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Risk sharing in the euro area


  • Cimadomo, Jacopo
  • Hauptmeier, Sebastian
  • Palazzo, Alessandra Anna
  • Popov, Alexander


This article discusses the concept of risk sharing, which generally refers to the notion that economic agents, such as households and firms, attempt to insure their consumption streams against fluctuations in the business cycle of their country, i.e. they try to “smooth out” changes in their consumption resulting from economic shocks. The article then considers what proportion of an economic shock in the euro area can be smoothed, and compares this with the situation in the United States. While a comparison of the degree of risk sharing between the euro area and the United States needs to be seen against the background of different institutional and political architectures, it nevertheless offers potentially interesting economic insights. The article shows that, while in the euro area around 80% of a shock to GDP growth in a given country remained unsmoothed over the period 1999-2016, thus resulting in sizeable differences in consumption growth across countries, in the United States at most 40% of a shock to state-specific GDP was unsmoothed over the same period. The article also evaluates the relative importance of the main risk sharing channels, i.e. the credit, capital and fiscal channels, as well as the role of European institutions. It shows that, in the euro area, risk sharing takes place mainly via the capital channel, i.e. through cross-border holdings of financial assets. Finally, the article puts the empirical results into the perspective of the ongoing debate on enhancing the institutional architecture of Economic and Monetary Union (EMU). It calls for euro area countries to make their economies, banking sectors and public finances less vulnerable to macroeconomic shocks. The article explains how efficient and integrated financial markets are a core prerequisite for effective private risk sharing in the euro area. It also shows how the euro area would benefit from a central fiscal stabilisation function to support national economic stabilisers in the presence of large economic shocks and thereby make EMU more resilient. JEL Classification: E21, E62, F15, F36

Suggested Citation

  • Cimadomo, Jacopo & Hauptmeier, Sebastian & Palazzo, Alessandra Anna & Popov, Alexander, 2018. "Risk sharing in the euro area," Economic Bulletin Articles, European Central Bank, vol. 3.
  • Handle: RePEc:ecb:ecbart:2018:0003:3
    Note: 352854

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Euro Area in the Age of COVID-19
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2020-05-17 11:53:03


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Ilzetzki, Ethan & Reinhart, Carmen M. & Rogoff, Kenneth, 2020. "Why is the Euro Punching Below its Weight," CEPR Discussion Papers 14315, C.E.P.R. Discussion Papers.
    2. Pablo Burriel & Panagiotis Chronis & Maximilian Freier & Sebastian Hauptmeier & Lukas Reiss & Dan Stegarescu & Stefan Van Parys, 2020. "A fiscal capacity for the euro area: lessons from existing fiscal-federal systems," Occasional Papers 2009, Banco de España.
    3. Zouri, Stéphane, 2021. "New evidence on international risk-sharing in the Economic Community of West African States (ECOWAS)," International Economics, Elsevier, vol. 165(C), pages 121-139.
    4. Lannoo, Karel & Thomadakis, Apostolos, 2019. "Rebranding Capital Markets Union: A market finance action plan," ECMI Papers 500, Centre for European Policy Studies.
    5. Helge Berger & Giovanni Dell’Ariccia & Maurice Obstfeld, 2019. "Revisiting the Economic Case for Fiscal Union in the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 657-683, September.
    6. Gilles Dufrénot & Jean-Baptiste Gossé & Caroline Clerc, 2021. "Risk sharing in Europe: new empirical evidence on the capital markets channel," Applied Economics, Taylor & Francis Journals, vol. 53(2), pages 262-276, January.
    7. Herzberg, Valerie & McQuade, Peter, 2018. "International bank flows and bank business models since the crisis," Financial Stability Notes 05-18, Central Bank of Ireland.

    More about this item


    economic integration; EMU; international capital markets; output smoothing; risk sharing;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration


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