The Reaction of Fiscal Policy to the Crisis in Italy and Germany: Are They Really Polar Cases in the European Context?

Abstract

This paper examines public finance developments in Germany and Italy in 2009 and find that the larger stimulus measures adopted in Germany were associated with a more favorable underlying trend in the German budget balance. Overall, the cyclically-adjusted primary balances deteriorated by a similar extent in the two countries. The automatic stabilizers are estimated to have had an impact of a similar magnitude on the deficit in Germany and in Italy. Given the fiscal conditions in 2008, it is not surprising that the size of the discretionary measures adopted by the two countries were at the opposite extremes of the gamut of reactions of all European governments. The authors then assess the macroeconomic impact of discretionary measures and automatic stabilizers on the basis of counter-factual simulations with the econometric models of the two countries developed by Deutsche Bundesbank and Banca d’Italia. Altogether, discretionary measures and automatic stabilisers counteracted the fall in real GDP in 2009 by more than 2 percentage points in Germany and by 1 point in Italy. The difference reflects both the size of the stimulus measures and the higher fiscal multipliers in Germany.