The political economy of reinsurance

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. I argue that in the EU, we can see an alternative emerging: a macroeconomic system of re-insurance. The euro area has increasingly the capacity to insure the ultimate insurers of citizens, notably the member states, against catastrophic risks (for instance the recovery fund) and against risks that are generated by monetary-financial integration endogenously (for instance, bailout funds). This evolution is a viable macroeconomic alternative on which member states with very different fiscal traditions can agree. It is less clear whether re-insurance has the same loyalty-generating effects among citizens as co-insurance in a federal polity.