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Shanghai European Model United Nations 2017 | Research Reports
Forum:
European Union Council
Issue:
Ending the European Debt Crisis and Inciting Economic
Recovery and Growth
Student Officer: Patrick Koppitz/Vincie Wong
Position:
President/Deputy President
Introduction
After the U.S. financial crisis of 2008-2009, the global economy growth has been slowed down,
leading to the exposal of unsustainable fiscal policies of countries all over the world. Many countries of
the European Union, such as but not limited to: Greece, Ireland, Italy, Portugal and Spain, are failing to
repay large sums of debts, resulting in an immediate collapse in the economy and the drastic increase of
unemployment rate amongst the population. As the problem worsened, many countries were affected
and involved in the debt crisis. Soon, the European Debt Crisis became a global and extreme critical
problem. In order to be able to solve this crisis, it is important for delegates to acquire enough knowledge
and contribute to a productive debate.
Definition of Key Terms
European Union (EU)
A political and economic union between 28 countries that was founded as the ECSC in 1950,
later on becoming the EU in 1993. The EU operates through a system of supranational institutions and
intergovernmental decision-making.
European Union Eurozone (EZ)
A monetary union consisting of 19 of the 28 EU member states that have adopted the Euro (€) as
their national currency.
Eurozone European Central Bank (ECB)
The ECB administrates the monetary system of the EU and is responsible for maintaining the
stability of the European currency.
Monetary policy
The actions and measure taken by a central bank which determine the size and growth of the
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money supply, thus affecting the interest rate.
Fiscal Policy
An instrument of the government to maintain the economy, by influencing the taxation and
government expenditures.
Deficit spending
A government can solely spend the amount of capital it has collected from the taxes. Any capital
spent above this amount has to be borrowed. The borrowed amount is called deficit spending.
Austerity Measures
It refers to official actions taken by the government, during a period of adverse economic
conditions. In order to maintain an economic stability, the government is forced to reduce it
budget deficit by cutting the spending or rising taxes.
Bailout
A bailout is a situation in which a business, an individual or a government offers money to a
failing business to prevent the consequences that arise from the business's downfall. Bailouts can take
the form of loans, bonds, stocks or cash. They may require reimbursement. Bailouts have traditionally
occurred in industries or businesses that are perceived as no longer being viable or are sustaining huge
losses.
Bonds
A bond is a debt investment in which an investor loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Bonds are used by companies, municipalities, states and sovereign governments to raise money and
finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
Background Information
In order to understand what caused the European Debt Crisis and how the major countries and
institutions chose the response to the event, one has to look at the historical economic development
within Europe.
Causes of the European Debt Crisis
The major causes of the European Debt Crisis were the rapid unwinding intra-EZ lending and
borrowing imbalances. The three underlying causes that led up to this development are several policy
failures within the institution, crisis mismanagement and the lack of the European economic system to
absorb shocks.
Lending and Borrowing imbalances
Before the EU was established, smaller countries in Europe had to pay high interest rates to
borrow capital and were restricted in borrowing since lenders weren’t as willing to lend large amounts of
capital. With the establishment of a unified Europe trade barriers were brought down, resulting in lower
costs for doing business and lower interest rates for smaller countries. When the Euro was launched in
1999, the ECB was founded in order to control monetary policies within the EU. It is important to note
that although the monetary policy of Europe was unified, each country still governed over its individual
fiscal policy.
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Smaller countries were now part of the united monetary policy; hence they could borrow larger amounts
because the low interest rates allowed them to have unprecedented access to credit. Consequently
smaller countries embarked on enormous deficit spending programs and lenders were willing to lend
credit, assuming if one country was unable to repay, the larger countries of the EU would step in
because of the common currency. Although several countries accumulated huge debts, they still were
enabled to repay these deficits with more borrowed money from EZ core nations (Germany, France).
Over time the lending and borrowing capital flows became increasingly imbalanced.
When the housing bubble in the US popped in 2008, cross-border capital inflows in the EU came to a
sudden stop. Subsequently, the EU periphery countries that were borrowing capital were unable to do so
anymore, resulting in a major debt crisis.
Policy failures
As the unified fiscal policy was ruled out during the creation of the Maastricht Treaty, three
safeguards to prevent problems were introduced. The first was the Stability and Growth pact, stating that
member countries should keep deficits below 3% of GDP in normal times and debt levels below 60% of
GDP. Secondly, the ECB was established to function independently from the EU in order to be protected
against political pressures to inflate away debt and was explicitly forbidden from financing members’
deficits. Lastly, a no bail-out clause was introduced (Article 125, Lisbon Treaty) to define the act of one
member assuming the debts of another as an illegal act. The SGP failed since it was vastly ignored by
member states while the other safeguards became major burdens during the crisis.
Failure of shock absorption
The governments and banks of the EZ are so closely linked, that if one institution suffers from an
economic shock, it easily spread throughout the whole system. The underlying fact of this system is that
national governments are obliged to bail out the banks if they are insolvent. Banks hold the capital the
government owes the so-called public debt. If the government is insolvent, it is unable to repay its debt,
resulting in indebted banks, which consequently become insolvent as well. Hence shocks such as the
financial crisis of 2008 cannot be absorbed adequately.
