FISCAL POLICY IN GERMANY AND IN GREECE DURING THE RECESSION IN 2008-2009

By

Mohammad Waqas

Approved _________________________________________
(……………………………..)

A thesis submitted in partial fulfillment of the requirements for the degree of
Bachelors of …….
May 2011

Abstract
Recession has been a highlighted feature of the world economy over the past few decades. Recession has added importance to the discretionary fiscal policy because monetary policy and automatic stabilizers could not pull back the economy from recession on their own. The case of EU countries is of great significance in times of recession because of certain common policies which the member states have to follow. The research is theoretical in nature synthesizing previously done studies in the same field. Fiscal policy in Germany and Greece during the recession in 2008-2009 is being analyzed to come up with the better policy measure.

TABLE OF CONTENTS
Abstract……………………………………………………………………………….3
TABLE OF CONTENTS………………………………………………………….….4
1.INTRODUCTION ………………………………………………….………………5
2. OVERVIEW………………………………………………………….…………….9
3. RECESSION IN EUROPE 2008-2009…………………………………………..11
3.1. Recession in Greece………………………………………...…………...…..13
3.2. Recession in Germany……………………………………...…………...…..17
4. EU FISCAL POLICY………………………………………………………....….20
5. POLICY TOOLS………………………………………………………………….23
6. FISCAL POLICY IMPLICATIONS …………………………………………….25
6.1 Greece ………………………………………………………………………..25
6.1.1 Pre Crisis Economic Condition …………………………………..…….25
6.2.2 Recession 2008-2009 ………………………………………….……….26
6.1.3 Addressing the Recession: The post Crisis Period……………………27
6.2 Germany…..………………………………………………………………….28
6.2.1 Post Crises Economy and Recession 2008-09…………………..……28
6.2.2 Post Crises Germany ……………………………………..…………….29 6.2.3. Suggestions ………………………………………………….…………..30
7. CONCLUSION……………………………………………………………………32
References……………………………………………………………..…………….34
Appendix …………………………………………………………...………………37

1. INTRODUCTION
Global financial crises intensified during the third stage in 2008 which pushed most of the world economies under recession. The recession of 2008-2009 started from the United States of America with the bankruptcies of Lehman Brothers, General Motors etc and bail out of AIG which lead to catastrophic effects all over the world. The recession of 2008-2009 was not the first recession faced by the economies as they had experienced it before in the 1930s known as ‘The Great Depression’ and many more times. During the recession of 2008-2009 monetary policy and rescue packages were insufficient to rebound the economy from contraction. Thus governments had to come up with fiscal policy measures to stimulate the economy.
The financial crisis of 2007 has cast a dark shadow over many misfortunate countries and their economies, as a result of which the great recession started. Starting as a subprime mortgage crisis in the US, it quickly wrapped around the global economy before 2007 ended. This proves the interdependence of the economies and the vital role the US economy plays in changing the fate of the economies worldwide. Soon after the US, recession hit UK, Japan and European economies. The interdependence of the European economies was highlighted during that time because of the adverse effect of the Southern Europe on the Central. The crisis in the Southern Europe didn’t intensify because of the financial crises but due to the greater obligations to the public sector which left those economies vulnerable in the face of the economic recession (Verney, 2009)
EU fiscal debate is considered both essential and redundant. However it is important to note two important things that is a set of regulations that is laid down in the Maastricht Treaty and the Stability and Growth Pact (also referred to as SGP or Pact). Any discussion of EU fiscal rules has to start from this basic point. The members of the EU tackled the situation in their own ways. While some countries depended on the automatic stabilizers the others employed expansionary fiscal policy. Also, some of them tried taking care of it via regulating their financial sectors in order to alleviate the growing unemployment as a result of economic contraction. And there those too who chose not to take any fiscal measurement against the crisis. This was the reason the while some countries were able to pull themselves out of recession in late 2009 while others took their time and started recovering late in 2010.
In order to obtain a better idea about the financial crisis in the European Economies, the fiscal policy stimulus against the economic environment and the overall impact on the economies, we study the effect of the recession on two of the European Economies namely Greece And Germany. To acquaint ourselves of the fiscal policy tools and implementation in those sectors and how successful were they in overcoming the crisis 2008-09.
The purpose of this paper is to study and analyze the effect of the 2008 recession on overall economic stability and how close the German and Greek economy was influenced by it. Due to the differences in the economic structures and mechanisms of the both countries, we will be able to better recognize the complexities of the issue.
The paper starts by presenting the problem and how it spreads, thanks to the globalized world acting as a catalyst. The paper further goes on describing the issue on continental level which in this case is European Union and how its member states are effected by the policies towards such crises. Moving from general to specific the research will shed some light on the role of recession in our selected economies.
Fiscal policy could be either discretionary or non-discretionary. Non-discretionary fiscal policy refers to the automatic or built in stabilizers in an economy which are the structural features of government spending and taxation where as discretionary fiscal policy is the deliberate manipulation of government expenditure and taxation to achieve macroeconomic targets. Automatic stabilizers themselves increase or decrease budget deficit in times of recessions or booms and are countercyclical without any lags. On the other hand discretionary fiscal policy is complicated due to the lags and legislative action required for their implementation.
Discretionary fiscal policy is employed by the government of a country to influence the economy through two main instruments, government expenditure and revenue collection, primarily taxation. Government use these two instruments to try to impact; economic activity, price stability and income distribution of a country. Fiscal policy stance refers to the type of fiscal policy employed by the government and could be neutral, expansionary or Contractionary in nature. In the case of Germany and Greece, fiscal policy was employed to rebound the economy from the recession in 2008-2009. Fiscal policy of both of these EU countries, Germany and Greece can be compared and contrasted to analyze and evaluate economic tactics used by the respective countries to tackle the problem of recession which seemingly revamps every 8-10 years. In order to explore the issue further we will examine the structure of the Eu’s fiscal policies and the tools first and see how far they have been successful in achieving the desired results. Hence,clearify whether the Eu provides its member states with solutions appropriate enough to cope up.
The end part of the paper will examine as to how far Germany and Greece were able to manage their performances against the crises by implementing fiscal policy measures .to have a sound understanding the paper will review the pre crises condition of the two countries and to what extent it effected them during the crises.
Sights of many authors are used as a theoretical substantiation of the work ,emphasizing the help of qualitative data. The paper attempts to represent the background of the problem and how fiscal policy tool helps in overcoming such financial crises.
Germany could be seen as a country who managed its fiscal stimulus well to counter the economic downturn and was one of the few countries to experience positive growth in 2009. Whereas Greece on the other hand failed to bounce back from the recession and had to file in a request to European Union and IMF to help service its debt.

