Of the many good ideas currently being discussed in Europe, the most interesting proposal is to let national unemployment schemes manage the regular business cycle, and to provide European financing to extend the duration of unemployment benefits during a crisis period.

The joint behaviour of US aggregate consumption and saving over the period 20072009, and notably the pronouned U-shaped pattern of consumption together with the rise in saving, are difficult to reconcile with the view that financial markets are frictionless. We propose an alternative framework...