Blueprint for a Cyclical Shock Insurance in the euro area
This study by H. Enderlein, L. Guttenberg and J. Spiess presents how a cyclical stabilization insurance fund, as it was proposed in the Padoa-Schioppa report, could be a solution to the problem of lacking business cycle convergence in the euro area.
Many positive steps have been made in the last four years so as to reinforce the Economic and Monetary Union’s architecture. Nevertheless, the common currency area appears still incomplete, and several EMU weaknesses put in evidence by the crisis were not addressed yet. Beyond the short term challenges, such as achieving better public and private debt positions, more growth and lower unemployment, decision makers also need to complete the EMU in order to guarantee the long term sustainability of the common currency.
In this study, Henrik Enderlein, Lucas Guttenberg and Jann Spiess outline the technical features of the proposed “Cyclical Shock Insurance” scheme as well as its economic and political implications. The authors also contrast their proposal with some other proposals that are currently discussed to tackle the issue of business cycle convergence, such as an unemployment insurance scheme. Finally, the authors run a simulation on how this scheme would have operated had it been in place during the first fifteen years of EMU and show it would not have generated unbalanced transfers between member states.