General Assembly Research Report



Commission: Economic and Social Council (ECOSOC)

Agendum: Dealing with the Eurozone Financial-Economic crisis

Student Officer: Jihoon Kim

Introduction

The recent world economy is often referred to as the ‘black swan’. While diverse factors contribute to such naming, the leading factor is the debilitation of the European economy. The European financial crisis, also called the Euro-zone crisis, is becoming a global economic phenomenon as Europe had been acting as one of the main economic centers. Nations such as Greece and Spain are near bankruptcy and Greece - the starting point - is in a destitute situation to sell their national territory, including their islands.

While the rough characterization of the cause and progress of the crisis is brief and simple, there are diverse ways nations can approach the situation. Nations inside the Euro-zone might attempt to devise a method of a monetary security and safety program, or ask other nations for temporary help in financial policies. Direct changes in the Euro system could also be an option. Nations that are not in the Euro-zone are not excluded in the situation, as their economy are also affected due to the European market failures. They could employ different subsidies along with trade-related policies in order to solve the problem.

As the agenda is directly related to the European Union(EU), it would be extremely helpful for the delegates to read and comprehend the EU charters and treaties thoroughly. Also, it would be highly recommended for each nation, especially those in the Euro-zone, to conduct research on its own national economy and how the resources are being utilized, and identify the problems of the economic system.

This report is written in the deepest detail, in order to help the delegates to understand the agenda and create original and creative methods to counter the situations. The chairs will hope greatly that reading this report will help your comprehension, however only relying on the material on the report is highly NOT recommended.

Definition of Key Terms

European union, Eurozone

The Eurozone, also called as the Euro Area, is the financial and monetary union of 17 European nations, all members of the European union(EU). But delegates should not confuse the Eurozone with the European Union(EU). The European Union consists of 27 member states, while the eurozone only 17.

The full list of the members of the European union (EU) are:

Austria, Belgium, Cyprus, Bulgaria, Czech republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

The members of the eurozone(where the Euro is used) are: Austria, Belgium, Cyprus, Estonia, Finland,France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The ECB (European Central Bank)

The European central bank is a ‘shared’ bank among the Euro-zone members, with the head chief of each national bank all governing as a board of the heads. The ECB serves its role by employing fiscal and monetary policies, primarily to prevent and deal with inflation, but also to stabilize the overall economy of the EU, and keep in track the flow of the Euro inside and outside the Eurozone. Delegates might employ this bank in order to make decisions related to monetary affairs within the European Union – since all of the nations have agreed to follow the decision of the ECB in 1998, it will be helpful to unify the decisions of each nations when making a consensus.

Euro

The Euro is the currency used inside the eurozone (of 17 nations). This is the second-largest currency (in the measures of usage around the world), following the US Dollar. The Euro was first introduced in the financial markets in 1999, and is still employed as a unified currency inside and outside Europe. As more than 175 million people are using the Euro (if pegged currencies are included), the influence of the currency is massive and so its consequences are dangerous.

Real Estate Bubble

Although the main factor of the Eurozone crisis was the overusage of tax, another highlighted factor was the real estate bubble. The ‘bubble’, in financial terms, refers to the overpricing of certain goods or services. The real estate bubble, therefore, refers to the overpricing of the real estate. The reason of the severity of this phenomenon was because there was a massive influx of money into the real estate market as investors saw potential from the continuous price rise. However, as the bubble ‘exploded’, the price faced a sudden steep drop, and the people who invested their money had to go though immense deficit. This phenomenon happened in both the US and Europe.

PIGS

The PIGS nations refer to Portugal, Italy, Greece, and Spain. The common denominators of the nations listed are that the nations are going through serious financial problems. The PIGS nations are the leading countries in national debt to the IMF and the world bank, and also in the price of their national bonds. The delegates of these nations should focus on stabilizing their domestic economy first, while the other nations should focus on the situations of the PIGS nations for reference examples for different policies and changes.

Retrenchment policy

This is one of the stances/policy measures that a nation can take, in financial crisis. Retrenchment policy is basically limiting and restricting the use of money by the government, so that the government becomes more reluctant in using up its tax budget. While there is a disadvantage of less money being used in the market, retrenchment policies can temporarily reduce national debt to a certain degree. This is the reason on why Germany required retrenchment policies as a requirement for additional subsidies to Greece. (Greece is currently failing in its attempt of retrenchment).

