This paper analyzes the dynamic effects of monetary policy, fiscal policy, and foreign interest rate shocks in a monetary union, which is small relative to the rest of the world and simultaneously characterized by supply-side and demand-side asymmetries. We investigate both, the implications at the aggregate European level as well as in the individual member countries. The analysis distinguishes between anticipated and unanticipated shocks. We find that monetary policy, which is expansionary at the aggregate European level, may have a contractionary impact in individual member countries. Whereas monetary and fiscal policy cause temporary cyclical divergences within the monetary union, shocks to the world interest rate lead to lasting cyclical divergences within the monetary union.