PatMedMUNCXII

European Union Parliament

Future of the Eurozone

The sovereign debt and banking crisis of 2010-2012 has led to significant economic

changes within the institutions of the Eurozone. The credibility of the common policies regarding

budgetary discipline and economic convergence remains weak. The picture of the Eurozone must

be completed with getting national parliaments within the European Union more involved in the

European policy process. The present state of the Eurozone has been described as a sort of a

political equilibrium, and not economically stable.

The Eurozone was a concept that was idolized by many European leaders as early as the

1960’s, but due to economic decline that occurred in Europe during the 1970’s, the concept of a

single common currency that could be used throughout Europe was put to a brief halt. It wasn’t

until 1989 where leaders that agreed to the Maastricht Treaty, a treaty that established a

modern European Union, and most importantly, the introduction of a single common currency

that could be introduced and used throughout Europe. The European Central Bank ( ECB) was

also established. The treaty was signed and ratified by the national parliaments of Ireland, Italy,

Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom. These leaders agreed to a

three stage transition plan that would begin to phase out local currencies and introduce the Euro.

Figure 1- Map of the Eurozone

Stage 1- 1 July 1990 to 31 December 1993- Introduction of free movement of capital between

member states of the EU.

Stage 2- 1 January 1991 to 31 December 1998- Increased cooperation between national central

banks and increased alignment of member states economic policies.

Stage 3- 1 January 1999 to Present- Gradual introduction of the Euro together with the

implementation of a single monetary policy for which the ECB is responsible for.

Figure 2- A brief infographic summary of the Maastricht Treaty

Included within the Maastricht Treaty is the Maastricht Criteria, which are standards set

for states applying for EU membership. These standards are Inflation, Levels of Public debt,

interest rates, and exchange rates. The purpose of these standards were to ensure that a state

applying for EU membership and adopting the Euro as their sole currency had a relatively stable

economy, and would not hinder in the goals of Europe moving towards a strong, single market

economy. However, those standards didn’t necessarily live up to the expectations and goals in

which they would be in place to do so. The combined effects of the sovereign debt crisis along

with tariffs from the Trump Administration in Washington have posed threats to the stability of

the Euro and the Eurozone.

After the signing of the Maastricht treaty, the goal of establishing a unified Europe with a

single common currency and a single unified market was starting to come together. It was that

until 2008 when the first EU member state and a member of the Eurozone defaulted on its debt

Greece, who fully entered the Eurozone on 1 Jan 2001 under the guidance of Greek Prime

Minister Kostas Smitits were unable to pay the debts that the Greek gov’t was hiding with the

assistance of American multinational investment bank, Goldman Sachs. In three years, the Greek

depression later began to affect other member states, such as Portugal, Italy, and Ireland. These

nations, like Greece were facing debt defaults. The EU, led by Germany and France couldn’t

provide support to these EU member states in order to save them from their drowning debts. This

resulted in the issuance of bailouts initiated by the ECB ( established in the Maastricht treaty)

and the IMF. Following this, in May 2012, German Chancellor Angela Merkal proposed a seven

point plan that followed on a recently approved EU treaty that was approved 8 December 2011.

Now that the final bailouts have been delivered and are over, the Eurozone still continues to

struggle to emerge from the impact the crisis has left.

Currently, Economist expect to see a .2 percent monthly decrease on month production

on industrial products ( ex. Automobiles, consumer products, etc) throughout the Eurozone. The

European commission warned that the economies of member states can be affected along with a

“host of negative risks”. Finally, the decrease of growth of industry and production within the

Eurozone has prompted the ECB to lower it’s Eurozone 2020 growth forecast. The European

Commission also stated that the Eurozone growth will “slow down by 1.4%” followed by a

projection of .7% growth, the slowest it has been in years. With the rough terrain in which the

European economy is facing, it is very important to note that this crisis hasn’t only affected the

EU economy, but the world market. Excluding Greece, a very prime example of an EU member

state in crisis having a significant impact on the world markets is the EU island state of Cyprus,

located in the Mediterranean sea. The 2013 Cypriot financial crisis, affected both EU and World

markets briefly in 2013 when it’s economy fell. Although a small island nation near both Greece

and Turkey and one of the few nations in the world that is considered a “ Tax Haven”, the

situation took a turn when the Greek economy defaulted on their debts, prompting Cypriot banks

to lend money to Greek banks, when the crisis became even more severe, the Cypriot banks took

a larger risk, they brought Greek government bonds in hopes of a bailout. However, Germany

announced that they would not bailout another EU State that is facing their own debt crisis, this

left the Cypriots a broke, small, divided island nation that was left with a debt to GDP ratio of

102.5% in 2018. Now that the economic situation has improved, the world takes this as a prime

example of if the Eurozone crisis isn’t contained and the crisis spreads to investors situated in

other countries, the entire global market could face trouble. A more recent prime example is the

decline recession fears in Germany as the recent business confidence has fallen to its weakest in

7 years. This drop in sentiment has come less than a week ( In August) after Germany posted its

second-lowest manufacturing readout in six years, followed by an economic shrinkage in the

second quarter. Fears of a global economic slowdown risk the already perilous state of the

Eurozone entering a worse environment.

Figure 3- Debt-to GDP ratio, fourth quarter of 2018

One way that the EU can attempt to at least ease the Eurozone crisis is stricter criteria and

regulation for new states wanting to join the European Union and the Eurozone in order to make

sure another major financial crisis is avoided. Furthermore, the EU could explore ways to

encourage more investment into countries that were deeply affected by the Eurozone crisis in

order to jumpstart economic growth. Reforms previously issued by the EU commission that

provided alleviation to the debt crisis, such as EUCO “Creation of long-term investment funds”

and others have been considered in need of revisitation. Strict control over financial markets

along with democratization and social control on EU policies can be included in discussion in

order to aid the struggling countries, all these points mentioned should be strongly considered.

Figure 4- EU member states which Debt as a percentage of GDP of that nation.

Points to consider:● Should EU- US relations be revisited?● How does your party wish to address the ills faced by the Eurozone?● Has your party proposed any solutions to this issue?● Does your party recommend any new criteria be introduced for future EU member states

to follow?● Has your nation of origin been affected by the Eurozone crisis?● Should future nations in financial trouble be lend for themselves?● Does your party believe that strict control over financial markets followed by

Democratization will help alleviate the Eurozone crisis and its effects?● What is your nation’s debt to GDP ratio? ● If your party was in government during or after the Great Recession, what actions did

they take to alleviate the crisis?

Helpful links:

https://journals.sagepub.com/doi/abs/10.1177/1465116515622567?journalCode=eupahttps://www.euronews.com/2019/07/10/eu-lowers-eurozone-2020-growth-forecasthttps://www.ft.com/content/778154c8-a220-11e9-974c-ad1c6ab5efd1https://www.ecfr.eu/page/-/ECFR64_EU_CRISIS_MEMO_AW.pdfhttps://www.robert-schuman.eu/en/european-issues/0289-labour-costs-and-crisis-management-in-the-euro-zone-a-reinterpretation-of-divergences-inhttps://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-reforms-and-their-progress/progress-financial-reforms_enhttp://www.europarl.europa.eu/portal/en