The political economy of reinsurance

Abstract

Do the euro area reforms over the long decade since 2008 add up to a system of risk-pooling among member states that share a common currency? Most political economists see the macroeconomic policy architecture as incomplete. The standard for completeness is a fiscal federation in which central and state budgets form a co-insurance scheme for citizens. However, the argument here is that we can see an alternative emerging in the EU: a macroeconomic system of reinsurance. The euro area has increasingly the capacity to insure the ultimate insurers of citizens, the member states, against catastrophic risks and systemic instability that would overwhelm national capacities. It does so in a variety of ways, not confined to budgetary transfers. In contrast to a fiscal federation, this evolution is a viable macroeconomic alternative on which member state representatives with very different fiscal traditions can agree. It is less clear whether reinsurance has the same loyalty-generating effects among citizens as co-insurance in a federal polity.