Mimicking a Buffer Fund for the Eurozone

Paul van den Noord

Published: June 2020

Eurozone fiscal buffer fund could be set up to finance transfers to countries triggered by the cyclical movements in their unemployment rate. Countries would contribute a fixed share of their GDP to the fund in good times. The receipts from the fund are found to significantly mitigate the fiscal contractions during downturns and thus help bolster the stability of the Eurozone economy by counteracting the pro-cyclicality of fiscal policies. To quantify the extent of macroeconomic stabilisation thus achieved, estimates for the ‘fiscal multipliers’ are superimposed on the assumed change in fiscal policies. It suggests that a Eurozone buffer fund would have significant stabilisation properties. The computations are carried out using two databases – the European Commission's AMECO database and the OECD Economic Outlook database -- by way of a robustness check.