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Risk Reduction and Risk Sharing in the Governance of the Euro Area

Fabrizio Balassone (), Sara Cecchetti, Martina Cecioni (), Marika Cioffi, Wanda Cornacchia, Flavia Corneli () and Gabriele Semeraro

Politica economica, 2016, issue 3, 463-488

Abstract: The unchecked build-up of imbalances during the 2000s exposed the euro area to the risk of sudden stops. Such risk materialized in 2009-10 and its consequences were amplified by the absence of adequate institutions. Europe embarked on a thorough process of reforming its economic governance. We review the measures taken concerning sovereigns and banks since 2010 and discuss possible ways forward on both fronts. We argue that, while significant progress has been achieved, a lot of ground remains to be covered. In general, reforms have favoured risk reduction over risk sharing. As a result, in the face of exceptional circumstances, the euro area is not equipped with the fiscal tools necessary for macroeconomic stabilization; moreover, banking union lacks common financial backstops. Only further risk (and sovereignty) sharing can avoid harmful pro-cyclical excesses.

Keywords: Economic and Monetary Union; Banking Union; Fiscal Union; Sovereign Risk; Prudential Regulation; Sovereigns-Banks Nexus. (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:mul:je8794:doi:10.1429/85007:y:2016:i:3:p:463-488