I find myself thinking of Ludger Schuknecht’s very powerful and apposite comments about just what, even if you believe–as I do–that there are substantial spillovers for Germany and for the world for Germany to use its fiscal space for expansionary policies right now, it is supposed to use its fiscal space for…

The fiscal space is in Germany. The infrastructure needs are in Sicily. This is in the end the political and also the political-economic dealbreaker. It does speak to necessary reforms of the European Union so that things like this do not happen again.

I remember Maury Obstfeld saying once that at the start of the 1990s California and New York had no problem using the United States’s fiscal space to transfer 25% of a year’s Texas GDP to Texas to clean up the Savings and Loan financial crisis mess. This just was not an issue in American politics or political economy. Texas had bet wrongly on the real estate sector via lax regulation–both at the federal and state level–and financial engineering. It was regarded as a proper use of America’s fiscal space to spend money on this and pull Texas out of what was a shallow national but would have been a very deep regional recession.

The fact that the Chair of the Senate Finance Committee at the time was from Texas may, however, have had something to do with it.

The American institutions then were, somehow, a better set of institutions for dealing with this kind of crisis. That there was an alignment of interests, and that the prosperity of each would redound to the prosperity of all in the long even if not always in the short run was taken for granted.

In fact, perhaps, Europe’s institutions today are inferior along some aspects of this dimension than Europe’s institutions in the past. Back in 1200, say, the question of how Germany should use its fiscal space, if in fact the desired location of spending was in Sicily, was finessed. A Germany Hohenstaufen princeling would be married to a Viking-Sicilian princess, and she would then bring Sicily along with her into the Holy Roman Empire as her dowry, and Germany–at least Germany’s rulers–would have an obvious interest in upgrading Sicily’s infrastructure.

Admittedly, the German Emperor might then decide that he would rather spend time in his palace in Palermo than in Burg Hohenstaufen twenty miles east of Stuttgart.

Somehow, national borders and national communities constrain us in Europe in ways that are not the wisest today…

Fiscal Policy in the New Normal: IMF Panel