2. OVERVIEW
All around the world, one topic of debate has stirred the past which is the position of fiscal policy in the macroeconomic policy debate. There are different views that are advocated by opposing factions and they hold the importance of the fiscal policy as a macroeconomic tool accordingly. The stir in the action taken in the credit crunch of 2007 hold importance in this regard when most of the western economies increased expenses as a fiscal policy action against the recession that the world economy face during 2008-09, also known as the Great Depression of 2008-09. Consequently the budget deficit rose as the expenditure rose, as a fiscal policy implementation, greater than the tax revenues collected (Bowdler, 2011).
The financial crisis of 2007 has cast a dark shadow over many misfortunate countries and their economies, as a result of which the great recession started. Starting as a subprime mortgage crisis in the US, it quickly wrapped around the global economy before 2007 ended. This proves the interdependence of the economies and the vital role the US economy plays in changing the fate of the economies worldwide. It also supports an old proverbial claim that the whole world sneezes if the US catches a cold which pretty much illustrates itself in the form of the global recession 2008-09 (Verick & Islam, 2010).
The global economic collapse took the policy makers by surprise, and other agencies and investors. No one had really anticipated the crisis, moreover, Cotis of the OECD, Jean-Philippe announced, on the eve of the outbreak of this crisis, a potentially optimistic growth rate was to be expected in the coming years i.e. remainder of 2007 and 2008, given the constructive financial and economic conditions (OECD, 2007). This put the economic as a profession subjected to great deal of censure forms the scholars. It went as far as to witness Krugman, reprimanding other economists and in way of playing with word calling them blind (Krugman, 2009). However Galbraith argued making a point that difficulty in the field arose due to both clear and implied complications in the profession which kept the leaders from encouraging a conclusive debate for better policy making procedures (Galbraith, 2009).
The 2008-09 crises began in August of 2007 as a mortgage crisis in the United States and quickly developed into a global recession (Tong & Wei, 2009). As the bubble burst in 2007 in US, the wealth of the households reduced sharply along with the risks on their investments. This caused a shock in Demand all over the US. As a result the external demand of the economies depending on the US market fell while the investment opportunities in the US responded with less return. This snowballed in to a chaotic economic environment worldwide (Keppel & Wörz, 2010).

