Front Matter Page
Independent Evaluation Office
Contents
1 Introduction
2 The EU response
3 The Models
3.1 Strategic behaviors and EU risk sharing
3.2 COVID-related debt, moral hazard and EU fiscal centralization
4 Discussion and conclusions
Acknowledgments
First order conditions – analytical passages
Optimal delegation with high delegation costs
Sensitivity
Figures
Figure 1: The role of fiscal risk sharing in the European Union. When the risk of insolvency critically increases in one member country, fiscal risk sharing becomes comparatively convenient to the whole Union.
Figure 2: Expected support from the EU and expected welfare gain from risk sharing (net of moral hazard) for varying level of formal risk sharing and selected levels of COVID-related debt.
Figure 3: Optimal centralization of fiscal authority and optimal risk sharing as functions of the surge in debt induced by the pandemics. Parameter configuration: relatively low costs of centralization (c = 1) and of sovereign bailout (b = 0.01).
Figure 4: Optimal variation of fiscal risk sharing and delegation to the center for rising COVID-19 related debt of a member country. Parameter configuration: clow = 1, chigh = 100, b = 0.1.
Figure 5: Optimal delegation to the center. This is a zoom of figure 4b. The maximal delegation at the optimum corresponds to d ∗ = 1/c = 0.01.
Figure 6: Sensitivity of the optimal fiscal risk sharing and delegation to the center to b (welfare costs of bailout). Parameter configuration: clow = 1, chigh = 100.
Figure 7: Sensitivity of the optimal fiscal risk sharing and delegation to the center to c (cost of delegation). Parameter configuration: b = 0.1.
Appendixes
Appendix