A policymaker’s guide to a Euro area stabilization fund


In 2012, several reports were published advocating the creation of a genuine fiscal capacity at the European level, to strengthen the foundations of the Economic and Monetary Union (EMU) by helping member countries to adjust to asymmetric shocks. The design of a common stabilization fund should be well thought, though: what would be stabilized? When would transfers be paid? Would they be directed towards governments or individuals? How would they be financed? And would they help stabilize economies? We address these questions by outlining recent existing proposals, their features and their simulated stabilization effects. We finally underline the difficulties in implementing such a scheme.

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  1. 1.

    The President of the European Council wrote the report in collaboration with the Presidents of the Commission, the Eurogroup and the European Central Bank, hence the nickname “the Four Presidents’ Report”.

  2. 2.

    Its function would be stabilization, not redistribution.

  3. 3.

    Drèze and Durré (2014) proposed a different and somewhat complex system based on pooled GDP-indexed bonds as an insurance against asymmetric shocks.

  4. 4.

    In addition, there exist redistributive funds that are not related to divergences in the business cycle. Such funds are out of the scope of the paper, being of a purely redistributive type. We thank the reviewer for the distinction.

  5. 5.

    In Engler and Voigts (2013), α = 0.3.

  6. 6.

    Also, depending on the nature of shocks, specific markets (goods, labor, credit or housing) or specific accounts (balance of payments, public or private debt) may be subject to large disequilibria, and targeting directly one of these may be more effective. However, as changing the target during the operation of the scheme would be a source of tensions and uncertainty, we do not pursue this point further.

  7. 7.

    This effect derives from the fact that the reference point, X*, is the EA average and not the country-specific average. If the latter were chosen, national positions of each country with regard to the fund could be affected by forecast errors as well, but not necessarily in the same direction.

  8. 8.

    In any case, real-time uncertainty and revisions also affect other macroeconomic indicators and other policy areas (among which monetary policy and budget planning).

  9. 9.

    The size of this change could be specified.

  10. 10.

    In the ‘new’ literature on fiscal federalism, Luelfesmann et al. (2015) show that decentralization can outperform centralization provided certain conditions related to the governance structure are satisfied: namely, if the decision maker of the federal government is not benevolent, if bargaining is feasible between regional governments and if externalities are not too large. The authors disregard transaction costs in the bargaining process though. Note that their analysis deals with the implementation of local investment projects and not with automatic transfers for stabilization purposes.

  11. 11.

    However, Persson and Tabellini (1996a) had argued that federal transfers to regional governments should not provide full interregional risk sharing. Due to the moral hazard in any insurance scheme, regional governments could have fewer incentives to implement local public investment plans that could help decrease the occurrence of asymmetric shocks or help the local economy adapt to such shocks.

  12. 12.

    In the United States, for instance, under the 2008 Economic Stimulus Plan of the Bush’s administration, temporary federal transfers to households amounted to $300 and were paid to those who paid no taxes but earned an income (Pennings 2014).

  13. 13.

    Note that the low-risk region could then threaten to secede from the union. As a consequence, the high-risk region could accept to pay a lump-sum transfer (a premium) to the low-risk region, to compensate the latter for larger transfers due to its higher risk. Von Hagen (2007) also proposes this compensation.

  14. 14.

    The scheme proposed by Drèze and Durré (2014), based on the pooling of bonds, would lead to permanent transfers, with five permanent net contributors (Belgium, Austria, Finland, France and the Netherlands), and two permanent net recipients (Italy and Portugal).

  15. 15.

    For instance, in the simulated scheme studied by Dreyer and Schmid (2015), the redistribution effects counteract the stabilization effects: Ireland would have still been a net contributor to the EA budget in 2008 and 2009 because its relative richness dominates its relative GDP growth performance. Still, the conclusion on this point is strongly dependent on the features of the system.

  16. 16.

    Source: own calculations based on European Commission data (EU budget and AMECO).

  17. 17.

    Eichengreen et al. (2014) give the examples of Florida and Nevada during the year crisis 2008: one year after, net transfers amounted to approximately 9 per cent of GDP for Florida (10 % in 2010) and 4 % of GDP for Nevada (5 % in 2010). Nevada was a net contributor to the federal budget in 2008 and became a net recipient the year after.

  18. 18.

    Di Giorgi (Di Giorgio 2016) analyzed the business cycle properties of Central and Eastern European Countries (CEECs) and the Euro Area. He found that business cycle synchronization is high between both groups, especially with regard to (the duration of) recessions.

  19. 19.

    Dolls et al. (2013) update the work of Bargain et al (2013) by using data for 17 EA countries in 2007 instead of 11 EA countries (without Luxembourg) in 2001.

  20. 20.

    In terms of redistributive effects, they also found that disposable income could increase much in Slovakia (69 %) and Estonia (61 %), but at the cost of a large decrease in disposable income in other countries, such as Ireland (−28 %), Luxembourg (−25 %), and Cyprus (−18 %).

  21. 21.

    Disposable income could increase up to 28 % in Greece but it could decrease as much as 9 % in Ireland and 8 % in France and Austria.

  22. 22.

    Note that Bayoumi and Masson (1998) found empirical evidence that fiscal stabilization provided by the federal government (via transfers to local governments) is more effective than that provided by the local governments in Canada. Households do not expect future tax liabilities associated with national transfers, and as a consequence, do not reduce consumption.

  23. 23.

    For a survey, see Whalen and Reichling (2015). Note that, for our subject, we focus on the effects of transfer payments and disregard those of government purchases or taxes.

  24. 24.

    The creation of Eurobonds would thus be unprecedented.

  25. 25.

    The US unemployment insurance is financed by a tax on employers that amounts to 5.4 % of labor cost. This rate is a common minimum standard across states. By experience rating, employers pay more if they fire more or if the state has not reimbursed the loan.

  26. 26.

    For earlier studies on this subject, see the assessment made by Mélitz (2004).

  27. 27.

    Over the period 1970–1994, the degree of stabilization was 47 %.

  28. 28.

    Before 1995, there was full insurance.

  29. 29.

    Yet, the German debt brake of 2009 stipulates that the federal government must cut its structural deficit to 0.35 % of GDP by 2016. 


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We thank the editor and the referees of the journal for useful suggestions and remarks. The usual disclaimer applies.

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Correspondence to Etienne Farvaque or Florence Huart.

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Farvaque, E., Huart, F. A policymaker’s guide to a Euro area stabilization fund. Econ Polit 34, 11–30 (2017). https://doi.org/10.1007/s40888-016-0038-y

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  • Federal transfers
  • Fiscal union
  • Fiscal federalism
  • European integration
  • Stabilization effects

JEL classification

  • F45
  • H87
  • E60