3. RECESSION IN EUROPE 2008-2009
The interdependence of the European Economies has been tinted bold during the crisis. Moreover, the potential externalities have been pinpointed and concerns have been raised regarding the impact of the southern Europe on the Central. Unlike the Euro zone, the crisis in the southern Europe was not brought on due to the financial crisis. Rather it was more due to greater obligations to the public sector which left those economies vulnerable in the face of the economic recession (Verney, 2009).
A proposal for recovery program was set forth by the commission of EU in November 2008, which would provide a fiscal stir worth €200 billion in the fiscal year 2009-10. This fiscal spur that was being expected made about a 1.5% of the GDP of the whole EU. This indicated the limited capacity of the EU institution itself, which meant that almost 85% of the stimulus would come from the member states. The plan was approved by the European council in December 2008. However at the same time, the European Central Bank, unaware of the building economic crisis, dropped its benchmark rate from 4.5% and fueled the recession instead (Cameron, 2011).
Resistant to the call for another fiscal stimulus, though collectively, the member of the EU tackled the situation in their own different ways. Expansionary fiscal policy was the tool used by some, while others depended upon the automatic stabilizers. Also, some of them tried taking care of it via regulating their financial sectors in order to alleviate the growing unemployment as a result of economic contraction. But there were also those who chose to take no fiscal measurement against the crisis. This was the reason the while some countries were able to pull themselves out of recession in late 2009 while others took their time and started recovering late in 2010. But there were also those who had to go to IMF and seek their assistance along with the conditions that implied that came with the loan (Cameron, 2011).

Table 1. Quarter-on-Quarter and Year-on-Year change in GDP 2007-2010 | Eu 27 | Euro zone | Year-on-Year | 2007Q1:Q2:Q3:Q4: | 0.80.50.80.5 | 0.70.30.70.4 | 2.9 | 2008Q1:Q2:Q3:Q4: | 0.5-0.1-0.3-0.5 | 0.6-0.2-0.2-1.6 | 0.7 | 2009Q1:Q2:Q3:Q4: | 2.40.20.30.2 | 2.5-0.10.40.2 | -4.2 | 2010 Q:1Q:2 | 0.31.0 | 0.31.0 | 1.0 |

Source: European Commission, “Eurostat News Release: euroindicators,”127,2010 <http://ec.europa.eu/eurostat>
Table 1 show the change rate in real GDP, quarter wise starting from the first quarter in 2007. The data in the table implies a slowing down of economy in Europe during the second quarter of 2008 and gained pace near the last quarter in the same year in 2009. A huge economic contraction was experienced by European economies and not until the second quarter of 2010, did the growth rate returned to the pre crisis level (Cameron, 2011).
Table 2 in the appendix shows the GDP change quarter wise in the European Union member states and indicates an expansion or contraction in the economy quarter wise. Denmark and Ireland were first to show any economic contraction in second quarter of 2007 but before contracting again in the last quarter of the same year, these both economies expanded for the third quarter. The data for the last quarter of 2007 shows any negative growth for contractions showing the indicating a recessionary instigation. These contractions are persistent throughout the recessionary phase until early 2010 when economies started to recover again.
In order to obtain a better idea about the financial crisis in the European Economies, the fiscal policy stimulus against the economic environment and the overall impact on the economies we study the effect of the recession on two of the European Economies namely Greece And Germany. To acquaint ourselves of the fiscal policy tools and implementation in those sectors and how successful were they in overcoming the crisis 2008-09.
3.1. Recession in Greece
In Greece, the economic expansion that had been taking place in the previous decade ended in 2008, when the economy started to collapse and intensified in 2009. Despite the favorable economic environment in the last few years Greece wan unable to withstand them owing to its huge fiscal imbalances which led to huge deficits (almost 12.7% in 2009) and subjected Greece in April 2009 till present, to undergo fiscal deficit procedures (with a debt of about 115.1% in 2009). This was mainly a consequence of missing fiscal targets, overestimated tax revenues and tax evasion, which exposed Greece to risk of deficits.
The Global Economic crisis made the economy even worse pushing it to towards bankruptcy (Kapsalis, 2010); (Kazakos, 2010).
The extent to which the economy had reached was due to unawareness of the lacking fiscal stance till late in time, which adversely affected the timely corrective measures to be taken place and delayed the implementation of corrective policies. Thus the economic crisis in Greece can hold accountable the weak infrastructure, the perceived fiscal instability, and scarce reaction to fiscal imbalances (Commission EC, 2010). Greece failed to control its expanding debt and had to repay a large amount of government bonds maturing, which placed its ability to refinance debt in question given its financial position.
Greece borrowed, over the past decade, from international capital markets to fund its account deficits. The dependence on backing from capital markets on a global level exposed Greece to shifts in investor poise. In 2009, when the new Greek government revised budget deficit for 2009 as a % of GDP from 6.7% to 12.7% investors became nervous. The European Union (EU)’s statistical agency (Euro stat), estimated, in April 2010, the Greek deficit to be higher than before. Greece’s ability to repay its maturing debts made the investors very nervous. The Greek government requested help on financial grounds from the other European countries and the International Monetary Fund (IMF) to assist in covering its obligations. (Nelson, Belkin, & Mix, 2007).
The cause of the debt crisis comprised both domestic and international factors in play. On domestic level, the high government spending, and the excess of the expenditure over the tax revenue generated, which was weak, was main cause contributing to the financial crisis that led the country to go under recession, besides the weak infrastructure of the Geek economy. Observers dispute internationally that Greece's access to capital at a low borrowing cost after adoption of Euro and the conditions laid down by the EU rules in putting ceiling and floors to debts and deficits assisted in the taking the debts to such high levels . In order to raise funds, the Greek government sold bonds during the crisis while also it aimed towards strict measures to bring down the deficits to less than 3% of the GDP by the year 2010. Also to avoid defaulting on its debt, it appeared possible that it would continue to receive aid from the European Union and the IMF (Nelson, Belkin, & Mix, 2007).
Another method to contain the situation of the budget deficit is to devalue the currency, but Greece did not have the luxury to enjoy this liberty as long as it is bound by the conditions laid down by the European Union till it stopped using Euro. If the strict rules and financial aid from external parties proved inadequate, Greece could have been forced to restructure its debt. .. Furthermore there were a number of cross border implications associated with the crisis in Greece with concerns that Greece’s crisis could have externalities to other European countries in difficult economic state, and it raised brows towards the topic of imbalances in the Euro zone, having a common monetary policy but different fiscal policies. It was notable that intricate financial instruments had a role in serving Greece helping to accumulate and conceal its debt, which also had consequences for debates over the reforms for financial regulations (Nelson, Belkin, & Mix, 2007).

