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, more specifically, the European Economic Recovery Plan (EERP) in the European Union (Coenen, Straub and Trabandt, 2012). The European Commission (2009) explained that the plan aimed to re-establish consumer and business trust, restart lending and motivate investment in the EU's economies, generate jobs and provide the unemployed with work.
After the adoption of their jointly planned European Economic Recovery Plan on 12 October 2008, the principles of which were recommended by the European Council a few days later, European countries proceeded to introduce additional national actions to support their financial systems and establish favourable financing conditions for the economy as a necessary condition for growth and employment.
Buti (2009) states that fiscal policy enhanced growth throughout...