Sectoral Structure, Risk Sharing and the Euro

Under the prospects of productive specialization, the degree of success of the euro was seen since inception as closely linked to the development of effective risk-sharing mechanisms across union members. Without shared fiscal resources, financial integration was expected to play a leading role in this respect. This paper documents the failure in the task of 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 conductive for income risk-sharing across euro members, while it has favored 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 that the specialization split has had differential impacts on sector productivity, affecting negatively to euro members specializing in low-medium technologies, and so helping to make the monetary union a club of less equals.