Assessing the Euro Area's Shock-Absorption Capacity: Risk Sharing, Consumption Smoothing and Fiscal Policy

CEPS Special Report, No. 146

40 Pages Posted: 27 Oct 2016

See all articles by Cinzia Alcidi

Cinzia Alcidi

CEPS; Graduate Institute of International and Development Studies (IHEID)

Gilles Thirion

Centre for European Policy Studies (CEPS)

Date Written: September 29, 2016

Abstract

Based on a combination of quantitative analysis and a qualitative forward-looking approach, this paper assesses both the state of play and the future capacity of the EMU to respond and adapt to asymmetric shocks. The objective is to provide a basis upon which to gauge the potential value added of a European Unemployment Benefit Scheme (EUBS), against the background of the recent plans for the Banking Union, the Capital Markets Union and the reform of the fiscal governance framework. We find that the capacity of the system to deal with asymmetric shocks (and in principle reduce their occurrence) is likely to increase due to these changes; but it will remain limited in the medium term and certainly lower than in the US. We also argue that given the broad pro-cyclicality of fiscal policy, the idea that national policies alone can deal alone with asymmetric shocks is not realistic. Lastly, we maintain that an ex-ante fiscal insurance mechanism can provide some degree of income smoothing and is likely to catalyse market insurance. Fiscal and market insurance can reduce the role of credit and borrowing, which until now has been the main channel for shock absorption in the euro area but also the least effective in times of crisis. We conclude that, from a macroeconomic point of view, an EUBS is a useful tool to improve shock absorption capacity and is not mutually exclusive with market risk sharing.

Keywords: European Unemployment Benefit Scheme, EUBS, fiscal insurance mechanism, EMU, asymmetric shocks

Suggested Citation

Alcidi, Cinzia and Thirion, Gilles, Assessing the Euro Area's Shock-Absorption Capacity: Risk Sharing, Consumption Smoothing and Fiscal Policy (September 29, 2016). CEPS Special Report, No. 146, Available at SSRN: https://ssrn.com/abstract=2859428

Cinzia Alcidi (Contact Author)

CEPS ( email )

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Graduate Institute of International and Development Studies (IHEID) ( email )

132, Rue de Lausanne
Geneva, 1211
Switzerland

Gilles Thirion

Centre for European Policy Studies (CEPS) ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

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