Fiscal stabilization in EMU: proposition of an automatic mechanism

Since the EMU members have abandoned their national monetary policies and their exchange rate such as adjustment mechanisms, they search a solution to protect them from shocks, and especially from country-specific shocks. This implies a limited role to asymmetric shocks regulation as monetary policy is common. Moreover, European tabour markets are sufficiently rigid that stabilization is an useful intervention. Regions suffering therefore from asymmetric shocks might need to turn more to fiscal stabilization to buffer shocks. In fact, the need for stabilization is only based on cyclical asymmetric shocks, called asymmetric hazards too. Under these conditions, we propose an automatic mechanism that implies fiscal flows according to asymmetric hazards. There are transfers between countries which positive hazards and the one which have negative hazards. The proposed mechanism respects european financial constraints since it is include in European budget at constant size. It is shown in this paper that effective stabilization can be achieved indeed with an estimated annual cost of only 0, 14% of European GDP Moreover, this mechanism has no redistributive effect and no moral hazard.