Fiscal Policy to retaliate against financial crisis in Europe

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During September 2008, a worldwide financial crisis erupted and was succeeded by the most severe global economic recession for decades. Governments in the euro area intervened with a extensive mixture of emergency acts to stabilise the financial sector and to soften the effect of the consequences for their economies. This paper examines the start of the Great Recession, EU governments’ general response to the economic crisis and their ultimate effects. This paper aims to draw a conclusion on whether or not fiscal policy, implemented in many European countries during the Great Recession of in 2008-9, was the best choice.

Fiscal policy involves changes being made in government expenditure and or taxes with the aim of reaching certain economic objectives, such as stable prices, low unemployment and ultimately economic growth (Arnold, 2012). Arnold (2012) explains that fiscal policy may be expansionary or contractionary depending on the government budget.

In mid-2007 the first signs of upset became visible in global financial markets (Stark, 2010). Stark (2010) explains that these signs were connected to a swiftly increasing crisis in the sub-prime mortgage market of the US, which had an negative affect on the prices of related structural financial products owned globally by banks and other financial institutions. Eventually, European banks were subjected to the unravelling of harmful financial instruments and to plummeting commodity prices and Western consumer demand for imports (Love & Mattern, 2010). Finally, these factors culminated and credit tightened, consumer demand decreased, and unemployment increased on a global scale (Love & Mattern, 2010).

In reaction, large-scale fiscal stimulus was launched around the world and,...

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...uture debt obligations are not well anchored”.

It is apparent that numerous European countries had high government deficits and debt ratios even before the financial crisis, which in turn restricted the impact of their fiscal actions during. Moreover, when announcing bank rescue operations and fiscal stimulus packages, Afonso, Trabandt and Warmedinger (2010) are of the opinion that a trustworthy commitment to uphold longer-term fiscal sustainability may have restricted the negative market reaction.
To conclude, euro area countries should therefore have secured a “fiscal cushion”, by uniting during favourable economic times, in order to have been able to best retaliate during the economic downturn of 2008-9. Yet, given their circumstances at the time, the implementation of the fiscal policy was .

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