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The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?

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  • Davide Furceri
  • Aleksandra Zdzienicka

Abstract

The aim of this paper is to assess the effectiveness of risk sharing mechanisms in the euro area and whether a supranational fiscal risk sharing mechanism could insure countries against very severe downturns. Using an unbalanced panel of 15 euro area countries over the period 1979–2010, the results of the paper show that: (i) the effectiveness of risk sharing mechanisms in the euro area is significantly lower than in existing federations (such as the U.S. and Germany) and (ii) it falls sharply in severe downturns just when it is needed most; (iii) a supranational fiscal stabilization mechanism, financed by a relatively small contribution, would be able to fully insure euro area countries against very severe, persistent and unanticipated downturns. Copyright Springer Science+Business Media New York 2015

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  • Davide Furceri & Aleksandra Zdzienicka, 2015. "The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?," Open Economies Review, Springer, vol. 26(4), pages 683-710, September.
    • Handle: RePEc:kap:openec:v:26:y:2015:i:4:p:683-710
    DOI: 10.1007/s11079-015-9347-y
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    More about this item

    Keywords

    Risk sharing mechanisms; Consumption smoothing channels; Fiscal union; F41; F32; F36;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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