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The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?
Author:
Davide Furceri null

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and
Ms. Aleksandra Zdzienicka
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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 198
Language:
English
Publication Date:
25 Sep 2013
DOI:
https://doi.org/10.5089/9781484334201.001
ISBN:
9781484334201
ISSN:
1018-5941
Pages:
34
Keywords:
WP; stabilization fund; risk sharing; consumption smoothing; fiscal union; euro area country; severe downturn; euro area member; Euro area crisis; GDP shock; Income; Credit; Consumption
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund