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A case for a European Rainy Day Fund

29/11/2018
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Discussion Papers

ESM

A case for a European Rainy Day Fund

Download PDF: Discussion Paper 5

This paper draws on the US experience with state rainy day funds (RDFs) and develops a proposal to build a fiscal stabilisation function for the euro area in the format of a common non-mutualised European RDF.

Authors

  • Andreja Lenarčič (European Stability Mechanism)
  • Kari Korhonen (European Stability Mechanism)

Abstract:
This paper draws on the US experience with state rainy day funds (RDFs) and develops a proposal to build a fiscal stabilisation function for the euro area in the format of a common non-mutualised European RDF. The design of the fund is based on a saving-loan structure, which would preclude permanent fiscal transfers and minimise moral hazard. Moral hazard would be further reduced by imposing ex-ante eligibility criteria and limiting pay-outs to severe shocks. Simulation results show that the proposed model produces stabilisation  effects comparable to a fund based on transfers. We also show that the European RDF would have limited external borrowing needs. These could be practically eliminated by adding a ramp-up period or limiting pay-outs to severe shocks.

 

Disclaimer: The views expressed in this discussion paper are those of the authors and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this paper.

Source: European Stability Mechanism | Discussion Paper Series | Volume 2018 | No 5 | November 2018 | 59 Pages

Copyright © European Stability Mechanism, 2018 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.

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