Figure 1: Deposit Interest Rates and the ECB’s Policy Rate (%)
Source: European Central Bank

The global crisis started to spread out when the Greek economy was already dealing with the persistent imbalances and overblown foreign indebtedness. This situation placed Greece at a serious disadvantage with respect to servicing its obligations. With increased debt figures a higher threat of default was implied naturally and thus, inflated risk increased the risk premium considerably as a result. This resulted in an increase in spread between interest rates on Greek and other euro zone members' debt. Hence, in March 2009, the spread between Greek and German government security rates touched 2.87% from an average of 0.26 points over the period 2002-2007 (Athanassiou, 2009).

3.2. Recession in Germany
The German government launched reforms that contributed to high growth in 2006 and 2007 and rising employment. This progress along with the scheme of reduced working hours subsidized by the government explained the relatively low increase in the unemployment during the recession period of 2008-09. Almost 1% growth in GDP was observed in 2008 while the economy contracted to only about a 5% in 2009. Due to this advancement the German economy was able to creep out of recession among the early ones in the second and third quarter of 2009 mostly owing to the exports and manufacturing sector for the consumer demand remained relatively stable.
According to a report the BBC published, Germany entered a recession only after when the figures for economic growth projected a contraction by a mere 0.5% in the third quarter of 2008. Right before this in the second quarter the contraction was only 0.4%, however the economic output fell more than the 0.2% that expected by many analysts.. Thus Germany, which was considered as Europe's largest economy was hit only by falls in exports, which was the only reason it had sustained the crisis till then, and fell by 8% during the third quarter. (BBC, 2008)
The contraction was even more than it was expected, which the analysts predicted to be a 0.1 % as relative to the previous quarter. The German data was said to be published as growing towards the worst recession since the 1930s. According to the figures from the third quarter, the economy was in a much weaker situation than was actually previously expected. A major factor reason happed to be that the leading exporter of the world had a net negative export figure while the imports showed an increasing trend (France, 2008).
Even though the economy had a good start in 2008, facing expansion by 1.4 % in the first quarter, but the country has been hit by a slouch in its major exports sector while the consumption on domestic grounds laid low. German investor confidence hit rock bottom in October 2008. All the forecasts for 2009 were getting misty as the recession hit the economy right in the middle of the year distorting the figure as the major exports sector had been devoured having been the basic pillar of support for the sustaining economy. (France, 2008)
While a substantial drop in GDP was suffered by Germany (about 5%), the unemployment level an rates were seen to be very flexible as most of labor adjustments occurred at the intensive working hours. This was in contrast to what would have been observed in many other Western countries. (Bargain, Immervoll, Peichl, & Siegloch, 2011). Since the collapse of Lehman Brothers, Germany recovered impressively from the slum of 2008-09 when the world had been paralyzed by huge economic contractions. in the second quarter of 2009 the German economy after having faced a four quarter period of economic slowdown, resumed its positive growth and showed immense improvement by the third quarter showing growth of almost 0.7%. Nevertheless, the recovery made till now can hugely be attributed to the combination of loose monetary policy ad fiscal stimulus (Deutsche Bank , 2010).