ESF (Europe Stabilization Fund)

The ESF is one of the projects that the European nations are striving to work on. The fund is open to basically all nations and corporations who are willing to invest, and the money will be distributed (possibly by the ECB) to create jobs, reduce national debt, and more. This can be a project that can be developed further by delegates, therefore research is highly recommended.

National Bond, Corporate Bond

One problem that the delegates should solve is the price of bonds. Bonds are, in the most basic degree, a written promise to repay the money. Bonds are one of the major ways that the nation borrows money, and the corporations create their business budget. However, as the European economy is seemingly in danger, the bond prices of European nations and companies are falling. This makes economic recovery much harder, therefore some measures to attract clients to purchase bonds is needed. (Or to increase bond price by different measures).

Background Information

The start of the Economic crisis was when Greece asked for financial subsidy of 1,100 Euros. The motive force of this bailout was, simply put, the overuse of government budget over tax payment. As the Euro-zone nations were using the same currency ‘Euro’, and as all of them were interconnected, the financial effect reached all over the EU. Nations inside the financial ‘circle’ were not able to receive their money that they have lent, along with the interest. This led to the limitation of national budget of the countries around, leading to an overall failure.

Currently the financial crisis is expanding, and nations such as Spain are also publicly requesting for national funding from the International Monetary Fund (IMF), or the World Bank. The United States has officially announced that its benefits of trade from Europe have decreased 38%, for Korea 42%, and for Japan 36%. Greece is still requesting for financial bailouts, and Germany, originally a nation to be considered stable from economic fluctuations, is also receiving financial harms from trade. In France, the unemployment rate for youths is reaching 40%. Debates on whether Greece and the other European nations should leave the Eurozone for the purpose of Euro stabilization is on set.

Major Countries and Organizations Involved

Other than the organizations already mentioned above, the important organizations are the:

IMF

The International monetary fund is providing many European nations with funding. It is currently pressured by other organizations and governments to decrease its interest rates. Without the IMF, the safety budget for security situations cannot take place. The IMF is likely to be the main source of money in this agenda.

World Bank

The World Bank is open to all nations, for the borrowing of money. However, it is not only engages in lending projects, but also invests in different funds, (possibly the ESF if made) and subsidizes different organizations under conditions. The World Bank could be one of the organizations to get support from.

UN

The United Nations, as supposed to deal with global problems, is creating resolutions for different nations to sign, and are creating independent projects to urge for help from different entities(as it cannot force other nations to take specific actions).

As the nations involved in the European financial crisis can be characterized in two - the ones which need support and the ones which are currently providing support - the below are nations that are in serious situations of crises:

Belgium – Belgium is not yet recovered from its 2008-2009 financial crisis, and has requested the IMF for funds.

Greece - Greece is the starting point of the crisis, and is a beneficiary of different economic plans and policies.

Hungary – Hungary is one of the nations affected by Greece, and it has publicly announced national deficit.

Iceland – Iceland is currently experiencing 2008-2012 Iceland financial crisis, along with the general European Crisis.

Ireland – Ireland is also experiencing 2008-2012 Ireland financial crisis, along with the general European Crisis.

Latvia – Latvia is still struggling from Latvian financial crisis from 2007, which led to more than 13% of national deficit.

Portugal – Portugal is going through 2010-2012 financial crisis, and has publicly announced 4.5% of national deficit.

Russia – Russia is not yet recovered from 2008-2009 crisis, and is affected most, as located in the European areas.

Spain – Spain has had a financial crisis, and also has announced deficit.

Ukraine – 2009-2011 financial crisis is not yet resolved, along with the general Eurozone crisis.

Several of the nations that are subsidizing the nations above are:

Germany – Due to financial democratization and stable economy, Germany was able to survive through the crisis. Although it is experiencing deficit to a certain degree, it is acting as a pole that is maintaining the current European economy stable. It is providing budget for diverse projects related to financial aid, and is also devising methods and policies to revitalize the region.

U.S.A – Holding the world’s most standardized currency, the United States is contributing enormously to resolve the situation. It is one of the main signatories of the UN resolution calling for financial aid and trade policy amendments.

Timeline of Events

Date Description of Event

2009 October New government of Greece

2010 January EU commission supported Greece’s Growth Programme,

EU decides to cooperate with the IMF to scrutinize domestic economies

2010 March EU commission urges members to sign subsidy resolutions for Greece

2010 April EMU(European Monetary Union) agree bailout plans

2010 May Strikes against retrenchment in massive Scale in Greece, 11 people killed

2010 November Ireland requests fund, IMF accepts

2011 August France officially announces deficit of 12 billion Euros

2011 November Italy’s borrowing rate reaches all-time highest

2011 December Portugal publicly announces national deficit of 4.5%

(This is a rough timeline for delegates to understand, and more complex details can be seen in: , the source of this information.)

