Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: A Simple Proposal for Dealing with Mistrust in the Euro Area

Heikki Oksanen

No 5817, CESifo Working Paper Series from CESifo

Abstract: The euro area will not have a centralised budget and smoothing of country-specific asymmetric shocks via private financial markets will develop only slowly. Mistrust among the governments has caused rigid, even pro-cyclical fiscal policies. Smoothing mechanisms are absent due to the fear that the transfers would develop into permanent redistribution. For removing these deficiencies we propose a transfer mechanism to be managed in periods of seven years so that the cumulative balance of each country is cleared in equal instalments during the subsequent 7-year period. The transfers would smoothen asymmetric shocks and alleviate the rigidity of the fiscal rules.

Keywords: euro; monetary union; smoothing shocks; fiscal transfers; government budget (search for similar items in EconPapers)
JEL-codes: E42 E62 H10 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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