Figure 2: Economic Growth: Germany
Source: Federal Statistical Office

Figure 2 shows the economic growth of Germany from 2006 to 2009. The effect of recession could be seen from the drastic drop in real GDP from almost 2 to more than -4.0. Also as discussed earlier, it is shown in the graph that Germany posted positive growth in the third quarter of 2009

4. EU FISCAL POLICY
Fiscal policy implies the rapid reduction in the deficits and in order to do that there are different views as how to go about such goal. One view suggests making radical cuts in taxes, planned as concerns over debt sustainability inflate the interest rates and raise risk of crowding out private investment. Another view suggests the implementation of fiscal consolidation as other sources of expenditure provide the government with ample time to adjust its stance to being a saver from being a borrower (Bowdler, 2011).
. (a) (b)
Figure 3: a) Income determination in the Keynesian model. b) Income determination when prices are flexible
It would be to our benefit to understand the two models mentioned here to emphasize on the importance of fiscal policy. Ricardian Equivalence model points out that a fiscal consolidation would implement a scenario where budget surpluses from future are brought forward in time. Consequently, private savings that were appropriated for time of low government expenditure with higher taxes in the future can increase the total income of the government in the two time periods which instead can be spent in the current time period and increasing the private consumption (Figure 3). However, Neo-Classical model suggest an alternative claim that adjustment of price downwards induces higher private consumption directly. Nevertheless, none of the models represent a realistic aggregate economy and consumer behavior (Bowdler, 2011).
EU fiscal debate is considered both essential and redundant. However it is important to note two important things that is a set of regulations that is laid down in the Maastricht Treaty and the Stability and Growth Pact (also referred to as SGP or Pact). Any discussion of EU fiscal rules has to start from this basic point. Although, the EU fiscal framework cannot be considered as “optimal” from all analytical views, nevertheless, the framework covers few important requirements for being fiscal rules that are, as they quote, “economically sound”. The main topic of interest for the European Central Bank is the sustainability and stabilization of fiscal framework by preserving that the ECB prevents losses in outputs and manages intergenerational equity (Schuknecht, 2004)
However, European Monetary Union and the convergence criteria implementation limit some of the governments to follow the same fiscal policies. Consequently, the process of democracy is put at a challenge because leaders of the political parties cannot offer the people a wide variety of choice in combination of fiscal or monetary performance (Paulson, 1997). The focus thus remains on the fact that EMU increases the democratic deficit by constraining monetary policy while the European Central Bank (ECB) that is responsible for monetary policy in the euro zone, is not accountable any national political institutions (Verdun, 1998).
Ten central and eastern European countries (CEECs) plus Malta and Cyprus were committed to be a part of EMU in May 2004. In order to do that, as a precondition for this act, they had to meet the convergence criteria and participate in the exchange rate mechanism (ERM) for two years at least. This meant for the previously existing CEECs that their monetary policies were going to be subjected to further restrictions as to cater the monetary policy convergence of the newly committed members. This projected the importance of the fiscal policy as a tool for stabilization even further (Pogorelec, 2006). The gains to be achieved through fiscal cooperation depended upon the goals that were set by the policymaker’s agreement which showed that there was no need for fiscal cooperation in a monetary union given that all members agreed on their goals. However some findings also suggest that the gains from fiscal policy cooperation depend on the monetary regime (Pogorelec, 2006).
The ECB faced a problems with regards its credibility, which got worse due to the lack of an EU fiscal authority. The SGP, to some extent solves the problem by emphasizing on the reinforcement of the monetary dominance over the fiscal privileges of the governments however it fails to provide an optimal solution as combination of fiscal mechanisms that are compatible with the monetary policies (Ardy, 2000).
According to Brian Ardy, reducing the debts further to increase automatic stabilizers can have inconsistent effects. Low debt would mean that the public deficit would be close to zero. Thus, it would be feasible to allow deficit during a recession to spread with expenditure rising and tax revenues falling. However when the public sector's finances increase in a favorable time with expenditure falling and revenue rising, it would not be easy have a strict policy if necessary. Nevertheless, it would be politically difficult to convince the public of the need for public discretion while experiencing a fiscal abundance. (Ardy, 2000).