Relevant UN Treaties, Resolutions and Events

EU@UN conference in 2012, August 14

Delegates from the EU, Germany and Finland, Vice-president of the European commission spoke on the issue of stabilizing the Economy in the Euro-zone.

The European Union’s Eurozone crisis and what to (not) do about it, 2011 winter

A document provided by an executive officer of the European Union, Vivien.A.Schmidt, about the protocols and solutions on dealing with the Eurozone monetary crisis within the Eurozone nations

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The International Monetary fund’s resolution on the Eurozone Crisis, 2012 March

The IMF sets an open discussion on the dealing of the Eurozone financial crisis.

Previous Attempts to Solve the Issue

Debate on Greece leaving the Eurozone

This debate, although did not end up in Greece really leaving the Eurozone, gained support on the basis that the national credit of the Eurozone is decreased because of Greece, and without Greece in the Eurozone, the Euro currency would be revitalized, and that will contribute to helping nearby nations which were also affected. However, the other side of the opinion was that Greece leaving the Eurozone, although will lead to short-term positive change, will restore the situation in the long run, primarily because the debt is still unpaid, and the invisible loss from political and diplomatic stance will far exceed the benefits from it.

Subsidy to the individual Nations

This has been the main focus of the international society, and it has been beneficial in several fields, for it provides budget for different nations to run governmental projects and create jobs, or simply pay back national debt. However, the main problem – or the only shortcoming – is that nations, as they have already paid enormously, are getting reluctant to provide subsidy. Other incentives to lure nations is required, if delegates are to continue on employing this method.

Decrease in Trade regulations

- As the international society always did, many nations are currently lowering their trade regulations and extra fees, as it is making products from Europe more expensive and therefore decrease demand for it. Although it is obviously a beneficial act and had success so far, a type of incentive is required in order to urge more nations to be part of the plan.

Possible Solutions

One of the possible measures that the delegates can take is to EXPAND from current measures listed above. As the subsidy and policy amendment is reaching it’s limit, it is very important for the delegates to state and clearly show what kind of benefits that the help-providing nations can receive from accepting the plan.

Another measure is to amend rules in the Eurozone, especially those of the European Central Bank (ECB). There are current rules that are considered and replied as lenient, in terms of it being the cause of the crisis. If the delegates decide that several clauses should be amended (e.g. those on the limitations of borrowing money, or strengthening the scrutiny of the domestic economy before lending money, etc), they are free to do so, although they should keep in mind that this should be done in the ‘urging’ form, not a forceful change. One of the major benefits of such change is that it does not infringe on the national sovereignty of any country. It’s only a change in the rules, and it can take an effect directly, for most of the money that flows in the market is from the European Central Bank. However, the possible concerns that might rise is the problem of unity- there must be nations who are benefitting from the previous rules, and there must be nations that will go through serious financial deficit if the regulations change. The role of the delegate who proposes to this solution should specify the actual changes, and will have to persuade other delegates to be part of the amendment, by providing them an incentive to do so.

The delegates could also directly make stronger decisions, such as recommending certain nations to leave the Eurozone until it is decided to be financially recovered enough. Although this sounds peculiar, it is one of the suggestions given by financial experts. If delegates are to take this stance, their main argument would be about responsibility – for the consequences of the decisions made by one nations, the ‘mess’ should be cleaned by its own. The main benefit is that most of the Eurozone nations’ financial burden for co-debt will decrease. However, this should be a very careful decision, because no matter what type of approach the UN takes, the fact that it urges a nation to leave the league for the general benefit can damage further political relationships with such nations. Delegates who propose to this solution should be extremely careful on the reasons and the identification of clear benefit from the expulsion.

These are only examples of stances and policy approaches that delegated might choose to take. There are extremely many branches of choices that the delegates might prefer, and ALL options are recommended to be debated. As in other agendas, the creation of new organizations, the usage of an already existing organization, creation of a inter-national network, and more are possible.

Bibliography

- "Overcoming Europe's Sovereign Debt Crisis - the Road to Stability and Growth." EU@UN, New York Conference. EU@UN, 14 Aug. 2012. Web. 27 Nov. 2012. .

- "2000s European Sovereign Debt Crisis Timeline." Wikipedia. Wikimedia Foundation, 23 Nov. 2012. Web. 27 Nov. 2012. .

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