European Central Bank I: Brexit's Effects on the Eurozone

Dear Delegates,

It is with great pleasure that I introduce you to the 7th annual YMGE conference. My name is Haci Catalbasoglu, and over the course of the next few days I will be directing the European Central Bank. The ECB is a vital component of the economic prosperity of the entire continent and plays a large role in most European's day-to-day lives, and we all look forward to the deliberation, problem solving, and teamwork that will flourish from such an environment.

Speaking of environments, I was first introduced to the Yale International Relations Association as a junior in high school during one of the Yale Model UN conferences. I still remember how nervous I was during my first conference, but remember that you eventually get the hang of it. At Yale, I am a rising junior in Davenport College. I row for the Varsity Men’s Heavyweight Crew team (Go Dawgs!), compete on Model UN team that travels around the country for conferences similar to this one, and am heavily involved with New Haven politics (let me know if you have any questions!).

Your time in this committee will be very enlightening, constructive and eye-opening. Because the format of this conference is that of a crisis, you will always be on your toes and ready to react at any given moment. Representative of contemporary European politics, you will need to collaborate and think quickly. Much of what you learn and experience at the conference will be directly applicable to your lives when you get back home.

If you have any questions/concerns about the conference, Yale, the committee or just want someone to talk to, email me at Hacibey.catalbasoglu@yale.edu. I look forward to meeting you all in November!

With love,

Haci

Committee History

In 1998, the European Central Bank was established in Frankfurt, Germany to regulate the Euro in the new Eurozone. Its primary roles are to issue bank notes, keep interest rates near or below 2%, and keep liquidity within the market. Another responsibility, of lesser importance, includes serving as the bankers' bank. In other words, whenever a smaller, private bank needs to borrow capital, it may do so from the ECB. Because the ECB also issues the Euro, its branches are heavily intertwined with that of member states’ governments and banks, giving it amenities and powers that other similar institutions do not equip. For example, the ECB has the unilateral power to print Euros -- though the mints of various countries can print Euro notes at their mints, only the ECB has the jurisdiction to issue the creation of those notes.

Other responsibilities of the ECB include being a lender of credit to other smaller banks as a last resort. By lending capital to these banks, the ECB can deter the instability that would result from the bank's insolvency. Further, the ECB regulates the monetary policy in the Eurozone (e.g., interest rates), while fiscal policies (e.g., taxes) are delegated to their respective member states.

Executive decisions at the ECB are fulfilled by its Governing Council. This council is comprised of governors from other Eurozone national banks and the ECB’s executive board. The second decision making body at the ECB is the Executive Board. The Executive Board is responsible for the implementation of monetary policy and running the bank. Thirdly, there is the General Council, which deals with issues pertaining to the adoption of the Euro in countries that previously utilized its own currency. Finally, the Supervisory Board meets twice a week to ensure the smooth progress of activities on other boards.

Through much of its existence, Europe has continually been at war with itself. The height of Europe’s infighting came during WWII: millions of lives lost, governments collapsed, and economies withered. Following such carnage, France’s Jean Monnet proposed a unified, coalesced Europe where economies would flourish hand-in-hand. Monnet’s persistence is considered by many to be the first domino to fall in the creation of the European Union (EU). This persistence birthed a coalition of European countries (France, Germany, the Netherlands, Italy, Belgium, and Luxembourg) that signed the 1957 Treaty of Rome. The treaty established a universal marketplace (the European Economic Community) and kick-started economic growth in its member states.

Up until the creation of the EU, nearly all European countries employed trade tariffs that hampered the free flowing transfer of goods between the countries. Furthermore, in order to trade goods, the buying country had to convert its currency to that of the selling country. This caused countries with weaker currencies to have to convert their capital in order to purchase goods from other, more powerful countries.

With the introduction of the European Union in 1996 and the Euro in 1999 many of these previous barriers were lifted: Countries that were in the Eurozone (used Euro as the national currency) began to freely trade between one another, without having to exchange currencies or pay tariffs

The political, social, and economic standing of a country is always determined by its financial standing, and in order to manage such finances, certain institutions like banks must be put in place. These banks manage the various nuts and bolts of a state’s economy such as commercial banks, investment banks, and other financial entities. In short, banks play a key role in the success or demise of their nations and therefore the globe.

Brexit: History

The predecessor of the EU, the European Economic Community (EEC), was founded in 1957. The Community's goal was to bring forth unified economic prosperity in a war-torn Europe that was divided for so long. The original EEC saw membership from Belgium, France, Italy, Luxembourg, Netherlands, and West Germany, not the United Kingdom (UK). The UK finally joined the EEC in 1973, only after having its application vetoed by French President Charles de Gaulle. It is reported that Gaulle was adamantly opposed to the UK’s membership, because he did not want French to be replaced with English as the dominant language. A mere two years later, the UK held a referendum questioning whether or not they should stay in the EEC. An overwhelming majority voted yes.

