Do fiscal spillovers matter for recovery?


In the drive to fiscal policy coordination, the potential of fiscal spillovers should feature more heavily, especially for small open economies like Ireland. Sadly they don’t, as this new research shows. Other models hold out more hope (but in a static setting), but the principal findings are that small open economies can’t rely on larger trading partners to help them overcome large cyclical slumps in output.

Money quote from the first linked piece:

“Even under very high multipliers, a 1% of GDP fiscal expenditure stimulus in Germany would raise the GDP growth in Ireland by only 0.3 percentage points after 2 years, in Portugal by 0.1 percentage points, and have virtually no effect on growth in Greece. Similarly, fiscal policy changes in Germany alone have only a small impact on the trade balance of the peripheral countries, and are thus unlikely to contribute to the reduction in peripheral countries’ imbalances.”

This is worth considering in the context of monetary, and perhaps fiscal, union in the EU. The source document for the spillover calculations is this IMF report.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

28 replies on “Do fiscal spillovers matter for recovery?”

The problem for Ireland is that whatever the spillovers of individual developed countries are, it is solely dependent on these countries and when they are all put in the one basket, then it matters.

Ireland’s trade with India is a decimal point and exports to China are about 2% of the annual total.

So we can only gain very indirectly from growth in groups such as the BRICs.

“fiscal spillovers”?

Stephen you just aren’t thinking big enough:

“French President Nicolas Sarkozy says he and German Chancellor Angela Merkel want a “true European economic government” that would consist of the heads of state and government of all eurozone nations.

The new body would meet twice a year and be led by EU President Herman Van Rompuy.”



…but wait, there’s more!



actually I made that last bit up.


I posted on the other thread Sarky saying …No need to enlarge funds and No Eurobonds.

How long to the next crisis?

After reading the following I agree.

“The chancellor stressed that the crisis built up over several years by the actions of several member states, and there is no solution to tackle the crisis within days now.

“We will regain the lost confidence,” she said. “That is why we go into a phase with a new quality of cooperation within the eurozone,” she added, referring to the proposal of forming a permanent economic government for the eurozone.”

Utter rubbish

How’s about this peach, then ceterisparibus?:

How long should we continue to repect the 60% debt limit after we’ve gone past it? 100%? 110%? 118%?

Meanwhile, France and Germany to harmonise corporation tax to present a fait accompli entry requirement to eurobonds…

There won’t be e- bonds as there probably will not be a euro. The ECB will end up mopping up billions of peripheral debt in the next few days. In addition, deposit flight will continue out of French banks. Then there will another summit at which the dénouement will occur.

Not sure I am givning up yet. The end game in the crisis has always involved a sort of fiscal transfer from the centre to the periphery. It can happen in two ways i) the strong lends its credit rating to the weak and/or provides cash. ii) the weak defaults on the strong and fails to pay back the cash it owes and keeps it for itself. In the latter event, the euro is toast.

Option ii) is extremely messy in the short to medium term as it probably involves extreme economic dislocation. The French and Germans probably lose their AAA/Aaa as they are forced to bail out their banks and insurance companies.
I m not sure whic is in our interest now. However, it is beyond our pay grade now.

“However, it is beyond our pay grade now.”
Nonsense. It is our paygrade that will be paying for it…

There is also a third option – the PIG or the PIGI or the PIGIS are shed (along with anyone else who doesn’t join the tight Franco-German club). It’s much the same as ii), but more vindictive…

I think Hogans option 3 is the one coming down the track….
Sweat little piggy, sweat!

I wonder how markets/agencies will look at those countries/piggies that do enter the barn door in terms of soverignity, self interest, etc.
It will be” once a pig, always a pig”

Time to step back a little and do our own thing?

Yes, that is a possibility that the German grand plan might be to have a euro consisting of Germany, Austria, Finland plus Flanders and Holland with France as an associate member. However they still don’t get paid under that scenario & we get a competitve currency with a low debt burden.


“Ireland’s trade with India is a decimal point and exports to China are about 2% of the annual total.”

Could be room for pretty big growth here?

The Nordic Euro option is also not a runner (option 3 above) as option 2 must precede it – default. In the event of a multi nation default there will be no coordination possible as French, British, Belgian and other countries banks will collapse en masse.

Maybe this would be a good thing? It could bring everyone to their senses and set the scene for the restoration of sound economics and real money. It might see the end of Government interference in markets. It may induce in the public sense of its venality and stupidity which are largely responsible for the idiot governments we suffer with? An end to this fetish with Socialism? Who knows?

Has Ireland been secretly preparing for such an eventuality? Have we a hidden stash of gold salted away up in Cabinteely? And our new currency – have we organised a competition yet on its design?

