European Economic Crisis 2010Committee: European UnionChairs: Jeremy Levine & Mark GerowIntroduction During a period of worldwide economic issues in the late 2000s, numerous membercountries of the European Union (EU) have experienced severe negative effects to theireconomies causing what has become known as the 2010 European Economic Crisis. Thissituation has caused international panic regarding the financial security of many countries of theEurozone, economic and monetary union of 16 EU member states, which have adopted the eurocurrency as their sole legal tender. Climbing government deficits and debt levels in Europe havealerted world markets of the possible collapse of the euro. Greece, Spain, Italy, Portugal, andIreland are considered the five largest risks to the future of the EU economy. These countries areoften derisively referred to as the acronym PIIGS, a term banned by the Financial Times andBarclays Capital and deemed unacceptable for use in this committee. Despite the accusationsagainst these five countries, many other EU members, consisting of both euro and non-eurocountries, are also experiencing economic deficits including France and Great Britain. Thiscommittee will focus on the issues surrounding the economic crisis in Europe, including foreignaid for indebted countries, long-term fiscal policy changes, and possible economic integration.History Although it originated in the United States in late 2007, the economic crisis quicklyspread to Europe. It disturbed much of the region, which already contained several countries in arecession as of early 2009. Denmark was the first to fall into a recession, promptly followed byEstonia and Latvia. Economists corrected predicted Germany, Spain, and Great Britain wouldsoon also fall into an economic recession. Ultimately, every country of Europe has beennegatively affected by the crisis. The five main risks to the future of the economy of the EU have all caused differentproblems concerning the euro:
Greece: Greece is Europe’s most indebted country despite its surplus in the early 2000s. Fromabout 2000 to 2007, Greece was one of the fastest growing countries in the Eurozone with anannual growth rate of 4.2 percent. Due to the unsustainable rapid growth and a lull in foreigninvestment, Greece needed to borrow money to maintain its economic progress. In early 2010,news reports revealed that Greece was spending far beyond its mean and secretly borrowingmore than it publicly stated. The state’s debit is well over 100 percent of its Gross DomesticProduct (GDP) and its deficit is almost 13 percent, while 3 percent is the limit allowed in theEurozone. The government has submitted a recovery plan to the EU regarding short-term effortsto cut public sector salaries and workers, but the plan ignores the fundamental issues ofmodernizing the public sector and fighting corruption.Spain Spain is likely to become the most indebted country, overtaking Greece, in the nextcouple of years. Although the countrys debt is comparatively low at 54.3 percent of GDP, thereare fears that if the country goes into a recession the situation could be more disastrous than theone in Greece because the Spanish economy is four times as large. Through the mid 2000s, theSpanish economy flourished because of a boom in the real-estate sector, which has beendemolished by the financial crisis. But, since the burst of the housing bubble, the budget deficitspiked to 11.2 percent of the GDP in 2009 and is only forecasted to increase.Portugal Portugal is facing enormous economic challenges. The budget deficit has soared,reaching 9.3 percent of GDP in 2009. Additionally, the public debt is approximately 77 percentof GDP, which is still around the European average, but it is expected to climb to more than 85percent by 2011. Although the government has cut civil service jobs and salaries, there is littleprospect of legislative reforms or structural reorganization. Despite the short-term focus of therecent reform measures, critics have speculated that more economic decline is still to come.Italy
Compared to that of the rest of the indebted Eurozone countries, Italy’s economy is ratherstable because it has been suffering since 2006, long before the outburst of the crisis. Due in partto the strict policies regarding bank oversight, Italy’s financial sector has managed to remainrelatively unaffected by the economic crisis. Additionally, unlike that of Spain and Greece,Italy’s economy will probably not get any worse in the near future. In fact, despite a nationaldebit of more than 100 percent of GDP, its economy is on the upswing from its economictroubles of the past several years.Ireland Ireland’s financial sector has been greatly affected by the crisis, which has led to anoverall downturn in the county’s economy. In 2009, the economy shrunk 7.5 percent and had abudget deficit of nearly 13 percent. Similar to Italy, Ireland’s government has alreadyconfronted many of the issues faced by Greece, Spain, and Portugal. The government isattempting to stabilize the bank sector and balance the budget by slashing civil servant salariesand paying off bad loans. At this point, the future of Ireland’s economy is yet undetermined butits market is slowly improving.Past Resolutions The European Economic Crisis is can be compared to the Panic of 1907 in the UnitedStates and the Great Depression (1929-35). Although Europe managed to largely avoid financialdistress, the Panic of 1907 in the United States is reminiscent of this crisis because financialdecline in US markets was rapidly transmitted to foreign economies. The event negativelyaffected world trade and capital flows and the world economy entered a severe but briefrecession. Overall, this crisis only affected a few specific countries and concluded with a strongrecovery without much government intervention. On the other hand, the Great Depression was an expansive economic crisis, which deeplyaffected many countries throughout the world. In the 1920s, the world economy has not yetrecovered from damage of trade and financial institutions resulting from the First World War.The recession deepened dramatically due to extensive bank failures in the US and Europe andinsufficient economic policy. Countries adopted many policies changes, which were not allsuccessful, in an attempt to curb the affects of the recession.
