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A case for a European Rainy Day Fund

Author

Listed:
  • Andreja Lenarčič

    (ESM)

  • Kari Korhonen

    (ESM)

Abstract

This paper draws on the US experience with state rainy day funds (RDFs) and develops a proposal to build a fiscal stabilisation function for the euro area in the format of a common non-mutualised European RDF. The design of the fund is based on a saving-loan structure, which would preclude permanent fiscal transfers and minimise moral hazard. Moral hazard would be further reduced by imposing ex-ante eligibility criteria and limiting pay-outs to severe shocks. Simulation results show that the proposed model produces stabilisation effects comparable to a fund based on transfers. We also show that the European RDF would have limited external borrowing needs. These could be practically eliminated by adding a ramp-up period or limiting pay-outs to severe shocks.

Suggested Citation

  • Andreja Lenarčič & Kari Korhonen, 2018. "A case for a European Rainy Day Fund," Discussion Papers 5, European Stability Mechanism, revised 25 Oct 2021.
    • Handle: RePEc:stm:dpaper:5
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    File URL: https://www.esm.europa.eu/sites/default/files/document/dp5.pdf
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    Cited by:

    1. 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.

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