This paper examines the future design of shock facilities by the European Commission, and makes broader suggestions for a more general shocks architecture.
The European Commission has put in place various shock absorbing schemes most recently the FLEX, V-FLEX and Food facility initiatives. Recent studies have suggested a number of strengths and weaknesses in the past schemes and suggested the initiation of new shock compensatory schemes.
This report discusses a number of issues. We first review the recent literature on the impact of shocks on development in order to appreciate the efforts to address the impact of shocks. We then review and provide a statistical analysis of critical expenditures and vulnerability to understand what happens to government spending categories when crises hit economies. We then include a review of the range of policy options open to countries to address crises. A major part of this paper includes a review of existing shock facilities and lessons learned.
This sets the stage for a discussion on a range of assessment criteria against which we would consider in any new EU shock absorber scheme. We discuss a large number of alternatives as part of three broad options and analyse these including through numerical simulations. We provide specific comments and suggestions on trigger variable thresholds, and scale of the facility and we suggest that payments should be dependent on resilience.