This document discusses the European Commission's proposal for a European Stabilization Function (EISF) and debates around it. The EISF aims to prevent pro-cyclical fiscal tightening during economic shocks, reduce market overreactions, and contribute to EU cohesion. It would provide loans to Member States facing large unemployment shocks, proportionate to shock severity, to fund public investments with interest subsidies. While some are skeptical due to perceived lack of need, the document argues asymmetric shocks do occur and risk-sharing would be improved with public and private mechanisms. The design aims to target severe shocks and avoid moral hazard through eligibility conditions. Charts show many Member States could benefit from the EISF,

1. A European
Stabilisation Function :
A difficult debate
Carlos Martinez Mongay
DG ECFIN, European Commission
OECD-France Stratégie Workshop
5 February 2019

2. Background to the Commission proposal
• Five Presidents Report 22 June 2015
• Commission Reflection Paper
on EMU deepening 31 May 2017
• Commission Communication
on new budgetary instruments 6 Dec. 2017
• Commission proposals
for the next EU budget 31 May 2018
– Reform delivery Tool
– European Investment Stabilisation Function (EISF)
2

3. Main objectives
• Foster more resilient public investment paths and
avoid pro-cyclical fiscal tightening
• Prevent excessive market reaction to shocks and
financial disruptions
• Contribute to the cohesion and integrity of the
Union
• (Tried to build a realistic proposal. But …)
3

4. 4
Eligible Member State faces large unemployment shock
Commission borrows on markets and on-lends the funds to MS
with an interest rate subsidy. Size of the loan is automatically
proportioned to severity of shocks
MS spends the money on eligible public investments
At maturity: MS reimburses loan
How does the EISF work?

5. 5
Sceptics’ views
• There is no need because there are few asymmetric
shocks
→ Empirically one finds significant asymmetric business
cycle. Moreover, there is also a case for smoothing
common shocks.
• There is no need because proper financial integration
can provide enough risk-sharing
→ Genuine financial integration is still some way off.
Moreover, there is some evidence that private risk-
sharing works better if coupled with public risk-sharing.

6. 6
Sceptics’ views
• There is no need if only Member States ran prudent
fiscal policies providing enough national fiscal space
→ For severe shocks, even MS respecting the rules may
be constrained. Moreover, highly indebted MS will be
constrained in running countercyclical policies for a
long time.
• Any scheme presented as providing stabilisation will
generate moral hazard and permanent transfers
→ Design features matter: targeting severe shocks;
eligibility conditions; nature of support.

7. 7
A timely focus on large shocks: Share of eligible MS
Source: Impact assessment of the EISF proposal, AMECO and DG ECFIN calculations.
Double condition on the unemployment rate
 Above its average value in the past 15 years Level condition
 Significantly increasing: Yoy increase > 1 pp Change condition

8. 8
All MS may benefit, some more often
1985q1-
1986q4
1991q2-
1995q3
2002q3-
2005q1
2008q3-
2014q1

9. 9
A limited (but realistic) size
Source: Impact assessment of the EISF proposal, AMECO and DG ECFIN calculations.

10. 10
State of play
• No take up by the Council
→ No consensus on stabilisation at Eurosummit
→ Current political focus on convergence and
competitiveness instrument (useful but no substitute)
→ Technical discussions to continue on stabilisation
function (e.g. on unemployment reinsurance funds)
• Debate might gain traction when discussing
simplification of fiscal rules? Or next crisis? …

11. Thank you