Crisis mismanagement
The responses to the crisis differ variously, making the collective management of the crisis nearly
impossible. The lack of cooperative reaction from the EU and its member nations has amplified the
consequences of the debt crisis. To acquire further knowledge of the mismanagement, please read the
section “Major Countries and Organizations Involved”.
Major Countries and Organizations Involved
Countries in debt: Greece, Ireland, Italy, Portugal, Spain
With the establishment of the European Union, the ECB was founded in order to control monetary
policies within the EU. Smaller countries (Greece, Ireland, Italy, Portugal, Spain etc…) were then able to
borrow large amounts due to the fact that they were now part of the united monetary policy. When these
have accumulated huge debts, they could still repay these deficits with more borrowed money from EZ
core nations (Germany, France). The lending and borrowing capital flows became more and more
imbalanced, resulting in a major debt crisis.
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European Union (EU)
When the crisis began in 2008, the EU activated certain emergency measures and initiative bailout programs with a net worth of 544.05 €. Additionally, the European Financial Stability Facility (ESFS)
was established. It served as a legal instruction to provide financial assistance to Eurozone states in
crisis and was set to expire in 2013. The ESFS was replaced by the European Stability Mechanism
(ESM), a 500 billion Euro rescue program.
European Central Bank (ECB)
The ECB played a vital role in order to mitigate the consequences of the crisis. Its major goal was
to improve liquidity in the Euro, thus it initiated an open market operation. During this operation it bought
government securities, which are debt obligations of the governments, in order to expand the amount of
money in the banking system. Subsequently, this action stimulates growth. On top of this, dollar swap
lines were reactivated and the ECB infuse credit worth 489 billion Euro into the European Banking
System.
European Commission
The European Commission can borrow loans and issue bonds from international markets at a
low interest rate on the behalf of the EU. The raised funds are then lent to EU countries in financial need
at the same interest rate, allowing them to benefit from the low rates. Further, three loan programmes
currently run under its administration in order to raise funds to assist countries suffering financial
instability.
International Monetary Fund (IMF)
The IMF is an organization of 189 countries working to foster global monetary cooperation an
secure financial stability. It is actively engaged in the European debt crisis as it provides many European
countries with financial assistance and exceptionally large loans. It is likely that the International
Monetary Fund is main source of money in this crisis.
Timeline of Events
Date
Description of event
February 7th, 1992
st
January 1 , 1999
The Maastricht Treaty is signed founding the European Union
The Euro officially comes into existence in 11 countries
September 15th, 2008 The collapse of Lehmann Brothers leads to the global financial crisis
February 2010,
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Greece, Portugal and Spain adopt austerity measures; Greece is bailed out
Shanghai European Model United Nations 2017 | Research Reports
May 9th, 2010
The European Financial Stability Facility (EFSF) is created providing financial
assistance to countries in debt
November 2010
Ireland is bailed out
May 2011
Portugal receives bail-out; Italy launches austerity measures
March 2012
A second bail-out package for Greece is launched; talks about Grexit
Relevant UN Treaties and Events
Maastricht Treaty (1992)
With the Maastricht Treaty the European Union was established, facilitating closer cooperation
between EU governments.
Lisbon Treaty (2007)
The Lisbon Treaty gave more power for the European Parliament and clarified which powers
belong to the EU and to the EU member nations.

Basic Principles on Sovereign Debt Restructuring Processes, 29 July 2015 (A/69/L.84)
Previous Attempts to solve the Issue
The ECB has tried quantitative easing through buying up bonds to pump euros into the money
supply in hopes of causing the banks to lend the money out to businesses. However, this attempt of
solving the crisis was a failure.
Possible Solutions
The European Debt Crisis is a highly complex issue and its effects will be felt for several years.
Economists have suggested a wide share of solutions how to mitigate the effects. The solutions include
but are not limited to the following:
European Fiscal Union
Many economists and politicians have suggested implementing a unified fiscal union in form of a
central body controlling the budgets of the member states. This would enable the EU to correlate its
already unified monetary policy with its fiscal policy and consequently result in the inability of member
nations to accumulate great amounts of debt. A less rigorous approach would suggest the adoption of
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national institutions that guarantee fiscal discipline.
Eurobonds
A bond is a loan for a set period of time. The loaner pays out a monthly fee and at the end of the
borrowing period the total amount has to be repaid by the borrower. The Eurobonds would be a special
kind of bond, because it could be issued by a single government but would be underwritten by all 19
member nations. Investors would see this as a safe opportunity to invest and thereby increase capital.
However, a downside of the implementation would be that if one country cannot pay its bonds anymore,
all other members had to pay for it.
Austerity measures
Austerity measures are implemented in order to curtail government’s spending. The
measurements could include increasing taxes or decrease spending in the public sector. During the EZ
debt crisis, Germany agreed to help mitigate the debts of Greece but only if the Greek government would
implement austerity measures in order to help increase government’s capital. The downside of austerity
measures is that the common people usually suffer from this due to increased unemployment rates and
increasing vulnerability of already low-income social groups.
Bibliography
IMF – Country Information
http://www.imf.org/external/country/
What is the European Debt Crisis? – thebalance.com
https://www.thebalance.com/what-is-the-european-debt-crisis-416918
United Nations General Assembly adopts basic principles on sovereign debt restructuring
http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1074
European Commission – European Commission
https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/financialassistance-eu-countries/loan-programmes/how-commission-finances-eu-financial-assistanceprogrammes_en
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