Don't expect too much from EZ fiscal union – and complete the unfinished integration of European capital markets!
Mathias Hoffmann, Bent E. Sørensen 09 November 2012
How do members of existing monetary unions share risk? Drawing on a decade of research, this column argues that fiscal transfers in fact make a limited contribution to economic coherence. In the context of Europe’s current crisis, the evidence suggests that unfinished capital market integration must be completed if we wish to see adequate and effective risk sharing.
The sovereign debt crisis apparently suggests that Eurozone economies should now move substantially closer towards fiscal union. Current policy discussions revolve much more around how such a fiscal union should be designed than whether fiscal union can solve Europe’s underlying problems of economic coherence. What can we expect from a fiscal union? Aren't private capital markets better suited to economic coherence?
EU policies International finance Monetary policy
capital markets, risk, Risk sharing, Eurozone crisis, fiscal union, banking union
Do capital gains on international portfolios have risk sharing benefits? Evidence from Europe
Sebnem Kalemli-Ozcan, Bent E. Sørensen 23 May 2012
News reports today are full of negative stories on the Eurozone. This column presents evidence of a much-overlooked benefit. The common currency has led to increased financial integration and in turn increased risk sharing, which helps to significantly reduce output shocks. Those arguing for a break up of the Eurozone should take note.
A common currency and harmonised financial regulation has led to increased financial integration in Europe which, according to standard theory, should lead to increased risk sharing, i.e. income and consumption smoothing in the face of country-specific shocks. Shocks that hit all countries at the same time cannot be smoothed through integrated financial markets but the impact of country-specific shocks will be diluted if ownership of production units is spread over many countries.
Europe's nations and regions Financial markets International finance
financial integration, Risk sharing, Eurozone crisis, international portfolios
Financial globalisation has improved international risk sharing
Robert Flood, Akito Matsumoto, Nancy P. Marion 12 January 2010
Financial globalisation makes it easier for individuals to trade financial assets, and that should help them diversify against country-specific risks. But empirical support for improved international risk sharing is limited. This column says that there is evidence of improved international risk sharing, and it comes mostly from the convergence in rates of consumption growth among countries.
Sharing risk is basic to market economies. Many institutions, such as insurance companies and equity and derivatives markets, are designed to spread risk. Indications are that markets are pretty good at spreading risk within countries.
consumption, financial globalisation, Risk sharing