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SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
European Central Bank (ECB) Governing Council
Eurozone Financial Crisis
Introduction
As the single currency of the Eurozone, the euro was expected to strengthen Europe’s
economy and fortify its union. However, massive and unsustainable deficits and public debt led
Greece, Portugal, Italy, Ireland, Cyprus, and Spain teetering on the brink of financial collapse,
triggering a sovereign debt crisis, and thus threatening the European Union’s viability.
Despite interventions, the EU’s economic recovery continues to be fragile. Without
immediate action, the euro and the EU’s economy will collapse. This would lead to a multi-year
depression in Europe, several years of recession in the United States, and ripple effects around
the world. Even worse, the collapse could destroy interbank lending worldwide; a run on banks
around the world would freeze credit markets, making it difficult for businesses to borrow
money.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Background information:
Throughout most of its history, the continent of Europe has been at war with itself. The
first half of the 20th century saw some of the most devastating warfare mankind has
experienced. The warfare had caused the European powers to be distrustful of each other, and
Europe had become a continent of trade barriers, tariffs and ultranationalism. However, after
World War II, Europe was left in crumbles financially, politically, and socially. After the war,
France’s Jean Monnet, considered the founding father of modern Europe, argued economic
integration was vital to the elimination of intercontinental conflict in Europe. Other political
leaders, such as Konrad Adenauer, also rose in prominence advocating for a more unified
Europe. Winston Churchill called for the foundation of a “United States of Europe.” These
leaders argued that trade barriers and tariffs stifled economic growth. Their arguments would
eventually lead to many key factors that created the European Union (EU).The 1957 Treaty of
Rome was one of the many major steps leading to the establishment of the EU. In this treaty,
France, Germany, the Netherlands, Italy, Belgium, and Luxembourg established the Common
market and the European Economic Community (EEU). The treaty also abolished trade tariffs
between members, and sparked rapid economic growth.
In Europe, to trade across borders, countries had to pay a tariff because of the trading
barriers. Before the euro, each country had their own currency. When countries wanted to trade
over their borders, they had to exchange their currency to that of the country they were trading
in. Certain countries had to pay more money because their currency had a lower value than the
country’s currency they were trading in. With the creation of the euro and the EU, this was no
longer a problem. Furthermore, when the EU was created, trading barriers (any regulation or
policy that restricts international trade, especially tariffs and quotas) were lifted and removed. As
a result, countries could trade freely. Goods, services, and people were also able to move
through Europe with ease. Trucks could carry goods across borders without stopping, and a
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
bank could open branches in any member country with supervision only by the bank’s home
country.
As the EU grew and developed, more countries join. Most of these countries adopted the
euro, creating the Eurozone (EZ). Without tariffs or trading barriers, trade between countries in
the Eurozone increased. Countries started to become interdependent on one another due to the
international trade taking place.
With the collapse of the world economy brought on by the financial crisis in the United
States in 2008, a number of glaring issues, most of which we still face today, with the EU’s
monetary system began to emerge. When the EU adopted the euro, countries accepted a
unified monetary policy, but countries kept their own fiscal policies. Monetary policies
manipulate the interest rates in circulation by a central bank or national treasury, while fiscal
policies can raise or lower taxes, government spending, and government borrowing. With
several diverse fiscal policies yet one monetary policy, countries, such as Greece, struggled to
balance their budget with the interest being low for all of the EU. Before Greece began using the
euro, the interest rate for loans was 18%, which kept the government from borrowing excessive
amounts of money. Once they became a member of the EU, the interest rate lowered to only
3%. Consequently, these states developed unsustainable fiscal policies in which deficit
spending was increased in order to pay for social programs. It became a political trend to
promise the public what you could not deliver, all on the opiate of large doses of lower interest
loans. As a result, Greece kept borrowing money without the having the ability to pay it back,
which accumulated in a massive amount of debt.