During its membership in the EEC, UK, despite being the third poorest nation in the EEC, was paying a considerable amount more for membership than its peers. A large reason for this was because the Community was granting large amounts of subsidies to countries with farms, which the UK did not have much of. Thereafter in 1984, the then Prime Minister was successful in negotiating a rebate that drastically cut British dues from 20 to about 12 percent.

In 1993, the EU was created. Based in Brussels, this new Union absorbed the EEC and was delegated the responsibility of unionizing not only the economics but the politics of Europe as well. Another crucial role of this new union was to centralize all of its members’ currencies. Thus, in 1999 the Euro was born. The UK, however, has its own currency, the pound. Further the people of Great Britain have always had a quasi-membership with the EU. Today, only 3 other member states in the EU have opt-outs of some kind (e.g., UK not using Euro). Of the 3 only, Denmark has as many opt outs as the UK. Further, the UK is the only country to have every gotten a rebate. The UK also has an opt-out of the Schengen Area agreement, where citizens of EU states can travel freely between country to country.

Over the past few decades, Euroscepticism was on the rise in the UK. This was clearly evident in the rise of the UK Independent Party (UKIP), a far right opponent party of the UK’s integration in the EU. In the 2014 UK European Parliament Election, UKIP won the most seats at 24. The idea of a non-Labour/Conservative party winning the most seats came as a shock, as it had never happened since 1906.

In 2015, in order to settle qualms about EU membership within his own party, the then Prime Minister David Cameron, promised that if his incumbent party, the Conservatives, were to win the general election, he would hold a referendum on whether or not to continue membership in the EU. The Conservatives did win the election, and Cameron delivered on his promise to hold a referendum.

During the months long campaigns, many issues came to the forefront of voters’ attention, but the most prominent issue was immigration. Ever since the UK’s integration in the EU, immigration was a hot-button issue, as many believed that the regulations were too loose. As a member in the EU, citizens from other EU member states were technically allowed to travel and work in the UK. Up until mid-decade, non-EU immigrants far surpassed those from EU origin; In 2015, that changed. For the first time, the number of immigrant that came from non-EU and EU countries were roughly the same. Some estimates even show up to 13 percent of UK resident being foreign born.

Another problem many UK residents had with the EU was this idea that the UK was paying for the upkeep of poorer countries with nothing in return. In 2015, the UK was at a net 12 billion Euro loss (amount received from EU – amount contributed to the EU). In fact, the Vote Leave campaign donned an infamous slogan on their campaign bus stating "We send the EU L350 million a week – let’s fund our NHS instead – Vote Leave." That figure does not put into account the rebate that the UK receives and the amount that ends up coming back through subsidies from the EU. In reality, the amount the UK sends to Brussels each week is closer to 160 million pounds, about one percent of what the UK government spends weekly.

Laws and freedom were another topic that concerned many Exit-ers. The Exit campaign claimed that 62 percent of the laws governing the UK was enacted by the EU, while the Remain campaign argued for a more accurate representation at a meager 13 percent. Both are stretching the truth: 62 percent is counting all the laws the EU has ever passed, regardless of whether or not they apply to the UK, while 13 percent neglects other EU laws and regulations.

The Exit-ers' concerns did not stop there, however. Many advertisements were posted across the UK stating in big, bold letter, "TURKEY (population 76 million) IS JOINING THE EU – Vote Leave, take back control." People were afraid of the influx of potentially new members in the EU, rightfully so. The more members – the more representation; the more representation – the less power left for the UK. Further, the fact that Turkey is a predominantly Muslim country and borders Syria irks many in the UK. In any case, Turkey’s file to join the EU has been open for many years. In fact, last year, Turkey’s president, Recep Tayyip Erdogan said that Turkey will withdraw its application to the EU. Long story short, Turkey is unlikely to join the EU any time soon.

On June 23, 2016, polling opened. All British and Commonwealth citizens were granted the ability to vote. The next day, the polling arrived to show the 52 percent want to leave while 48 percent wanted to stay. There was clearly a demographical factor, as Northern UK wished to Remain, while the South did not. Moreover, it was clear that younger generations wished to remain, while older generations wished to leave. The value of the Pound instantaneously plummeted by 10 percent. David Cameron immediately resigned after the referendum, to be replaced by Theresa May.

On March 29, 2017, Article 50 – the formal method by which leaving the EU takes place – had been invoked, and the UK has begun negotiations have begun involving its release from the EU. The process can take up to two years and requires a unanimous agreement from all members of the EU. Because this is the first time Article 50 has ever been invoked, UK and the EU at large are going through uncharted territory, and because of this, a lot hinges on the new negotiations between the EU and UK. One thing to keep in mind is that it is not in the best interest of the EU to negotiate generously, or else it will set a precedent that will make other country want to follow.

● After being rejected twice, Britain finally joined the EEC (what would later become the EU) in 1957.

● The UK always seemed to pay more that most other member states, despite having a weaker economy.

● Up until 2016, when it officially voted to leave, the UK always had a quasi-member of the EU, not participating in the common Euro currency, among other political opt-outs.

● In 2015 David Cameron called for a referendum to vote continuing the UK's membership in the EU.

