In a 300word essay explain and discuss the European fiscal p

In a 300-word essay, explain and discuss the European fiscal policy response during the last economic recession and its aftermath.

Solution

The first seven years of the euro area were characterized by stability, both internally as well as globally. The protracted period of tranquillity was abruptly brought to an end by the collapse of the US housing bubble and the subsequent implosion of the sub-prime mortgage market.

This notwithstanding, the European Central Bank did not fall victim to complacency and promptly intervened in the money market with an injection of 95 billion euros when severe strains emerged in that market in August 2007. However, despite these unprecedented interventions, and similar measures implemented in the US, in October 2008 Lehman Brothers collapsed wrecking havoc on international financial markets and the world economy.

The European Central Bank’s response to the crisis was swift and combined a mix of standard and non-standard monetary policy measures. Official interest rates were cut in a sequence of steps, bringing the main refinancing rate from 4.25% to 1% within a span of 6 months. The first of these reductions – on October 8, 2008 – was part of a concerted move with other major central banks.

In order to meet banks’ increased demand for liquidity and to reduce uncertainty, a number of non-standard measures to enhance \"credit support” policy were adopted. The most important of these have been the fixed-rate full-allotment policy, the introduction of additional and new long-term refinancing operations and the extension of the list of collateral eligible for monetary policy operations. By allowing banks to continue rolling-over their short and medium-term financing, the liquidity provision of the European Central Bank avoided a fire-sale of assets.

Like various other central banks, the Eurosystem has also embarked on outright purchases of securities, though on a relatively limited scale, in order to support the broader functioning of euro area financial markets.

Thus, due to strong and timely action by central banks and governments, worldwide signs of stabilisation in financial markets emerged.

Source: https://www.ecb.europa.eu/press/key/date/2011/html/sp110919.en.html