Starting in 2008, government authorities around the world launched extensive stimulus programmes, hoping to strengthen their economies during the crisis by lowering taxes or increasing spending. Soon afterwards, however, many governments had to introduce consolidation measures because they were too heavily indebted.

To what extent did fiscal policy influence the economic performance of Germany and the other euro-area countries during the global financial crisis? And how strong was the impact of German spending programmes on the other countries of the euro area? These are some of the questions explored by Niklas Gadatsch from the German Council of Economic Experts and Klemens Hauzenberger and Nikolai Stähler (both from the Bundesbank) in their recently published discussion paper "German and the rest of euro area fiscal policy during the crisis".

Wide range of statistical data

For the Bundesbank Research Centre study, the authors developed a macroeconomic model covering three regions: Germany, the other euro-area countries and the rest of the world. In each of these regions, there are four different types of agents: households, enterprises, a central government as fiscal policymaker, and a central bank. Apart from the fact that the euro area has a single monetary policy, each of the agents makes its own decisions. Households, for instance, lend their savings to enterprises, invest in financial assets domestically and abroad, purchase consumer goods, and decide whether they participate in the labour market or not.

Compared with other models of this type, the authors' model incorporates factors such as involuntary unemployment in the economies concerned and a more complex international structure. This means that the various regions are linked to each other in multiple ways; for example, through trade or a cross-border financial market. The theoretical model is set up by the authors based on actual developments in the past and draws on a very wide range of statistical data, including data from the European Commission, the European Central Bank and the Bundesbank.

The authors are able to use the model to estimate fiscal policy's contribution to GDP growth in the regions and the various countries concerned. At the same time, the "spillover effects" between Germany and the rest of the euro area can also be determined. In addition, the authors calculate multipliers for various fiscal policy measures. Put simply, these multipliers quantify the extent to which one euro, aimed at increasing government expenditure or lowering taxes, influences economic growth in a country at home and abroad. Measures based on additional government expenditure generally produced greater short-term effects than measures such as tax concessions, which reduced government revenue and left households and enterprises with more money.

Effects rather limited

The results of the study show that fiscal policy had an expansionary impact both in Germany and in the rest of the euro area, ie that it strengthened economic growth. However, other factors, such as a decline in demand for European goods in the rest of the world, or unexpected fluctuations in interest rates and productivity, had a distinctly greater impact than fiscal policy.

A further outcome of the study also has relevance with regard to a current debate in the euro area: it has been suggested that Germany should set an additional economic stimulus to help the economies of other euro-area members to achieve higher growth in the short term. However, the results of the study suggest that the effects of this are likely to be rather limited: the spillover effects from one region to another within the euro area were found to be marginal, at least over the past 15 years.