On May 20-21 2016, an ADEMU workshop was held at the European University Institute, organized in collaboration with the International Monetary Fund and the European Stability Mechanism. The workshop aimed to analyze the potentials of risk-sharing mechanisms in the European Union, evaluating existing strategies and discussing new proposals for a more efficient system.
The workshop benefited from the contribution of top economists from the organizing institutions and from a number of other Universities and research institutes (Zurich University of Applied Sciences, London Business School, University of Amsterdam, University Cambridge-INET, New York University, Washington University, Wuhan University, CEPS, Zew), as well as from the EC, the ECB, the Bank of Spain and the Bank of France. The juridical aspects of risk-sharing were also covered, thanks to the contribution of Tuomas Saarenheimo and Päivi Leino-Sandberg, from the Finnish Ministry of Finance and the University of Helsinki, respectively.
The workshop was divided into 4 main sessions:
During the first one, “Market VS Fiscal Risk-Sharing”, Gilles Mourre (EC, DG ECFIN) discussed some proposals with regards to establishing the hypothetical macroeconomic insurance schemes to offer additional income stabilization to countries participating in the single currency, while Tigran Pogoshyan (IMF) discussed the efficacy of smoothing regional shocks through net fiscal transfers, analyzing the case of three federations (US, Canada and Australia).
During Session 2, “Risk-sharing in the European Union and in the Euro Area”, Ramon Marimon presented a model (jointly elaborated with Á. Ábrahám and Yan Liu) for the implementation of a Financial Stability Fund for the EU, showing that such a mechanism can be more effective than sovereign debt financing, as – if well designed – it can result in substantial efficiency gains for the member states, improving their ability to share risks, borrow and lend without resulting in unwanted persistent redistributions.
Within the same session a paper was contributed by Alessandro Ferrari and Anna Rogantini Picco, who evaluated the level of risk-sharing across Euro Area countries over the last 25 years, in order to assess the changes occurred to risk-sharing overtime as well as the relationships between risk-sharing and the introduction of the single currency in the EU. Their results show, through a counterfactual exercise, that risk-sharing in the Euro Area has been lower than it would have been without the Euro.
Finally, Mathias Hoffmann closed Session 2 discussing a paper co-authored with Bent Sørensen, “Small Firms and Domestic Bank Dependence in Europe’s Great Recession”, which analyzes the role of SMEs in the transmission of the Eurozone crisis to member countries and suggesting that domestic bank dependence made countries, regions and sectors with many SMEs, more vulnerable to global banking sector shocks, providing at the same time, little risk-sharing.
Session 3 featured three presentations on bank financing, sovereign debt, contagion and risk-sharing: Gaetano Gaballo discussed how an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic Sovereigns to successfully enact bailouts (paper co-authored with Ariel Zietlin-Jones); Piero Gottardi illustrated the properties of financial networks allowing to optimally solve the trade-off between higher risk-sharing and contagion, as a result of a joint effort with Antonio Cabrales and Fernando Vega Redondo; and Martin Hillebrand presented how, while in the last decade market perception of the sovereign risks of the euro area government bonds has experienced several different phases, market-implied spillover risks have decreased since the European rescue and stability mechanisms came into force in 2011 (paper co-authored with Thomas Ott, Martin Schuele, Peter Schwendner).
The fourth session focused on two papers, presented by Mathias Dolls (coauthors, Clemens Fuest, Dirk Neumann, Andreas Peichl) and João Brogueira de Sousa (coauthors, Árpád Ábrahám, Ramon Marimon and Lukas Mayr), who discussed different options for the design of a common unemployment insurance system for the Euro Area as well as its potential benefits.
During the two days of the workshop, the paper presentations were alternated by three panels, which provided a room for discussion on the current situation (analyzing both risk-sharing strategies without specific regulating institutions and the ESM experience) and on new possible risk-sharing mechanisms that could be adopted in the European Monetary Union.
In particular, Panel 1, “Risk-sharing without risk-sharing institution”, was chaired by the scientific coordinator of the ADEMU project, Ramon Marimon and Angana Banerji (IMF), Giancarlo Corsetti (U.of Cambridge-INET, coordinator of WP 1 of the ADEMU project) and Thomas Cooley (NYU, chair of the ADEMU Advisory Committee) took part to the discussion. Panel 2, “Risk-sharing within the EMU: the ESM experience” was chaired by Giorgia Giovannetti (University of Florence and EUI) and the participants were Aitor Erce (ESM), Päivi Leino-Sandberg (University of Helsinki), Juan Rojas (ESM). During this panel, part of the discussion focused on the legal legitimacy of existing risk-sharing regulatory mechanisms. Panel 3, “New risk-sharing mechanisms for the EMU” was chaired by Christopher Towe (IMF), while the debate was fed by Klaus Masuch (ECB), Paolo Pasimeni (EC, DG ECFING), Tuomas Saarenheimo (Finnish Ministry of Finance) and Rolf Strauch (ESM).
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The full proceedings from this workshop will be available shortly.