Cross-border risk sharing after asymmetric shocks: evidence from the euro area and the United States

This section presents empirical evidence on the shock absorption capacity of the different channels of cross-border risk sharing in the euro area. The surge in economic divergence since the crisis has turned attention to the available cross-border mechanisms to smooth consumption in the face of asymmetric shocks. The main channels considered are: private risk sharing, through access to cross-border capital and credit markets and other cross-border factor income such as labour compensation; and public risk sharing, through cross-border fiscal transfers (public stabilisation through domestic means is not considered). This section shows that Economic and Monetary Union has likely facilitated cross-border shock absorption through private risk sharing, even taking into account the impact of the crisis on the financial sector. However, a direct comparison with the shock absorption capacity across US states shows that the size of the asymmetric shock that remains unsmoothed in the euro area is very high. The difference is mainly due to much less developed capital and labour market cross-border channels in the euro area. Therefore, enhancing private risk sharing among the euro area Member States, especially through capital markets, remains a policy priority.