5. POLICY TOOLS
Over the past decades, fiscal activism moved in and out of fashion. Economists and policy-makers shifted to having a commonly a more pessimistic view after decades of positive attitude by towards discretionary fiscal policy for the purpose of stabilization. The attitude change was partly due to the limitation on the use of fiscal policy as a demand management tool and partly due to the experience that showed practical limits to the approach. The recent years have brought in with a general agreement that fiscal policy if appropriately designed can prove to be effective and can be used as the only tool for stabilization during constraint monetary policy arrangements.
Another issue associated with this arena is that the way the fiscal authorities run fiscal policies i.e. counter cyclical or pro cyclical. It's common to assess the performance of the fiscal policy and measure the cyclical conditions. Even though there is consensus that the fiscal policy should be implemented in a counter cyclical manner, nevertheless confirmation of pro-cyclical stance is apparently common in both the developed and the developing countries (Gali & Perotti, 2003).
A number of frequent conclusions are projected on the reaction of the fiscal position to the cycle. One, mostly the cyclically-adjusted budget balance's (CAPB) response to the output gap turns out to be weak and insignificant statistically (Gali & Perotti, 2003). Another, the measure of cyclical conditions is important as to if it is ex-post or on in real-time. The existence of strong proof of counter cyclical ones when real-time data are used implies that there could be a gap between fiscal authorities’ results and their intentions (Golinelli & Momigliano, 2006).
One more we found is against the perspective that fiscal policy became more pro-cyclical after the EU fiscal framework was introduced (Gali & Perotti, 2003). However, it was observed that the fiscal policies did become less pro-cyclical in mid 1990s across most of the OECD countries. Furthermore, in the OECD countries fiscal policies appeared more counter-cyclical compared to European countries in the give time period (Gali & Perotti, 2003)). However results regarding the symmetry of the fiscal policy or the good or bad times in relevance to cycles of the policies are inconclusive (Golinelli & Momigliano, 2006).
At the margin, fiscal policy seems to be counter-cyclical. After observing for a number of factors the results conclude the fiscal stance through estimating the fiscal reaction functions. This came out to be similar to research that was previously done in this field. Nevertheless, the revenue position response to the cycle is in contrast to the expenditure stance, which implies that when revenue stance is counter-cyclical, the expenditure stance is pro-cyclical and it is supported by current evidence (Gali & Perotti, 2003).
Evidence points out that on average, fiscal policy pro-cyclical in good times. The CAPB falls in periods, on average, with output above prospective and rises when output is below potential, denoting pro-cyclicality in both cases without control. But with controls are, in good times there is confirmation of a pro-cyclical bias while in bad times bias is not found. Thus at a source of pro- cyclical bias, expenditure policy is apparently present. This means that in good times, the behavior of expenditure induces pro-cyclical outcomes in the Europe.
However, there is a counter to this evidence which is linked with the SGP and is the risk of pro-cyclical fiscal policy patterns in bad times. In Europe, Fiscal stabilization apparently fails when it comes to cooling-down over heated phases. The pro-cyclical behavior of expenditure policy, inside lags which coupled with inertia in expenditure plans, real-time errors cycle estimation, overoptimistic growth projections and contradictory motives are possible reasons for this. Also in the case of Germany and Greece the pro-cyclical behavior is observed. To contain the risk of pro-cyclic expenditure policies in good times, national-level fiscal authority may appear accommodating. (Turrini, 2008).

6. FISCAL POLICY IMPLICATIONS
6.1. Greece
The short run management is one of the focally discussed points in Greece's current problems. Greece is most likely to default with the crises taking on serious note, if the reforms are not undertaken. Debt management will become much easier if the reforms are taken. Lenders will have more faith in Greece's credit worthiness as lower interest rates. Greece's long run growth and prosperity are the results of the reforms that will be implemented, apart from its debt easiness. These reforms would be needed even if Greece's debts were to disappear overnight, because then new problems would arise. (Meghir, Vayanos, & Vettas, 2010).
6.1.1. Pre Crisis Economic Conditions
Greece has achieved a significant reduction in its rate of unemployment, and has turned into one of the fastest growing economies in Europe. Over 2006-2007, the GDP of Greece reached 4.2 as compared to the previous 1.9% in the Euro Zone, and the unemployment rate went down 2.9% as compared to the previous 7.4. The reasons behind these changes have been the rapid increase in domestic demand, with the overall contribution of the public sector being negative. Expansionary fiscal policies have been the reason behind these changes. Public deficits exceeding the EU’s Stability and Growth Pact (SGP)1 threshold of 3% of the GDP in most years (Table 3), and was boosted further through credit expansion to households and private businesses at average annual rates of 29.6% and 14.8% respectively, over the same period. (Athanassiou, 2009).

Table 3. Evolution of Public and Private Sector Indebtedness and Net Saving/Borrowing of the Greek Economy (% of the GDP)

| Public Balance | GovernmentDebt | DomesticMFI Credit to Enterprise | DomestMFICredit to Households | NetSaving | NetBorrowing Economy | 200020012002200320042005200620072008 | -3.7-4.5-4.7-5.7-7.5-5.1-2.8-3.5-5.0 | 103.2103.6100.697.998.698.895.994.897.6 | 31.134.335.137.138.441.043.948.854.5 | 12.516.320.123.528.334.40.345.648.2 | -0.10.20.00.01.4-0.6-0.6-2.2-2.7 | 9.610.211.711.08.99.39.112.111.0 |
Source: National statistical service of Greece, Bank Of Greece

