Last week,\u00a0the German government<\/a> ratified a significant economic stimulus plan that included amending the Constitution, i.e.,\u00a0loosening\u00a0the constitutional debt brake that required the deficit to be contained to maintain a balanced budget. It also gave the\u00a0federal states (L\u00e4nder) the flexibility to make\u00a0public spending outlays of up to a deficit ceiling of 0.35 percent of GDP annually. This albeit limited flexibility was previously at the sole discretion of the federal government, henceforth also granted at the regional level.<\/p>\n In addition, the plan included investments amounting to 500 billion euros, spread cumulatively over the next twelve years, in infrastructure, ecological transition, and modernization of productive capital. The German fiscal stimulus package is worth about 1 trillion euros in total. It\u00a0is a turnaround in fiscal policy that starkly contrasts the traditional dogma of budgetary austerity and thrift, which has\u00a0never been challenged\u00a0in the country. However, the decisive turn in fiscal orientation in Germany was\u00a0almost inevitable.<\/strong>\u00a0Most observers\u00a0praise it, given the persistent poor performance of the German economy, at least since the outbreak of the pandemic, opposite\u00a0to the instead excellent performance of countries like\u00a0Spain, Italy, Greece, and Cyprus, some of which have recorded as shown in the Figure below, the most significant declines in their public debt since the euro was introduced, right from 2020, not coincidentally during the period when the Stability and Growth Pact (SGP) was suspended to allow governments to support economic activity during the pandemic emergency.<\/p>\n In this regard, we could refer to the Covid crisis, with the Stability Pact suspended, as a natural experiment to compare\u00a0national fiscal policies. All things being equal —\u00a0without fiscal constraints — the frugal German model of debt restraint proved less effective than the countercyclical stimulus without self-imposed domestic constraints implemented by peripheral countries<\/strong>.<\/p>\n Even if this paradigm shift by\u00a0the Eurozone’s leading economy does not result in an immediate, large-scale\u00a0flexibilization of European fiscal rules, the extensive\u00a0budgetary stimulus package launched by the future chancellor\u00a0Friedrich Merz could indirectly influence the economies of other member states through mitigation of macroeconomic imbalances, i.e., the discrepancy between the trade surpluses accumulated by Germany and other frugal countries that have geared their growth model toward exports and, on the other hand, the current account and balance of payments deficits recorded by their trading partners in the Eurozone periphery, which apply less fiscal restraint.<\/p>\n However, this beneficial effect will depend on two factors:<\/strong>\u00a0on the one hand, whether the expansionary fiscal package will deliver\u00a0the hoped-for “defibrillator” effect on German economic activity, which has been stagnant since 2019, particularly in terms of domestic demand and productivity,\u00a0considering that the\u00a0package introduces relatively limited flexibility and spreads over 12 years the public investments, a long period during which unforeseen exogenous shocks could take place, given the continued volatility of the current international scenario. There could be changes in the monetary policy stance that could be relevant for growth, especially in the case of monetary tightening, i.e., in circumstances of possible rate hikes and\/or cuts in the money supply to the financial system (quantitative tightening).<\/p>\n In light of this, we must\u00a0assess whether the change in Germany’s fiscal stance will be cyclical or structural<\/strong>. The other factor that will determine if there is a\u00a0positive spillover effect on other euro-area economies resulting from Germany’s\u00a0adoption of expansionary fiscal policies regards the ability of countries such as Italy, Greece, Portugal, and Spain to increase their competitiveness, thus their export volume. It is possible to pursue the\u00a0latter\u00a0by cutting unit labor costs, either through wage compression —\u00a0though it is challenging\u00a0to go much\u00a0lower since in Italy, wages have not grown for 30 years and have suffered the most extensive\u00a0erosion in real terms, i.e., adjusted for\u00a0inflation, among advanced countries since 2008<\/a>\u00a0—\u00a0or, more importantly, through productivity gains, which in large part depend on productive public investment.<\/p>\n However, I doubt —\u00a0though I hope I am wrong — that the Germans will allow, at least in the immediate term, broad\u00a0exemptions to the SGP fiscal\u00a0constraints\u00a0for other investments beyond defense spending.\u00a0<\/strong>\u00a0The simultaneous implementation of budget policies with the same orientation — like\u00a0in the case of consolidation\/restrictive policies during the euro crisis, but it would be interesting to assess the issue in the case of expansionary policies like in this instance — could create problems of the fallacy of composition or coordination in a monetary union.\u00a0Hence, the effectiveness of policies put in place by one member state diminishes\u00a0if all other fiscal authorities follow the same strategy in the Union.<\/p>\n![](\"https:\/\/www.eunews.it\/wp-content\/uploads\/2025\/03\/Giulio.jpg\")
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