Asymmetric shocks and international risk sharing in the European Monetary Union and the European Union

In this paper we measure the effectiveness of international risk sharing taking place in the Eurozone (EMU) and the European Union (EU) over the most recent period of 1999?2014. We find that on average as much as 75% of shocks have been left unsmoothed during 1999?2014 in the EMU and the EU. Only 6?8% of shocks have been attenuated through the factor income channel and 20?25% of shocks have been smoothed out through the saving channel, predominantly through government saving. Our research shows that risk sharing patterns have not changed considerably after 2008. Importantly, the most recent experience from the period starting with the outbreak of the global financial crisis of 2008+ casts doubt on the ability of international financial markets to smooth large shocks between the euro area countries and back convergence among Eurozone members. A critical discussion about the financial sector�s linkages with the real sector and its influence on economic growth and financial stability of European economies complements the empirical analysis of this paper, providing arguments explaining the relatively low effectiveness of the factor income channel in smoothing asymmetric shocks in the euro area.