Abstract
A Eurozone fiscal buffer fund could be set up to finance transfers to countries triggered by the cyclical movements in their unemployment rate. Countries would contribute a fixed share of their GDP to the fund in good times. The receipts from the fund are found to significantly mitigate the fiscal contractions during downturns and thus help bolster the stability of the Eurozone economy by counteracting the pro-cyclicality of fiscal policies. To quantify the extent of macroeconomic stabilisation thus achieved, estimates for the ‘fiscal multipliers’ are superimposed on the assumed change in fiscal policies. It suggests that a Eurozone buffer fund would have significant stabilisation properties.The computations are carried out using two databases – the European Commission's AMECO database and the OECD Economic Outlook database -- by way of a robustness check.
Highlights
In its first two decades of existence the Eurozone has experienced pronounced cyclical swings in economic activity, with an almost unabated expansion until the global financial crisis in 2008-2009 followed by a deep slump as the ensuing sovereign debt crisis unwound
This paper examines to what extent the creation of Eurozone buffer fund, to which Member States contribute in good times and draw on in bad times, would have changed the conduct of discretionary policies in a counter-cyclical direction
The assumptions to calculate the flow of transfers to/from a Eurozone buffer fund adopted in this paper can be summarised as follows: 1. All member states contribute a fixed 0.35% of GDP to the buffer fund
Summary
In its first two decades of existence the Eurozone has experienced pronounced cyclical swings in economic activity, with an almost unabated expansion until the global financial crisis in 2008-2009 followed by a deep slump as the ensuing sovereign debt crisis unwound. Discretionary fiscal policies have frequently overruled the working of the automatic stabilisers in the Eurozone e.g. as governments cut expenditure in response to fiscal shortfalls caused by the cycle -- muting their smoothing impact, both in good and in bad times (Van den Noord 2019). Some of this could have been avoided had governments built up sufficient buffers in good times Against this backdrop, this paper examines to what extent the creation of Eurozone buffer fund, to which Member States contribute in good times and draw on in bad times, would have changed the conduct of discretionary policies in a counter-cyclical direction. This is followed by a discussion of the analysis while the final section concludes
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