Economic policy at federal state level: the example of Baden-Württemberg

In spring 2012, the IAW took the increased economic risks at the time as an opportunity to conduct a study in which, firstly, possible shock scenarios for the Baden-Württemberg economy were discussed and, secondly, the economic policy pursued by the state during the 2008/09 economic crisis was examined. The aim was also to draw conclusions for future economic downturns.

Forecasts by economic research institutes at the time assumed that Germany could expect marginal growth at best in 2012 - and even this was only subject to the proviso that the sovereign debt and banking crisis in the eurozone would not worsen significantly.

In the first part of the study, the IAW looked at various economic shock scenarios and possible implications for Baden-Württemberg as a business location. As part of the discussion of a financial shock, which would initially directly affect both the public sector and the banking industry, a possible credit crunch was also discussed. A corresponding restriction on lending to companies in the real economy would have negative repercussions for those companies in Baden-Württemberg that require bank loans to pre-finance production costs, meaning that they would not be able to accept certain orders due to a lack of external financing. In addition, Baden-Württemberg would have been disproportionately affected by the fact that, in the wake of a credit crunch, companies throughout Germany would no longer be able to easily obtain bank loans to finance their investment costs, which would have had an indirect negative impact on the state's capital goods industry, which has an above-average presence here. Irrespective of the case of a financial shock, aspects relating to rising oil prices and the ongoing general uncertainty among companies and private households were also discussed.

Due to the outstanding importance of exports for Baden-Württemberg's economic performance, an estimate was made in which different scenarios for the decline in foreign demand from the eurozone on the one hand and the remaining countries on the other were assumed. The effect on Baden-Württemberg's gross domestic product was then estimated for the various scenarios, taking into account an earlier IAW estimate of the proportion of imported intermediate goods and services contained in Baden-Württemberg's exports. This had to be limited to the first-round effect, not least because no up-to-date input-output tables are available for the state of Baden-Württemberg.

The second part of the IAW study discussed the economic policy measures taken at federal level and specifically in Baden-Württemberg during the 2008/09 economic crisis. On the one hand, this involved the Future Investment Programme (ZIP), under which the state of Baden-Württemberg and its municipalities received funding from the federal government for economic stabilization projects in the area of education and other infrastructure, with certain co-financing contributions. There were clear indications of major “time lags” here, which in some cases called into question the anti-cyclical effect of the measures. In addition, there was a weakening of the stabilization effect because other planned projects were crowded out to a certain extent and part of the financial volume used “went” into price increases. Finally, various aspects relating to the state infrastructure program (LIP) were also discussed - an economic stimulus program launched by the state of Baden-Württemberg itself, the funds from which were mainly used for construction investments.

As a lesson for future economic policy, the aim should be to reduce delays in impact. The “simplified tendering” procedure for projects has proven to be useful here; it should therefore be used more frequently in future. In view of the fact that the debt brake is also reducing the scope for government spending in economic policy, the following should apply: Economic stabilization measures should focus on projects that also generate positive growth effects and pay off fiscally in the longer term.

The IAW Brief Report 1/2012 ["Krumm, R. and B. Boockmann: Economic policy at federal state level: The example of Baden-Württemberg" - in German] can be downloaded free of charge from the IAW website.