Effects of financial transfers on redistribution and risk sharing within the EU and the Euro Area

Abstract

The effectiveness of European fiscal policies is of particular importance for the future economic performance of the community especially during times of crisis due to polarized public opinion and expert criticism. This study attempts to identify the redistributive and risk-sharing effects resulting from centralized financial transfers within the EU. We investigate a broader sample of EU (28) countries during 2000-2021 in addition to the Euro area countries used in most studies on the issue. Traditional regression methods and the Pooled Mean Group (PMG) model were used in order to maximize the objectivity of the analysis. The study’s results show that long-term redistribution is virtually absent with levels below 1%. In some cases, the values are even negative which is an interesting (but not unattested) finding in the context of such a sensitive issue as the permanent shift of wealth within the EA and EU. Budget transfers achieved a risk-sharing effect of 11% for the EU and 29% for the EA. Risk sharing levels are comparable and even better than those of some fully-fledged fiscal federations. This is an attestation to the capacity of the EU to successfully implement its intended policies despite some criticism.