1. European Economic Crisis 2010
Committee: European Union
Chairs: Jeremy Levine & Mark Gerow
Introduction
During a period of worldwide economic issues in the late 2000s, numerous member
countries of the European Union (EU) have experienced severe negative effects to their
economies causing what has become known as the 2010 European Economic Crisis. This
situation has caused international panic regarding the financial security of many countries of the
Eurozone, economic and monetary union of 16 EU member states, which have adopted the euro
currency as their sole legal tender. Climbing government deficits and debt levels in Europe have
alerted world markets of the possible collapse of the euro. Greece, Spain, Italy, Portugal, and
Ireland are considered the five largest risks to the future of the EU economy. These countries are
often derisively referred to as the acronym PIIGS, a term banned by the Financial Times and
Barclays Capital and deemed unacceptable for use in this committee. Despite the accusations
against these five countries, many other EU members, consisting of both euro and non-euro
countries, are also experiencing economic deficits including France and Great Britain. This
committee will focus on the issues surrounding the economic crisis in Europe, including foreign
aid 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 quickly
spread to Europe. It disturbed much of the region, which already contained several countries in a
recession as of early 2009. Denmark was the first to fall into a recession, promptly followed by
Estonia and Latvia. Economists corrected predicted Germany, Spain, and Great Britain would
soon also fall into an economic recession. Ultimately, every country of Europe has been
negatively affected by the crisis.
The five main risks to the future of the economy of the EU have all caused different
problems concerning the euro:
2. Greece:
Greece is Europe’s most indebted country despite its surplus in the early 2000s. From
about 2000 to 2007, Greece was one of the fastest growing countries in the Eurozone with an
annual growth rate of 4.2 percent. Due to the unsustainable rapid growth and a lull in foreign
investment, 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 borrowing
more than it publicly stated. The state’s debit is well over 100 percent of its Gross Domestic
Product (GDP) and its deficit is almost 13 percent, while 3 percent is the limit allowed in the
Eurozone. The government has submitted a recovery plan to the EU regarding short-term efforts
to cut public sector salaries and workers, but the plan ignores the fundamental issues of
modernizing the public sector and fighting corruption.
Spain
Spain is likely to become the most indebted country, overtaking Greece, in the next
couple of years. Although the country's debt is comparatively low at 54.3 percent of GDP, there
are fears that if the country goes into a recession the situation could be more disastrous than the
one in Greece because the Spanish economy is four times as large. Through the mid 2000s, the
Spanish economy flourished because of a boom in the real-estate sector, which has been
demolished by the financial crisis. But, since the burst of the housing bubble, the budget deficit
spiked 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 percent
of GDP, which is still around the European average, but it is expected to climb to more than 85
percent by 2011. Although the government has cut civil service jobs and salaries, there is little
prospect of legislative reforms or structural reorganization. Despite the short-term focus of the
recent reform measures, critics have speculated that more economic decline is still to come.
Italy
3. Compared to that of the rest of the indebted Eurozone countries, Italy’s economy is rather
stable because it has been suffering since 2006, long before the outburst of the crisis. Due in part
to the strict policies regarding bank oversight, Italy’s financial sector has managed to remain
relatively 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 national
debit of more than 100 percent of GDP, its economy is on the upswing from its economic
troubles of the past several years.
Ireland
Ireland’s financial sector has been greatly affected by the crisis, which has led to an
overall downturn in the county’s economy. In 2009, the economy shrunk 7.5 percent and had a
budget deficit of nearly 13 percent. Similar to Italy, Ireland’s government has already
confronted many of the issues faced by Greece, Spain, and Portugal. The government is
attempting to stabilize the bank sector and balance the budget by slashing civil servant salaries
and paying off bad loans. At this point, the future of Ireland’s economy is yet undetermined but
its market is slowly improving.
Past Resolutions
The European Economic Crisis is can be compared to the Panic of 1907 in the United
States and the Great Depression (1929-35). Although Europe managed to largely avoid financial
distress, the Panic of 1907 in the United States is reminiscent of this crisis because financial
decline in US markets was rapidly transmitted to foreign economies. The event negatively
affected world trade and capital flows and the world economy entered a severe but brief
recession. Overall, this crisis only affected a few specific countries and concluded with a strong
recovery without much government intervention.
On the other hand, the Great Depression was an expansive economic crisis, which deeply
affected many countries throughout the world. In the 1920s, the world economy has not yet
recovered 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 and
insufficient economic policy. Countries adopted many policies changes, which were not all
successful, in an attempt to curb the affects of the recession.
4. 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 the
global economy. The US economy made progress from 1934-36 from a fiscal stimulus package
instituted by the government. However, when the package was discontinued in 1937 and
monetary policy was tightened for fear of potential inflation, the economic situation worsened
significantly. Ultimately, World War Two acted as the final exit for the world from the Great
Depression.
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. The
strategy proposes three priorities based on establishing an economy derived from knowledge and
innovation, encouraging a more efficient and practical economy, and cultivating a society with
high-employment. Critics have criticized the plan for focusing on the long-term solutions
without addressing short-term issues currently affecting the European economy. This strategy
was approved in June of 2010 but it leaves much to be determined. As history has consistently
shown, economic recovery is not a simple task.
International Positions
As previous crises have shown, this economic situation requires swift action before the
European economy completely collapses. The indebted countries have reached severe
recessions, requiring international loans and rescue package money. The issue is that bailout of
instable countries and the reform of EU economic rules and regulations will affect the more
stable countries, such as Germany, Netherlands, and Finland. Markets are worried about how
Europe's financial system would fare if the economy stagnates or slides back into recession, or if
a European state defaults on its debt and banks are forced to post losses on the large amounts of
government debt they hold.
Germany is the wealthiest country in the EU and the main sponsor of the Eurozone’s
sovereign rescue fund. It supports the fund to protect the value of the euro, but seriously dislikes
paying for another country’s mistakes. Germany reluctantly gave up the deutsche mark for the
euro, despite the mark’s great buying power and economic prominence. With the decline of the
euro, Germany has three options. The country could insist upon full fiscal union among the
5. Eurozone countries, the countries in serious debt could be asked to leave the euro zone, or
Germany could pull out of the common currency and reestablish the deutsche mark. Although
the last option is not currently being considered, the concept will become more realistic if the
economic situation in Europe continues to worsen. The Netherlands, Finland, and the other more
stable countries are considering similar options.
On the other hand, the seriously indebted countries are relying on international, European
Central 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 insulating
the vulnerable economies. Integration would create a more unified economy, where individual
economies 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 an
obstacle to integration. As it stands now, the Europe 2020 strategy calls for more economic
integration 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?
6. Works Cited
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