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Economic Crisis in Europe: Causes, Consequences and Responses (2009)

The European economy is in the midst of the deepest recession since the 1930s, with real GDP projected to shrink by some 4% in 2009, the sharpest contraction in the history of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile. A swift and decisive EU response Aside from intervention to stabilise, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008 to restore confidence and bolster demand through a coordinated injection of purchasing power. The overall fiscal stimulus, including the effects of automatic stabilisers, amounts to 5% of GDP in the EU. But policies must take up new challenges To ensure that the recovery takes hold and to maintain the EU’s growth potential in the long-run, the focus must increasingly shift from short-term demand management to supply-side structural measures. Failing to do so could impede restructuring or be harmful to the Internal Market. Moreover, while clearly necessary, the bold fiscal stimulus comes at a cost. On the current course, public debt in the euro area is projected to reach 100% of GDP by 2014. The Stability and Growth Pact provides the flexibility for the necessary fiscal stimulus in this severe downturn, but consolidation is inevitable once the recovery is firm. A coordinated 'exit strategy' is essential Preparing a coordinated exit strategy now, not only for fiscal stimulus, but also for government support

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