Specialization, risk sharing and the euro

Abstract:

Under the prospect of productive specialization, the degree of potential success of the euro since its inception was seen as closely linked to the development of effective risk-sharing mechanisms across EU members. Without shared fiscal resources, financial integration was expected to play a leading role in this respect.

This paper documents the failure in fulfilling this expectation: Along with an analysis of the evolution of specialization and risk-sharing, we present evidence supporting the claim that progress in financial integration has not been conducive to income risk-sharing across euro area members, while it might have favoured a specialization split between countries with low-medium and high technology productive structures.

As a result, monetary union members face higher income fluctuation risk without enhanced insurance protection. Additionally, evidence suggests a differential impact of the specialization split on sector productivity, contributing to making the monetary union a club of non equals.

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