Because the EU links countries together, the EU benefits from one nation’s economic
prosperity. Likewise, a nation’s debt negatively impacts the economies of other EU countries. As
a result, the massive debts from countries such as Ireland, Portugal, Spain, and Greece have
led to the Eurozone crisis.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
To help countries with their debt crises, the EU utilized two measures: giving the
troubled countries bailouts and enforcing strict austerity measures on those countries. The
problem with austerity measures, in which the government borrows less, spends less, and pays
back more debt, is that when government spending is cut, the earnings of many citizens are cut,
resulting in job loss. The increase in unemployment causes citizens to become resentful of the
government, which can lead to riots. Riots have taken place in Greece because citizens were
furious about the strict austerity measures imposed on them. Taxes are based on the citizen’s
earnings, if earnings are reduced or cut, tax collection decreases, making it harder for a
government to pay off its debt. Bailouts weren’t effective because they were just loans, which
only increased nation's’ debts. Each country’s fiscal policy decides what the country is going to
do with the money from the bailouts. These fiscal policies didn’t balance their budgets wisely,
which was another reason why these bailouts didn’t work. The affected governments still have
staggering debt loans, which cannot begin to be paid down until a recovery takes hold. Because
the EU’s past actions failed, the “big three” economies in the Eurozone, Germany, France, and
Italy, are barely growing, and Italy has fallen into outright recession. France and Italy continue to
struggle to implement their own structural reforms. Countries like Greece and Cyprus are still in
a terrifying financial debt crisis.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Current Issues:
The anti-austerity Syriza party won the Greek legislative elections in January 2015, in
which Alexis Tsipras was elected to be prime minister. Greece requested the IMF to postpone
an installment of €1.6 billion to the end of the month on June 4th. Media had already begun
speculating a probable default as the deadline approached. Tsipras announced a public
referendum that was approved by the parliament three days before the payment was due. The
citizens had to decide if they were willing to accept the harsh conditions the Troika proposed in
order to secure another bailout package. Tsipras claimed the ECB’s proposals were humiliating
to Greece, which is why he led the ‘no’ campaign.
Greek banks started to run out of money as the deadline for the IMF payment
approached, which resulted in all Greek banks shutting down. As of June 28th, Greek citizens
are only allowed to withdrawal €60 from ATM machines.
Greece officially defaulted on an IMF payment on June 30th. Since the organization’s
establishment in 1945, this was the first time a developed nation has defaulted on an IMF loan.
This default placed the Greek banking sector at risk of being pulled out of the ECB’s Emergency
Liquidity Assistance (ELA), and it further damaged Greece’s credits. An overwhelming majority
of polling sources showed a great possibility of a ‘no’ vote as the Bailout Referendum
approached. The bailout conditions were rejected by the voters, 61% to 39%. The referendum
results put Greece in a difficult spot because it faces the possibility of leaving the Eurozone.
It is clear that the Greek citizens do not want austerity measures, but the government
desperately needs money. The Greek government came up with their own proposal, and sent it
to the creditors to secure a desperately needed third bailout package and to prevent the
dreaded Grexit. Oddly, many of the elements in the original creditor's proposal, which was
rejected by Greek voters, were integrated into Greece’s plan. Other Eurozone countries had
differing views regarding the proposal. Germany, Greece’s largest creditor, remained skeptical
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
about the country’s ability to follow through with its own plans, while France and Italy were quite
optimistic about reaching a deal.
Greece and the Eurogroup finally secured a third bailout consisting of 86 billion euros
after several lengthy negotiations. The 86 billion euros will be made available over the next
three years. Unfortunately for Greece, the deal does require more austerity measure from
Greece. This may not be the best solution for this debt crisis for the long run. The ruling Syriza
party rebelled against the prime minister because they saw Tsipras’ deal with creditors as a
betrayal of anti-austerity principals. Even though the rescue package temporarily ensured
Greece’s place in the Eurozone, there were revolts against the outcome of the negotiations,
which pressured Tsipras into resigning. Tsipras officially resigned on August 20th, and a
caretaker government (a temporary government set up until a stable democratic rule can be
restored) led by Vassiliki Thanou, Greece’s top Supreme Court judge, was set up to lead the
nation into legislative elections in September. Markets have responded negatively to the political
instability in Greece. However, experts suggest that an election will eventually stabilize the
country in the long run.