Net savings in the Greek economy were negative and high public deficits with quick increasing private sector debt which was being financed by outward borrowing. The country's external debt was magnified because of these very external outward borrowings don't by Greece. (Athanassiou, 2009).
6.1.2. Recession 2008-09
Greece entered its crises when its economy was a victim of chronic imbalances and huge foreign debts. This scenario placed Greece in a bad place because it had no way of working its way around it. Consequently a high spread emerged between the interest rates on Greek and other member state debts, and the Euro zone interest policy lost their effectiveness for the Greek financing costs. (Athanassiou, 2009).
Keeping the interest rates aside, the rapid deterioration of the economic conditions is what the Greek policy makers have been faced with. In 2008, economic expansion went down and consequently the yearly GDP growth rate went down by 2.9% with the only expansion being 0.3 in 2009. For 2009 as a whole growth prospects appear gloomy, with recent forecasts ranging from a positive growth rate of 1.1% (Ministry of the Economy and Finance, 2009) to a GDP contraction of 0.9% (European Commission, 2009). In the labor marker front, the unemployment rate picked up to 8.7% by March 2009 versus 7.2% in mid 2008 and is expected to increase further in the near future, in line with the slowdown in economic activity (Athanassiou, 2009).
An economy such as Greece with large external sector imbalances and high outward indebtedness, such as Greece, the adoption of a fiscal package would be ineffective with dealing with the problem and gaining recovery. This statement gives in to the fact that the fiscal policy discipline set on Greece by the EU will work to its benefit and prevent further deterioration of its fiscal position. (Athanassiou, 2009).
6.1.3. Addressing the Recession: The post Crisis Period
The measures employed, used to foster investor confidence in the Greek Economy, they implemented a series of wide ranging fiscal measures. However the combination of the taxes and cuts do not seem to have calmed the frayed nerves of the investors enough to be able to help Greece recover the money it needs to cover its debts.
On April 23, 2010, Papandreou announced that Greece would draw on €45 billion ($60 billion) in emergency financial assistance from Euro zone members and the IMF in order to avoid defaulting on its debt obligations. Even so, the IMF and the other European states welcomed the measures taken by the government so far, and will most probably ask for more means and more information on how to meet the budget deficit targets in exchange for monetary help. (Nelson, Belkin, & Mix, 2007).
Apart from all the measures suggested above, another suggestion is that Greece could also finance its budget deficit and increase export competitiveness by leaving the euro zone and devaluing a whole new national currency. Although, most consider this a not so likely policy course as both Euro zone and Greek leaders seem wishful of that fact that Greece remain a member of the Euro zone, plus exiting the euro zone could make borrowing costs high for Greece. If the Greek government is not able to reduce its budget deficit then it will most probably forced to default on its debt burdens. (Nelson, Belkin, & Mix, 2007).
6.2. Germany
6.2.1. Pre Crisis Economy and Recession 2008-09
Germany was about to recover in 2004. But the economy had severe structural problems. Germany although had a high upward cyclic turn due to high global economy, Germany itself was not self sustaining. It was dependant on the global economy to uplift its economy. They lacked a structural unemployment and had depressed private consumption. The fiscal deficit, in addition, had a deficit of 3 percent for the third year in succession, resulting in limiting the scope for fiscal action. The German policy makers were quite aware of the hard situation and they had in this turn, already initiated economic policies and reforms (Weber, 2010).
Later, in spring 2007, the German economy had considerably improved and was on its way upwards. The export sector was although still the main contributor, as well as the domestic economic conditions which had really improved. The labor market had improved which broke the long enduring spell of unemployment. Also on the positive side a nearly balanced budget was forecasted for 2007.The reason for this was that the important structural reforms had been implemented which included labor market reforms, which contemporaries the labor market structure and lowered the employment threshold, and adjusted the social security systems. (Weber, 2010).
Germany’s economy was showing real GDP growth of 2.5% in 2007 before crisis with a systematic demand for both private consumption and state consumption. Purchases had recovered from the 2003 recession, to almost 5.6% for the period, however building investment was still 12 percentage points below 2000 levels in 2007. The main vehicle of growth was still the exports sector, about 7.8 % and contributed some 7% percent to GDP in 2007. 18.7 percent, the investment ratio was low by Germany’s historical standards but growth in purchases of equipment specified strong future expectations (Leaman, 2010). After the balanced budget in 2008 and 2009, public finances worsened significantly. the public deficit was back to where it was (IMF, 2010).
6.2.2. Post Crisis Germany
Germany tried to recover from the deep downturn it experienced in winter 09. The recovery process was driven mostly by major fiscal and monetary stimulus. Still, GDP contracted by 5% compared to 2008 and hence by much more than in the United States. Around the turn of the year, economic activity was dampened as the fiscal stimulus wore off and also owing to the inventory cycle. The relatively cold and snowy winter weather was an additional burden for the recovery process. However, trend recovery remained basically intact and the recovery process is expected to regain momentum in the second quarter of 2010. As a typical mainstay of the German economy, exports will once again play an important role in the recovery. The labor market stayed surprisingly strong throughout the crisis. Consumption is more stable as before, thus the economic growth process has been sustained. (Weber, 2010).
Germany's growth potential had been considerably weakened by the crisis. The damage would have been worse, if not for the unemployment stats. For example, the deterioration of the labor market could lead to higher and more long-term unemployment than anticipated, which could slow the projected gradual recovery of potential growth to its estimated longer-term value of around 1¼ percent. But it seems equally likely that labor market conditions could develop better than expected.

