6. Can (And Should) Germany Do It? Spillovers of German Fiscal Policies in the Euro Area

In recent years, also in light of the economic and financial crisis that has affected Euro-area countries, the German government has received repeated calls for expansionary fiscal policies. Indeed, Germany exhibits both a conspicuous surplus in the current account and fiscal space. So far these calls have met with rather limited success. However, at this stage, we still lack firm evidence about the dynamic effects of German fiscal shocks on output of other Euro-area economies. In this chapter we therefore undertake an empirical investigation using a panel VAR which allows us to model cross-country interdependences and to study dynamic linkages. We show that a positive government spending shock in Germany has notable effects on national output and, moreover, exerts significant spillover effects on the other Euro-area countries. We also find that the government spending multiplier is greater than one and close to values found in the literature for investigations concerning the United States.