The nation urgently is trying to re-stabilize its failing economy, as its debt piles up.
Unfortunately, it will still be another 42 years before the country is debt-free, even if Greece
strictly follows its payment schedule.
Economic Issues:
The major problem Greece faces in this debt crisis is it’s failing economy. The
government is finding it increasingly difficult to borrow funds, and the nation is running out of
money. Creditors continue to demand Greece to raise taxes and make harsher cuts to public
spending. The impact of Greece’s crisis extends beyond its own country. Other nations’
economies continue to diminish as this crisis drags on.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Political Issues:
Politically, the debt crisis Greece faces has sparked speculations of a possible deal
between Russia and Greece. Previously, when the EU sanctioned Russia due to its acts in
Ukraine, Greece had suggested dropping the sanctions. It is very likely that Russia would offer
loans to the nation if Greece is pushed out to the Eurozone. This would strengthen the ties
between the two countries, and could potentially weaken the power of the EU.
International Involvement:
A plethora of meetings have occurred between EU leaders and members of the
European Commission discussing the Greek deficit. Furthermore, emergency EU summits that
have also been held in response to Greece’s Bailout Referendum and Greece’s IMF default.
Ongoing negotiations have occurred between Greece and its creditors, mainly the IMF and the
ECB. The Troika have been demanding austerity reforms within Greece, and have been
involved in the Greece crisis by providing needed bailout programs to the government since
2010. Several Eurozone leaders have been involved in the financial debt crisis Greece faces by
expressing the extent of their willingness to provide further bailout funds and by overviewing
austerity proposals. It has been necessary for international involvement to provide emergency
aid to Greece. The bailout packages Greece has so far received have undoubtedly relieved
Greece’s economic crisis in the short-run. The UN has not tried to intervene due to the problem
being mostly contained within Greece and the EU. Nevertheless, if the crisis continues to grow
and starts to cause greater impacts, the UN may become involved in the future.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Committee:
Our committee, the European Central Bank’s Governing Council, is tasked with
alleviating the economic conditions of the Eurozone. The focus should primarily be on the
economy of Greece as it is the most pertinent, however, the other PIIGS nations (Portugal, Italy,
Ireland, Greece & Spain) could also be discussed. Considering this is a regional bank, not a UN
body, this will be a unique debate experience. The ECB’s Governing Council is the main
decision making body in regards to monetary policy for the Eurozone. It does not consist of
countries or diplomats, rather the governors of each of the 19 Eurozone countries’ national
banks. Also included are six members of the executive board, with the chair and co-chair being
the president and vice-president respectively. Together we will save the euro, thus saving the
European Union from failure.
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Guiding Questions:
1. What does your national bank recommend as a remedy for the growing European debt
crisis? What kind of monetary policy does your national bank support?
2. What has been done previously in regards to debt crises within the international
community? What proved successful and what can you learn from their shortcomings?
3. How would ‘Grexit’ affect Greece and the rest of the EU? To what extent are Eurozone
countries obligated to bail out Greece?
4. How important is the opinion of the public when the fate of an entire nation is on the
line? How will EU citizens from different countries react to any proposed solution?
SEAHAWK MODEL UNITED NATIONS CONFERENCE 2017
Additional Sources
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This is an introduction to Greece on the official EU website:
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An outline of where other EU countries stand on this crisis:
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http://europa.eu/about-eu/countries/member-countries/greece/index_en.htm
http://www.bbc.com/news/world-europe-33408466
The original copy of creditor’s proposals, which Greek voters rejected
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http://www.referendum2015gov.gr/wp-content/uploads/2015/06/REFORMS-FORCOMPLETIONOF-CURRENT-PROGRAM-1.pdf
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More information on Greece and the Euro
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More statistics on the Greece debt crisis
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http://ec.europa.eu/economy_finance/euro/countries/greece_en.htm
http://www.tradingeconomics.com/greece/government-debt-to-gdp
Website on Greece and the UN
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http://www.mfa.gr/missionsabroad/en/un-en/about-us/the-permanentrepresentative.html