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Open Economies Review

, Volume 26, Issue 4, pp 683–710 | Cite as

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

Research Article

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.

Keywords

Risk sharing mechanisms Consumption smoothing channels Fiscal union 

JEL Classification

F41 F32 F36 

Notes

Acknowledgments

The authors would like to thank Celine Allard, Jochen Andritzky, Alan Auerbach, Roel Beetsma, Ansgar Belke, Helge Berger, Olivier Blanchard, John Bluedorn, Xavier Debrun, Pierre-Olivier Gourinchas, Jana Grittersova, Daniel Gros, Jules Leichter, Prakash Loungani, Franziska Ohnsorge, Tigran Poghosyan, Frank Smets, Livio Stracca, participants to the conference Fiscal Policy and Coordination in Europe (Central Bank of Slovakia) and the ECB/IMF conference Reforming EU Fiscal Governance, for very useful discussions and suggestions. We are also grateful to the editor George Tavlas and to two anonymous referees for useful comments. Shanti Karunaratne provided excellent editorial assistance.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.International Monetary Fund and University of PalermoWashingtonUSA
  2. 2.International Monetary FundWashingtonUSA

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