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Preprints, Working Papers, ... (Working Paper) Year : 2020

Reducing risk while sharing it: a fiscal recipe for the EU at the time of COVID-19

Abstract

The COVID-19 lockdowns have brought about the need of large fiscal responses in all European countries. However, countries across Europe are differently equipped to respond to the shock due to differences in economic conditions and fiscal space. In this paper, we build on the model by Berger et al. (2019) to compare gains from alternative mechanisms of EU fiscal integration in the presence of moral hazard. We show that any EU response strategy to the COVID-19 crisis excluding mutual financial support to member countries lacks credibility. Some form of fiscal risk sharing is indeed better than none, and the associated moral hazard can be hedged by introducing fiscal centralization to Brussels. While the desirable level of centralization increases monotonically with the stock of a country’s debt issued to finance COVID-related spending, the degree of risk sharing responds non-linearly. When the costs of delegating fiscal authority are relatively low, the optimal policy envisages increasingly higher delegation of fiscal authority and lower fiscal risk sharing. On the contrary, when the costs of transferring fiscal powers are relatively high the optimal mix favors more risk sharing. Proposed arrangements at the EU level in response to the COVID-19 shock seem reflecting these basic insights by rotating around a combination of fiscal risk sharing and delegation in the form of fiscal conditionality.
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Dates and versions

hal-04090084 , version 1 (12-05-2023)

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  • HAL Id : hal-04090084 , version 1

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Nicoletta Batini, Francesco Lamperti, Andrea Roventini. Reducing risk while sharing it: a fiscal recipe for the EU at the time of COVID-19. 2020. ⟨hal-04090084⟩
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