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Risk sharing in the euro area: a focus on the public channel and the COVID-19 pandemic

Jacopo Cimadomo

Economic Bulletin Articles, 2022, vol. 7

Abstract: This article surveys the literature on consumption risk sharing, focusing on the euro area but also presenting evidence for individual countries, including the United States. The literature finds that risk sharing is weaker in the euro area than between regions or federal states in the individual countries examined. However, our analysis of the response to the coronavirus (COVID-19) crisis indicates that risk sharing in the euro area has been more resilient in this period than it was during the global financial crisis of 2008-10. It suggests that the provision of timely large-scale policy support reduced the risk of cross-border financial flows coming to a sudden halt, thus preventing a severe disruption of private risk sharing. This experience speaks in favour of establishing a common public risk-sharing mechanism in the euro area and completing the banking union and capital markets union. At the same time, the right balance must be found between additional, centralised euro area stabilisation and risk-sharing instruments and credible enforcement of fiscal rules to anchor market expectations of sound public finances. JEL Classification: C23, E62, G11, G15

Keywords: COVID-19 crisis; EMU reform; Risk sharing (search for similar items in EconPapers)
Date: 2022-11
Note: 352854
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