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The deep recession which hit the world economy towards the end of 2008 induced massive, internationally-coordinated policy responses, both monetary and fiscal. In this paper we examine public finance developments in Germany and Italy in 2009. We find that the larger stimulus measures adopted in Germany mostly compensated a more favorable underlying trend; overall, the cyclically-adjusted primary balances worsened by a similar extent in the two countries. We further estimate the automatic stabilisers to have had an impact on the deficit of similar magnitude in Germany and Italy. We then assess, on the basis of counterfactual simulations, to which extent discretionary measures and automatic stabilizers were able to mitigate the downturn in the two countries. Our results show that the public sector contrasted the fall in real GDP in 2009 by more than 2 percentage points in Germany and by 1 per cent in Italy. The difference in the stabilizing effect of the two public sectors reflects not only the different size of the stimulus measures, but also the higher fiscal multipliers associated with Germany.

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