Tuesday, April 14, 2009

Difference in Response to Great Recession

The UK and Eurozone have responded to the great repression in different ways.

1. Fiscal Policy. Firstly, the UK has been keen to borrow as much as the markets will stomach. The UK feel higher borrowing will enable the government to kickstart the economy and to take the place of falling private sector spending. EU countries have been more sceptical of fiscal expansion. Germany have displayed a greater fiscal conservatism. They have been more concerned about the negative effects of higher borrowing.

2. Monetary Policy. UK (and US) interest rates were cut much quicker and more sharply. The ECB have reduced interest rates more cautiously and have interest rates 1% higher than in UK. This reflects the ECB's greater concern about future inflationary pressure and a desire to keep the Euro strong.

3. Quantitative Easing. The UK adopted a policy to purchase bonds through the creation of money. The ECB are reluctant to consider this. 'Printing Money' is an anathema to the German influenced ECB. Also, it is more difficult for the ECB to decide which countries bonds to buy. In the UK it is more straight forward. The UK is pressing ahead with quantitative easing, the EU remains reluctant.

4. Exchange Rates. The ECB have seemed relatively unconcerned about relative strength of the Euro - often pointing to this as a strength - reflecting their ability to weather the economic shock. The UK, on the other hand, have seemed unconcerned about the Pound's corresponding decline - pointing to the boost to exports.

5. Bank Bailouts. The UK has been forced into one of the most extensive bank bailouts within the EU. This reflects the scale of the banking crisis within the UK and also the importance of the banking sector to UK. However, EU countries have not been immune from this.

The UK has been hit hardest by the current downturn, but has also embraced unorthodox policies to try and recover.

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