Great Britain and the United States left the gold standard in 1931 and 1933, respectively,which aided in their economic recovery by protecting them against the deflationary impact of theglobal economy. The US economy made progress from 1934-36 from a fiscal stimulus packageinstituted by the government. However, when the package was discontinued in 1937 andmonetary policy was tightened for fear of potential inflation, the economic situation worsenedsignificantly. Ultimately, World War Two acted as the final exit for the world from the GreatDepression. In March of 2010, the European Commission Europe proposed the Europe 2020 strategy,which is a 10-year approach for reviving the European economy. It aims to create a "smart,sustainable, inclusive" economy with greater coordination of national and European policy. Thestrategy proposes three priorities based on establishing an economy derived from knowledge andinnovation, encouraging a more efficient and practical economy, and cultivating a society withhigh-employment. Critics have criticized the plan for focusing on the long-term solutionswithout addressing short-term issues currently affecting the European economy. This strategywas approved in June of 2010 but it leaves much to be determined. As history has consistentlyshown, economic recovery is not a simple task.International Positions As previous crises have shown, this economic situation requires swift action before theEuropean economy completely collapses. The indebted countries have reached severerecessions, requiring international loans and rescue package money. The issue is that bailout ofinstable countries and the reform of EU economic rules and regulations will affect the morestable countries, such as Germany, Netherlands, and Finland. Markets are worried about howEuropes financial system would fare if the economy stagnates or slides back into recession, or ifa European state defaults on its debt and banks are forced to post losses on the large amounts ofgovernment debt they hold. Germany is the wealthiest country in the EU and the main sponsor of the Eurozone’ssovereign rescue fund. It supports the fund to protect the value of the euro, but seriously dislikespaying for another country’s mistakes. Germany reluctantly gave up the deutsche mark for theeuro, despite the mark’s great buying power and economic prominence. With the decline of theeuro, Germany has three options. The country could insist upon full fiscal union among the
Eurozone countries, the countries in serious debt could be asked to leave the euro zone, orGermany could pull out of the common currency and reestablish the deutsche mark. Althoughthe last option is not currently being considered, the concept will become more realistic if theeconomic situation in Europe continues to worsen. The Netherlands, Finland, and the other morestable countries are considering similar options. On the other hand, the seriously indebted countries are relying on international, EuropeanCentral Bank (ECB), and International Monetary Fund (IMF) bailout loans and rescue packages.These countries are looking to tighten fiscal discipline, increase economic policy coordination,and review budgetary rules. Greater integration would help prevent similar crises by insulatingthe vulnerable economies. Integration would create a more unified economy, where individualeconomies would be less independent and more reliant upon the European economy as a whole.However, fierce nationalism within both the indebted and the more stable countries remains anobstacle to integration. As it stands now, the Europe 2020 strategy calls for more economicintegration of European than currently exists.Questions to Consider 1. How should the European Union handle the debt accrued by the high-risk countries? Should the Union provide loans and rescue package moneys? 2. What should be done to prevent this type of crisis from happening again in the future? 3. Is the Europe 2020 strategy a sufficient proposal for bringing the EU out of economic crisis? Does it include adequate planning for temporary debt relief? And does it provide a strong enough foundation for preventing similar economic catastrophes? 4. Is greater economic integration of the EU a viable option for preventing future crises? 5. Should indebted countries be asked to leave the Eurozone to improve the European economy? Or should the more stable countries abandon using the euro to improve their own economies?
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