Nevertheless footprints of the financial chaos downturn in Germany are palpable especially us in the banking sector. During the financial crisis the total write-downs accounted to an amount of US$ 98.9 billion. And further losses were still expected mainly damaging the financial institutions themselves, requiring consolidation efforts. However, the advantages provided to the banks for the banking stabilization measures by the government evened out the losses that burdened the fiscal budget (Weber, 2010).
6.3. Suggestions
When observing the economic crises that shook the world globally and the economic outlook of Germany and Greece, in 2008 to 2009, suggest that the following factors should be rendered necessary. These policies or recommendations would further enhance the economic situation of Germany and Greece. The following recommendations have been reached after assessing the economic outlook of Germany and Greece.
The first most important consideration to be taken note of is the fact that the fiscal policy itself needs to improve and the implementation of the fiscal policy needs to be looked into. The revenue that was generated in the year 2008 was stable even though an increase was observed in the direct taxes and the Value Added Tax Rate in the year 2007 which was mainly due to a decrease in social security contributions. Therefore, this stable growth needs to be maintained and it would be even better if an improvement was made to increase the revenues more than what was observed in the past.
Moreover, Germany and Greece have been following a certain trend whereby their deficits are not higher than their investments as of that period. This policy has not proved to be efficient hence; this policy needs to be revised. A new policy approach should be adopted which would look into balancing the budget of the economy. This could be achieved by focusing solely on public expenditures. This would then reinforce the growth of the tax rates at a national level whereby unemployment would decrease due to an increase in the investment of public expenditures.
In addition to this, the tax structure needs to be reformed to take into consideration the effect that mobilizing tax bases has. This could be brought about if corporate taxes were to be lowered and the tax base was to be widened. However in the long run this strategy would not be feasible as this would then induce other countries to lower their tax rates as well. Therefore the shifting of the tax burden from a mobile base to an immobile base should be considered, which could be brought about by decreasing local business taxes and by increasing the property taxes.
Furthermore, an increase in tax revenues could be achieved if the tax collection process were to be made much more effective which could be achieved by centering the process of tax collection at a federal level. Hence such policy procedures would help generate more revenues through the broadening of tax bases.

7. CONCLUSION
The Economic Crisis 2008-09 were not only a global but they were also naturally systemic. The economic policies of the last few decades have brought many countries to the brink of bankruptcy, which is avoidable with resumed growth only if appropriate economic reforms are designed with social consensus for successful implementation. In this arena much improvement is possible. There is a clear cut path of reforms that can help countries recover much of the lost ground during recession of 2008 -09.
It became apparent in the global financial crisis 2008-2009 that the economic models in use then to assess the economic systems were surely not good enough for situations with modified functions of basic economic patterns. These situations not only present themselves in financial crises but also in times of economic accelerations in developing economies at various stages. This approach has led to a debate on further improvement of the modeling tools currently available for unfolding and considerate policy measures and developments to achieve better economic stability .
As we went along the research we saw the building pattern of the crises and how quickly it developed into a major global upset stating the need for complex solutions that will be required as the economies being more and more interdependent, looking into historical evidence it suggests such crises usually starts appearing after every cycle and therefore cannot be neglected .
The paper examined that alone EU union policies for the survival not being much effective therefore, the countries need to calculate an appropriate policy in order to repel the adverse effects of financial crises like these .taking into consideration the importance of an intelligent fiscal policy and to extent it helps saving economy. We also see this in the context for Germany and Greece, where poor fiscal policy implementation not only led Greece to suffer from Debt burden and huge deficit in the favorable economic condition but also it exacerbated the economic conditions for Greece the recession finally hit the globe in 2008-09. An appropriate Fiscal stimulus could only have prevented the Greek economy for a such a major hit that it came near to bankruptcy and had to file in a request to European Union and IMF to help service its debt. On the other hand, Germany can be seen as an example of a good fiscal stimulus, while other countries suffered the wrath of recession , Germany was still experiencing positive growth till its exports sector collapsed which reeled it in crisis. Nevertheless, it was one of the first few to rise in 2009 and experienced positive level in growth in mid 2009.

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Appendix
Table 2. Quarters in which the Economy Contracted, 2007-2010

Source : European Commission ‘’Eurostats News Release:euroindicators,’’120/2010 ,august 13.2010 and earlier available at http://ee.europa.eu.eurostat