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The case for a loan-based euro area stability fund

Author

Listed:
  • Florian Misch

    (ESM)

  • Martin Rey

    (ESM)

Abstract

A greater likelihood of significant asymmetric shocks, the war in Ukraine, and stretched fiscal space all underscore the importance of establishing a euro area fiscal stabilisation capacity. This paper considers the merits of a fund that provides loans for fiscal stabilisation purposes, referred to as ‘stability fund’. First, we argue that this fund could better address moral hazard and be more easily set up than other proposed schemes. Second, using quarterly data from two decades, we model eligibility and the authorities’ decision to request loans to simulate the loan portfolio of this fund had it existed all along, with the loan parameters calibrated to match what the ESM could provide. The results suggest the ESM’s current lending capacity is sufficient to host this fund, and that the expansion of fiscal space can be macroeconomically significant and larger compared to other fiscal stabilisation capacity types.

Suggested Citation

  • Florian Misch & Martin Rey, 2022. "The case for a loan-based euro area stability fund," Discussion Papers 20, European Stability Mechanism, revised 05 May 2022.
  • Handle: RePEc:stm:dpaper:20
    as

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    References listed on IDEAS

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    2. Philipp Heimberger & Andreas Lichtenberger, 2023. "RRF 2.0: A Permanent EU Investment Fund in the Context of the Energy Crisis, Climate Change and EU Fiscal Rules," wiiw Policy Notes 63, The Vienna Institute for International Economic Studies, wiiw.
    3. Philipp Heimberger & Andreas Lichtenberger, 2022. "RRF 2.0: Ein permanenter EU-Investitionsfonds im Kontext von Energiekrise, Klimawandel und EU-Fiskalregeln," wiiw Research Reports in German language 23, The Vienna Institute for International Economic Studies, wiiw.

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