Week 3

Question 1

What core factors triggered recession in the EU

Answer 1

• Losses of financial institutions exposed to toxic US assets
• Decline in trust in financial markets
• Decline in external demand

Question 2

Other reasons for recession in EU

Answer 2

• Home-made real estate bubble
• Large government deficits, high level of external public debt
• several new EU members need emergency lending

Question 3

What happened to members of the Eurozone because of the crisis

Answer 3

• Large government deficits, high levels of public debt, inability to refinance debt
• Domestic liabilities, in particular as result of real estate bubble

Question 4

How did the IMF react to the crisis

Answer 4

• Short-term lending to address crisis situations in otherwise sound economies.
• Instrument for emerging economies
• Revamped system of concessional loans for low-income countries

Plus new arrangement for borrowing from members

Question 5

The challenge of monetary policy in the EMU

Answer 5

• No exchange rates that can help adjustment
• Independence of ECB is put down in treaties
• Single interest rates, one size does not fit all

Question 6

ECB during the crisis

Answer 6

• ECB active early on vis-à-vis private financial institutions
• ECB also starts to support governments
  -consistent pressure on states to develop their own support mechanisms

Question 7

Two arms of the stability and growth pact

Answer 7

Preventive and corrective arm

Question 8

The role of the IMF

Answer 8

• Contribution to lending programs
• Part of the troika (European Commission, IMF and ECB)
• IMF frequently at odds with European troika member

Question 9

Has EMU become more supranational or intergovernmental

Answer 9

• Supranational because strengthened procedures involving Commission under enhanced SGP
• Intergovernmental because European Council took leadership with regard to reforming the economic union