Questions. Questions.

As for fiscal stimulus in Deutschland or wherever. Every euro spent on stimulus has undermined some viable participant elsewhere in the economy. So someone is taxed for the stimulus and somewhere else either a business fails or is not started up due to a fall in demand. Everyone loses except those these moron Governments think of as deserving. After a time even these beneficiaries fail as well. The best thing for Germany and all of us is that Governments are put out of business. Just stop paying the bastards and they will go away.

Given economies of scale, Ireland has limited natural advantages. Our principle resource is individual human capital. We need to recognise this, and plan accordingly. Our current myopic obsession with education and research (where SFI in particular hand out grants willy nilly), is not the answer. More vocationally targetted courses, involving summer internships are needed. Experience is the #1 factor in human capital.

That there are skills shortcomings/labour market gaps in FS/Internet/Tech is ridiculous. People of modest academic ability, need to be targeting a specific class of job from year 1 in their degree.

@ Robert

‘ Just stop paying the bastards and they will go away’

Nice idea, but there is a whole queue of b******s out there. More thought is required. Luckily we have the 🙂

Anyone watching TV3? Declan Ganley is driving home a kind of smug I told you so message. Any chance of a thread on the latest France/German proposal?

Suggestion that part of the deal is that Greece would leave the Eurozone. Can’t find the source again, but it could be true as the inspectors are due there again next week and it is not looking good.

How about this…Sarkozy says constitutional changes are mandatory.


Fat lot of good…. too many Krugmanites.

Btw, Krugman thinks that we need to be invaded by aliens in order to galvanize the US into war production mode… the man has finally lost his marbles.

It takes more than a tango to make up a quorum in a post-national European constellation. How many more, of course, remains an open question.

@ Robert
I have been reading this board for three years. It’s the rare day when I don’t learn something. A poster can be wrong in their overall analysis but right on specifics. Or vice versa. The purpose of communication, apart from enjoyment, is explore issues and reach some consensus.

Lets face it. The economic development problems of this little island were there long ago. Many kids went to school barefoot in my mother’s time. It wasn’t excessive government intervention that had people in poverty, because there was very little of it in those days.

We have enough of our own troubles in Europe, in any case, so lets not import US ideologicial wars.

@paul quigley at 07;35am

Many kids went to school barefoot in my mother’s time. It wasn’t excessive government intervention that had people in poverty, because there was very little of it in those days.


Constructively put.


Innovations in medicine, energy, transportation, leisure and a myriad others, developed and brought to market by the private sector are what has helped people out of poverty. Government has ridden on the backs of the private sector throughout our history and rarely contributed anything to the people of this country that could not have been provided by the private sector more efficiently and at lower cost.

The fact that kids in our country now have shoes does not make them any more wealthy than their nineteenth century counterparts. Today we have poverty of a many different kinds. Add to this a level of debt that is likely to swamp us and set us back as far as…where? …to where many children go barefoot.! This is possible despite the strivings of the entrepreneurial class to innovate and meet the needs of consumers.

In any event there are hundreds of millions of children who go barefoot today directly as a result of the machinations of the Western nexus of criminal bankers and corrupt government.

Failure to see that the advantage gained here is at the cost to others elsewhere is the cognitive disconnection that characterizes most Government action.

The case for sound money and liberty may be led by Americans but it cannot be said that is any weaker for that. Indeed Americans today are only taking up the gauntlet thrown down by eighteenth and nineteenth century European thinkers such as Jean Baptiste Say, Frederick Bastiat, Adam Smith, Richard Cantillon, Karl Menger, Ludwig von Mises, Frederick Hayak et al.

The “idealogical wars” you deride are in fact the key questions of our age. If your opinions are generally held then it would seem that our intelligentsia here in Ireland would prefer not to engage.

Treasuries / CBs have official gold reserves and unofficial gold reserves – unofficial gold reserves is all private gold recorded in their juristiction……………

The answer to the question posed in the title is ‘maybe, if you happen to be a small open economy’

“For most countries, spillovers to growth from fiscal policy in other countries are limited (below half a percentage point over the next 2 years), but Ireland, Belgium, Austria, and the Netherlands are more substantially affected (see Figure 2). Ireland, in particular, could substantially benefit from a coordinated fiscal relaxation, although this would require contributions from the major economies, including the US and the UK—both countries where such relaxation is not on the cards.”

In this study, the spillover from austerity in other countries reduced Irish GDP by around 0.9 per cent after two years. So it would be good news in Ireland if our bigger neighbours decided to keep spending, but it wouldn’t matter very much for anybody else.

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