This paper applies structural vector autoregressions with time-varying parameters in order to investigate changes in the effects of government spending shocks in the euro area, and the driving forces of those changes. We present evidence that the short-run impact of government spending on real GDP and private consumption has increased until the end-1980s but it has decreased thereafter, along with a weaker response of the real wage and a stronger response of the nominal interest rate. Moreover, spending multipliers at longer horizons have declined substantially over the period 1980-2008. Exploiting state dependency using second-stage inference, we show that these changes can be traced back to increasing availability of credit and rising debt-to-GDP ratios in the euro area, as well as a smaller share of government investment and a larger share of public wages in total spending.