Title: The case for a loan-based euro area stability fund
Download PDF: Discussion Paper 20
A greater likelihood of significant asymmetric shocks, the war in Ukraine, and stretched fiscal space all underscore the importance of establishing a euro area fiscal stabilisation capacity. This paper considers the merits of a fund that provides loans for fiscal stabilisation purposes, referred to as ‘stability fund’. First, we argue that this fund could better address moral hazard and be more easily set up than other proposed schemes. Second, using quarterly data from two decades, we model eligibility and the authorities’ decision to request loans to simulate the loan portfolio of this fund had it existed all along, with the loan parameters calibrated to match what the ESM could provide. The results suggest the ESM’s current lending capacity is sufficient to host this fund, and that the expansion of fiscal space can be macroeconomically significant and larger compared to other fiscal stabilisation capacity types.
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 2022 no. 20 | April 2022 | 32 Pages
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