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Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: a Simple Proposal for Dealing with Mistrust

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  • Heikki Oksanen

Abstract

The euro area will not have a centralized budget, and smoothing of country-specific asymmetric shocks via private financial markets will develop only slowly. Mistrust among the governments has caused rigid, even pro-cyclical, fiscal policies. Smoothing mechanisms are absent due to the fear that the transfers would develop into permanent redistribution. For removing these deficiencies, we propose a transfer mechanism to be managed in periods of 7 years so that the cumulative balance of each country is cleared in equal instalments during the subsequent 7-year period. The transfers would smoothen asymmetric shocks and alleviate the rigidity of the fiscal rules.

Suggested Citation

  • Heikki Oksanen, 2016. "Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: a Simple Proposal for Dealing with Mistrust," CESifo Economic Studies, CESifo Group, vol. 62(2), pages 332-375.
    • Handle: RePEc:oup:cesifo:v:62:y:2016:i:2:p:332-375.
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    References listed on IDEAS

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    Cited by:

    1. Heikki Oksanen, 2019. "Reforming the Euro Pragmatically: Towards Sustainable Fiscal Policy and a Revamped Eurosystem," CESifo Working Paper Series 7912, CESifo.
    2. 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.
    3. Heikki Oksanen, 2018. "New Output Gap Estimates for Assessing Fiscal Policy with Lessons for Euro Area Reform," CESifo Working Paper Series 7287, CESifo.
    4. Bole, Velimir & Oblak, Ana & Prašnikar, Janez & Trobec, Domen, 2018. "Financial frictions and indebtedness of Balkan firms: A comparison with Mediterranean and Central European countries," Journal of Policy Modeling, Elsevier, vol. 40(4), pages 790-809.
    5. László Andor, 2022. "European unemployment insurance. From undercurrent to paradigm shift," Transfer: European Review of Labour and Research, , vol. 28(2), pages 267-283, May.

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