Do fiscal transfers or markets contribute more to stabilization?

Martin Sandbu reports from the FT:

IMF research shows there is indeed more risk-sharing in federal countries such as the US and Germany. Eighty per cent of local economic fluctuations are smoothed in those countries, against 40 per cent between eurozone countries. In other words local consumption suffers only 20 per cent of any hit to local GDP (against 60 per cent for eurozone countries). Most of this smoothing, however, happens through private channels. Banks, credit markets and investments insulate disposable resources. Fiscal insurance, in contrast, only compensates for 15 per cent of local downturns in the US, and just 10 per cent in Germany. Daniel Gros has concluded that achieving US-style fiscal risk-sharing “would be of very limited usefulness” to absorb shocks in the eurozone.

The (gated) article is of interest more generally.  I look forward to Sandbu’s new book, Europe’s Orphan: The Future of the Euro and the Politics of Debt, forthcoming from Princeton University Press this October.