank announces it will "actively
implement" its Securities Market Program to buy up Spanish and Italian
government debt.
October, EU leader created agreements with banks in order to reduce Greece’s
debt by 53.5%, and required that the European banks should achieve the mark of
9% capitalization.
2012 – March, 5th the IMF approves a new €28 billion loan for Greece as part of
The overall financing package agreed by Athens. The new loan will be made
under the Extended Fund Facility, which is designed for countries seeking to
address deep- seated structural weaknesses.
KEY TERMS:
Bankruptcy - Legal status of a broke person or organization, which cannot repay
the debts they owe to creditors. In most jurisdictions bankruptcy is imposed by a
court order, often initiated by the debtor.
Credit - Credit is the trust which allows one person, group or party to provide
resources to another person, group or party where that second party does not
payback the first party immediately, but instead arranges either to repay or
return those resources at a later date, if the pay is not done, it generates debt.
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The resources provided may be financial (e.g. granting a loan), or they may
consist of goods or services (e.g. consumer credit). Credit does not necessarily
require money. Unlike money, credit itself cannot act as a unit of account.
Debts - Obligation owed by one party (the debtor) to a second party, the
creditor. A debt is created when a creditor agrees to lend a certain quantity of
money to a debtor. Debt is usually granted with expected repayment; in modern
society, in most cases, this includes repayment of the original sum, plus interest.
EFEF or EFSF - European Fund of Economic Facility or European Financial
Stability Facility is a special purpose entity financed by members of the Eurozone
to withhold the European sovereign-debt crisis. Formed by 27 EU members, its
main goal is to provide financial assistance to Eurozone states in economic
difficulty.
European Union – Is an economic and political entity and confederation of 27
member states, which are located in Europe. Its origins are from the European
Coal and Steel Community (ECSC) and the European Economic Community
(EEC), formed by six countries in 1951 and 1958 respectively.
G7 - Group of seven industrialized nations of the world, formed in 1976 when
Canada joined the Group of Six (United States of America, France, Germany, Italy,
Japan, United Kingdom) plus Russia.
G20 – The Group of Twenty Finance Ministers and Central Bank Governors (also
known as the G-20, G20, and Group of Twenty) is a group of finance ministers
and central bank governors from 20 major economies: 19 countries plus the
European Union, which is represented by the President of the European Council
and by the European Central Bank.
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Great Depression (1930’s) – It was a severe worldwide economic depression
that originated in United States. In the majority of the countries affected, it
started in 1930 and lasted until the late 1930’s. It was the longest, most
widespread, and deepest depression of the 20th century.
IMF - The International Monetary Fund is an international organization created
1945, when 29 countries signed the Articles of Agreement. It originally had 45
members. The IMF's main goal was to stabilize exchange rates and assist the
reconstruction of the world’s international payment system post-World War II.
Countries contribute money to a pool through a quota system from which
countries with payment imbalances can borrow funds temporarily.
Recession - Is a business cycle contraction, a general slowdown in economic
activity.
Resolution 63/277 – Passed on April 9th of 2009, this resolution basically
requested large meetings in the UN and outside the UN to come up with
solutions.
Resolution 2011/37 – Stimulates the UN to help Europe, however, it doesn’t
really propose a solution.
GUIDING QUESTIONS:

What would be better: loans to pay in long term or try to pay back
without external help?

What if the EU separates in order to save the economy of certain
countries?

Is there any short-term solution?
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
What will be better: short-term solution or long-term solution?

Is it better to take out members of EU such as Greece, Spain, and Portugal
or help them?

Is the economic crisis a reflection of a power crisis of the European
States?

Can United States or China help the European economy? If so, how?

How will the European Union get over the economic crisis?
FURTHER RESEARCH:
All of the following sites contain data and explanations of what, how and why the
existential crisis in Europe formed. There are many facts in each website that you
can use for your research!

https://www.youtube.com/watch?v=Dkb-TEUMYhY

http://www.voxeu.org/article/economic-crisis-europe-causeconsequences-and-responses

http://www.cnbc.com/id/47689157/Europe_s_Economic_Crisis_What_Y
ou_Need_to_Know

http://nakedloon.com/news/us-world/2009/03/30/united-nationsresolution-declares-end-of-financial-crisis/

http://en.wikipedia.org/wiki/European_sovereign-debt_crisis
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BIBLIOGRAPHY:

http://timeline.stlouisfed.org/index.cfm?p=timeline#

http://www.bbc.co.uk/news/business-13361934

http://www.northstarcompass.org/nsc0902/janfeb.htm

http://news.bbc.co.uk/

http://en.wikipedia.org/wiki/List_of_banks_acquired_or_bankrupted_dur
ing_the_2007%E2%80%932012_global_financial_crisis

http://en.wikipedia.org/wiki/European_sovereign-debt_crisis
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