What is the potential for German fiscal stimulus?

This idea has been overpromoted for a long time:

Even if Germany manages to increase domestic demand, there is no guarantee that the additional spending will find its way into the peripheral euro-zone economies. A simple macroeconomic simulation suggests that a permanent increase in German government consumption equivalent to one percentage point of GDP would raise output in Ireland and Greece by 0.1% at most, and in larger countries, such as Spain and Italy, by much less than that.

That should come as no surprise. After all, exports to Germany account for just 2.5% of the combined GDP of Italy, Ireland, Portugal, Spain and Greece. In order to make a difference, Germany would therefore have to embark on a fiscal expansion that is too big even for the largest economy in Europe.

What about households and companies? German household saving is relatively high at 11%, in theory providing some scope for additional private spending. Here, too, however, there are difficulties. Designing a fiscally neutral set of measures that encouraged spending would be challenging because German households have, on average, less net wealth than their counterparts in France or Italy.

There is also the possibility of faster wage growth in Germany, which would undoubtedly help stimulate consumption. But only a small portion of that additional spending would be directed toward the troubled countries. And Finance Minister Wolfgang Schäuble, while acknowledging the likelihood of more rapid German wage growth, also warned that the economy should not lose its focus on competitiveness, implying that there is a limit to how much wage growth German authorities will tolerate.

That is from Amit Kara, here is more.


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