A fiscal shock absorber for the Eurozone? Lessons from the economics of insurance
Daniel Gros 19 March 2014
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.
Even before the euro crisis started, it had been widely argued that the Eurozone needed a mechanism to help countries overcome idiosyncratic shocks. The experience of the crisis itself seemed to make this case overwhelming, and throughout the EU institutions it is now taken for granted that the Eurozone needs a system of fiscal shock absorbers. For example, The Report of the President of the European Council calls for:
EU institutions Macroeconomic policy Welfare state and social Europe
eurozone, euro, insurance, fiscal policy, Eurozone crisis, fiscal union, fiscal shocks, fiscal shock absorbers
Banking union: Ireland vs Nevada, an illustration of the importance of an integrated banking system
Daniel Gros 27 November 2012
An integrated banking system saved Nevada after a local real estate boom turned to bust. Without an integrated banking system, the same wasn’t true of Ireland. This column argues that comparing Ireland and Nevada shows that banking union is far more important for Europe than current proposals of fiscal union. And, in the absence of a proper banking union that covers losses, it seems ever more likely that Europe will be pushed back towards nationally segmented financial markets.
The Eurozone crisis has demonstrated how an insolvent sovereign can destroy a national banking system, Greece, but also how an insolvent banking system can almost sink the sovereign – Ireland and Spain (Wyplosz 2012).
EU institutions EU policies
ECB, Ireland, fiscal union, banking union, Nevada
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
Spillover effects in a fiscal union: Evidence from US states and Treasury bond markets
Rabah Arezki, Bertrand Candelon, Amadou Sy 01 August 2012
What are the spillover effects within a fiscal union? This column looks at evidence within bond markets for individual US states and the market for US Treasury securities. Results are twofold. First, there are negative spillovers between most markets for individual US state bonds. Second, there is no substantial spillover effect between shocks originating from state securities and from federal markets, except for a few large issuers.
The market for US municipal bonds, a $2.9 trillion tax-exempt bond market amounting to about one third of the US treasury market, has often been viewed as a safe haven by individual investors.1 The most recent US state to default was Arkansas in 1933, during the Great Depression. Throughout history there have been but a handful of state defaults – ten in the aftermath of the US Civil War and eight, plus the then-territory of Florida, during the 1830s and 1840s.
International finance Monetary policy
US, bond markets, fiscal union
The euro’s salvation lies in a little less Europe; not more Europe
Avinash Persaud 25 April 2012
Does Europe need a fiscal union to support its monetary union? This column argues that the cause of Europe’s problems is not public sector ill discipline but rather private sector ill discipline. In such a situation, it asks whether we should be trying to save a drowning man by putting him in a straightjacket.
The European credit crisis is as political as it is complicated. This breeds solutions in search of the problem. One of these is the ubiquitous idea that the euro’s woes can only be settled by fiscal union; the more rigid the better and no room for backsliding. The broad popularity of this idea is based around its appeal to those who have a preference for whips and chains and includes both Europhiles and Europhobes.
EU policies Europe's nations and regions
Eurozone crisis, fiscal union
Lessons for Europe’s fiscal union from US federalism
C Randall Henning, Martin Kessler 25 January 2012
In the last few months, several Vox columns have drawn parallels between Europe today and an emerging – and even less stable – United States in the eighteenth century. This column stresses that Europe’s leaders in search of a fiscal union need not seek to replicate the US experience but they should at least learn from it.
The Eurozone crisis and debate over fiscal reform have led many observers to pray for salvation by a modern, European version of Alexander Hamilton. By this they generally mean someone capable of leading a movement for a robust fiscal union and implementing this vision. (See for example McKinnon 2011.) Europe has instead, they lament, a collection of leaders who are primarily responsive to divergent national electorates rather than engaged in building a pan-European political movement.
EU policies Politics and economics
US, Eurozone crisis, fiscal union, US federalism
The threat to use the printing press
Hans-Werner Sinn 18 November 2011
The first major crisis in the era of independent central banks is severely testing that independence – nowhere more so than the Eurozone. This column argues that the ECB is monetising the sovereign debt – a view widely held in Germany. It argues that the ECB is the Eurozone’s economic government with the power to enforce comprehensive rescue measures, up to and including a fiscal transfer union.
Fortunately, Nicolas Sarkozy is not getting his banking licence for the EFSF. The Luxembourg rescue fund is not going to buy government bonds of endangered countries with freshly printed money. The ECB, however, may continue to do this. The French president pointed out as much defiantly after his defeat, and in the preliminary negotiations for the European Council and Eurozone summit of 26 October. He even sought support for an appeal to the ECB to continue its bond-purchase policy.
EU policies Europe's nations and regions
Germany, fiscal union, EZ crisis
Eurozone banks must be freed from national capitals
Nicolas Véron 13 October 2011
Europe, and the Eurozone especially, is years into an economic crisis. This column argues that if the euro is to survive, Eurozone citizens will have to accept the surrender of economic policy decision-making on an unprecedented scale.
Most of Europe has been engulfed by a systemic banking crisis for more than four years, even as policymakers and bankers themselves have strived to deny it. As pointed out by many columns on this site over the past few months (see a collection on the EZ Crisis Phase 2 page), things are even worse.
EU institutions Europe's nations and regions International finance Politics and economics
decoupling, fiscal union
How Argentina left its Eurozone
Eduardo Levy Yeyati 02 October 2011
One of the many proposals for escaping the Eurozone crisis is to follow in the footsteps of Argentina since its currency fiasco a decade ago. This column points out the realities of such a path: regressive wealth transfers and debt dilution. Against this dismal backdrop, a fiscal union might well be a better option.
The European predicament is:
- Financial (large debt stocks); and
- Real (large fiscal and current-account flow gaps).
A solution to just one of these is likely to be inadequate. A solution, for example, that focuses solely on debt restructuring would be incomplete if not complemented with a plan to recover price competitiveness and growth to fix the real problem.
EU policies Europe's nations and regions Monetary policy
Argentina, devaluation, Eurozone crisis, fiscal union