● With the rise in Euroscepticism, nationalism, and the desire for tighter immigration (there were as many EU immigrants as Non-EU immigrants in the UK in 2015), the UK finally voted to leave the EU.

● The two years following the decision to call forth Article 50 will be filled with the unwinding of half a century of trade deals and drafting of new laws and legislation.

Current Situation

European Disunion

Many academics argue that the EU, and the UK’s position in it, was bound to fail. The original founders of the EU (see above) meant for it to become an economic union similar to that of the U.S. – the United States of Europe. They sought optimality in an area where there were too many differences across borders. Without common fiscal and monetary policies, these differences would eventually manifest into certain countries, such as Greece, holding on for dear life in a system that is designed to perpetually make it fail. With the UK’s exit from the EU, we now, for the first time, can look over the fence and ask ourselves if it's really greener on the other side.

● With the lack of a common fiscal policy, the EU was bound to fail since its conception.

Soft vs Hard Exit

A hard exit, the one preferred by the majority of Britons, would be an exit from the EU where the UK would sever complete ties with the rest of the Union and would entail Britain forming new trade agreements that gave full autonomy to the UK. A soft exit, on the other hand, would be the arrangement that many on the "Remain" camp would prefer. In this scheme, the UK would no longer hold a seat at the EU negotiating table but would still keep access to the European market. Countries such as Norway and Iceland have a similar relationship with the EU.

● Theresa May can either negotiate a deal with the EU where the UK is still a part of the free market, or she can completely cut off all ties with the rest of Europe.

No Deal

Britain’s Prime minister was quoted as saying, “No deal is better than a bad deal.” In other words, unless the UK believe that it is benefiting from the bargaining that will take place within the coming months, it will not sign off to the EU proposals. This could, however, have the potential to be damning to the UK and European economy: with no trade deal, the UK would have to abide by the rules set by the World Trade Organization (WTO) and pay tariffs for everything it purchases. This will undoubtedly deter investors from partaking in the UK economy when they otherwise may have. In fact many headquarters of European countries are situated in London, and without the ability to freely and easily travel between London and other large European countries, these companies may look to relocate. Further, it is in the best interest for the UK to negotiate some sort of trade deal with the EU, as more than half of the UK’s exports goes to Europe while about 15 percent of the European imports come from the UK: the UK needs the EU more than the EU needs the UK.

● Theresa May has entertained the idea of not coming away with a deal that greatly benefits the UK.

● The UK needs the EU more than the EU needs the UK.

● This uncertainty of the future of the UK and EU scares investors and retards economic growth in the area.

Role of ECB and Euro

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The Brexit debacle put into the forefront of millions of people’s minds the worth of the EU. It illuminated it faults and the reasons as to why change is paramount. Much of the bearish movements by investors can be attributed to the underlying uncertainty accompanied by the Euro and EU – the UK’s exit did not help. When negotiating with the UK, the EU has to make sure not to give too good of a deal, or else many other countries in the EU will follow suit. The Euro did, however, bring forth sweeping positive changes. It centralized a market that was pummeled by war and conflict for millennia; It acted as a safety net during the 2008 economic crisis; It brought forth unbelievably low interest rates to Europe. Its largest downfall is its inability to break down more than just economic barriers, and that is what great minds like yourselves have next on your plate. Good luck!

● In all, the Euro was a net positive for its member states.

● The EU has to make sure it does not give the UK too valuable of a dea, or else other countries will be inclined to follow suit.

Questions to Consider:

How can you break down more than just economic barriers and truly create a United States of Europe?

Should the ECB be responsible for the fiscal policies of countries that are economically unstable?

How do you incentivize weaker economies to stay in the EU?

What would an EU with each country spending its own currency look like?

Further Research

Because Article 50 was recently activated and Brexit is still in progress, you should regularly keep up to date with contemporary British news. For example, on June 5th, the EU and Japan just passed the new, monumental trade deal Japan-EU Economic Partnership Agreement. Though the UK will be included in trade talks, had Britons voted to leave the EU two years earlier, the UK would not be included.

Further, zoom out and take a look at what sort of role the UK will play internationally. Will it continue to be a global powerhouse, or will its economy, burdened with trade tariffs and uncertainty, will wither?

Another indicator to look at is the value of the Pound. After its vote to leave the E.U., the British Pound plummeted. This was because investors were uncertain of the UK’s future and sold many of their stocks and bonds.

With the rise in populism across the globe, it will be valuable to research how the geopolitics of the Middle East play a role in tighter immigration: one of the because of reasons why many Britons voted to leave.

The UK’s decision to leave the EU was unprecedented and may cause a domino effect of other countries such as Greece to leave as well. You should follow the negotiations between Brussels and London, as a deal that heavily favors the UK will entice other countries to follow suit.

While writing a position paper is not required, you are more than welcome to send me your thoughts on the topic and/or any questions you have before the conference. The more you prepare before the conference, the better position you'll be in to tackle problems as they arise during YMGE. Again, good luck, and see you in November!