Professor Ramon Marimon (EUI) speaks at the ESM

"The European Stability Fund as a Constrained Efficient Mechanism”

A European Stability Fund (ESF) designed as a 'constrained efficient mechanism', based on long-term risk-sharing contingent contracts, will be a "robust crisis management" mechanism, which is the main objective of the European Monetary Fund (EMF) proposed by the European Commission (6.12.2017). As with the EMF, the set-up of the ESF can, and should, be based on the existing European Stability Mechanism (ESM). In fact, the basic element of the ESF, the ESF contract, does not require an institutional change - as has the EMF - but just the introduction of ex-post contingent contracts, with the only ex-ante constraint of limited - possibly absent - redistribution. By contrast, the existing ESM (30+ years) long-term debt contracts are non-contingent ex-post, but are ex-ante contingent on austerity/reform programmes. ESF contracts are subject to limited enforcement constraints (there is no incentive to default, nor undesired ex-post redistribution) and moral hazard constraints (to reduce endogenous country risk). This design makes the ESF also suitable for: i) risk-sharing among countries with different risk profiles and existing liabilities, as is currently the case in the EU, and ii) solving existing 'debt-overhang' problems, given its absorbing capacity.

The ECB, thanks to its design, has successfully solved the time-inconsistency problem of monetary policy - the temptation to raise current prices. The ESF is designed to solve the time-inconsistency problem of fiscal policy - the temptation not to follow efficient countercyclical fiscal policies.

We illustrate all these features by developing a model of the ESF, where the ESF contract is calibrated to the euro area 'stressed countries'. In particular, we show that there are substantial welfare gains from using ESF contracts, as opposed to standard non-contingent defaultable debt contracts, which were at the root of the euro crisis.
   

Professor Ramon Marimon - Professor Ramon Marimon is Professor of Economics and Pierre Werner Chair at the European University Institute, on leave from Universitat Pompeu Fabra. Chairman of the Barcelona GSE, he is Research Fellow of CEPR and NBER. He has been Secretary of State for Science and Technology in Spain and he is a co-founder of UPF and first Director of CREi (UPF) and of the Max Weber postdoctoral programme (EUI). His research interests are macroeconomics, monetary theory, contract theory, learning theory and labour theory. He is the Scientific Coordinator of the Horizon 2020 project ADEMU, “A Dynamic Economic and Monetary Union”. He has been president of the Society for Economic Dynamics (2013 – 2015) and of the Spanish Economic Association (2004), Assistant and Associate Professor at the University of Minnesota and visiting professor in different U.S. and European Universities. He has been advisor of the European Commission on R&D policy. He has published in Econometrica, Journal of Political Economy, American Economic Review, Journal of Economic Theory, Review of Economic Dynamics, and others. He also publishes regular opinion articles in the Spanish EL PAÍS.

This is an ESM research internal seminar. If you would like to attend, please write an email to ESMresearch@esm.europa.eu