Two papers I saw presented this morning took very different approaches to reach a similar conclusion—inside a currency union there can be big fiscal policy multipliers. In other words, large positive effects of running budget deficits and negative effects of fiscal consolidation. First Olivier Blanchard and Daniel Leigh presented "Growth Forecast Errors and Fiscal Multipliers" which takes advantage of the fact that economic forecasters typically make mistakes… the scale of the error was… systematically correlated with the amount of deficit reduction the countries did. The conclusion is simple—previously the IMF had been underestimating the "multiplier"…. Daniel Shoag's "Using State Level Pension Shocks to Estimate Fiscal Multipliers" is very different but reaches a very similar conclusion…. [A] bad hit to your [state] pension fund is correlated with bad economic performance, seemingly because there's a state spending multiplier greater than one.
In both cases, the policy implications are subjective but not conclusive. The worst-hit European countries generally didn't have the option of doing fiscal stimulus. And states obviously can't choose to get well-timed stock market windfalls. But in both cases the implication of the research is that timely bailouts could be very helpful to the recipients.