The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity (a fiscal union), to buffer country-specific shocks. The reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing – though to a limited extent – elements of cross-country risk sharing. In particular, the banking union will help smoothing out some of the most relevant asymmetric shocks that can affect the euro area, i.e., the financial crises. Nevertheless, further elements of risk sharing are probably needed. Proposals to create a sort of rainy-day fund for the euro area present major practical difficulties – associated, inter alia, to the uncertainty characterising the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations – though not without implementation issues – may be centralizing specific public functions. We argue that, among these, consideration should also be given to the creation of a euro-wide, notional-defined contribution pension scheme.
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