Creating A Union With A “Human Face”: A European Unemployment Insurance

The latest economic crisis has shown that the claims of the early 2000s that the EU’s common monetary policy would act as a stabilising force for the overall economic cycle has proved unrealistic. Meanwhile, national welfare systems have been tremendously weakened. The recession has thus unveiled the “original sin” of the Economic and Monetary Union (EMU) – the lack of fiscal coordination and solidarity among its members. In this context, the ambitious proposal of creating a European system of automatic fiscal stabilisers has resurfaced. A European Unemployment Insurance (EUI) for the EMU would be a feasible and effective tool to cushion the impact of an economic downturn, stimulating aggregate demand by supporting disposable incomes and reducing the pressure to cut fiscal stabilisers in a pro-cyclical way (the so called “race-to-the-bottom” effect). Most of all, it would give a “human face” to the EMU, by tackling the existing imbalances through policies with a far-reaching impact on the everyday lives of citizens.

What Does The EUI Consist Of?

A basic EUI is a targeted and temporary fiscal stabiliser. It addresses all employees in the Eurozone, who have contributed to national insurance systems for at least 12 months prior to unemployment. Taking into account the differences in GDP per capita among the EMU Member States, the EUI would provide an average insured wage of around 80 percent of the average national wage, with a replacement payment of 50 percent of the insured wage for a limited timeframe (12 months). The scheme would be financed with taxes paid both by employers and employees and collected through national unemployment insurance administrations. A common unemployment insurance should be a flexible tool, able to run surpluses or deficits in individual years, depending on the overall economic performance of the Union. The EUI would complement rather than replace already existing national fiscal stabilisers. Hence, States would be free to use national funds to add further resources to the scheme. Simulations have revealed that a basic EUI would have cost around €50 billion per year over the period 2000-2013 (which means 0.5 percent of the total GDP in the Eurozone).

Weaknesses

There are several reasons behind the opposition to the implementation of a basic EUI. The risk that permanent transfers would emerge among Member States is an important source of concern. Some analysts warn that a basic EUI would make some States (Austria, Germany and the Netherlands) net contributors, and others (Spain, France and Latvia) net recipients. Another fiscal problem regards the way the scheme would be financed. Some simulations have proposed a 1.57 percent uniform contribution rate on employment income for the baseline scenario as a way to assure revenue-neutrality to the system as a whole. Yet, this would create strong imbalances, since a uniform contribution rate does not assure revenue-neutrality at the Member State level. The risk is that some countries would be forced to demand higher taxes on wages from their taxpayers. Fiscal obstacles are accompanied by institutional ones, the most important being the high fragmentation of the EMU’s labour markets. Shaping a “one-size-fits-all” model seems rather unrealistic to many.

Additionally, establishing a common unemployment insurance for the Eurozone requires a certain legal framework to be set. Although the Lisbon Treaty envisages “solidarity” as one of the key elements which binds all the members of the Union, article 125 of the Treaty on the Functioning of the European Union (TFUE) also prevents fiscal transfers among Member States. For this reason, the implementation of the scheme would imply either a change of the Lisbon Treaty or at least a new intergovernmental agreement. Another argument opposing the EUI is the so-called “moral hazard”, both ex-ante and ex-post. The former means that countries could be tempted to reduce domestic stabilisers to benefit more from the common scheme. The latter warns that national governments could use funds for purposes which are not suitable for stabilisation, but which are more desirable in political terms. Finally, some analysts claim that a basic EUI would create disincentives to reform national labour markets, while others question its stabilisation impact. In precise terms, they argue that the scheme would better address short-term rather than long-term unemployment, thus being more effective during short recessions than in long downturns.

Why Is The EUI A Desirable Tool?

A common unemployment insurance for the Euro area nonetheless seems a necessary step to be taken for several reasons. A basic EUI would have a strong stabilisation impact. Several studies have revealed that the scheme would have absorbed 36 percent of the unemployment shock in 2009. Moreover, it would increase the number of people covered by an unemployment benefit scheme, for instance the self-employed – representing 39 percent and 27 percent of total workers in Greece and Italy respectively – who are often excluded from any basic unemployment protection system. Permanent transfers can be tackled as an issue by setting precise thresholds and criteria that do not reduce too much the generosity of the scheme. Furthermore, effective mechanisms can be created in order to avoid the emergence of “moral hazard”. On the one hand, a “rulebook” for macroeconomic stabilisation policies could be established, setting agreed minimum standards as well as effective mechanisms, which could even lead to the suspension of a country’s participation in the scheme in case of persistent violations of those standards. On the other hand, in order to prevent ex-post moral hazard, funds should be earmarked in a way ensuring that they are spent effectively by preventing cuts in unemployment benefits schemes. The EUI would also be a powerful driver for structural labour market reforms. It would increase the incentive for making labour markets more flexible, since some of the short-term costs will be covered at the EU level. Additionally, as States will still hold primary responsibility for tackling long-term unemployment, these costs will not be shifted to the other members. Reforming the EMU labour markets would strongly reduce existing fragmentation, leading to a higher harmonisation within the Eurozone. A convergence towards best practice models in the EMU – in terms of generosity and stabilisation capacity – would not only smoothe existing differences but also limit the discrepancies in wage developments. A more integrated social welfare system will definitely improve the functioning of the EMU, boosting labour mobility and making the conduct of monetary policy easier.

Giving A “Human Face” To The EU

A basic, targeted and temporary EUI represents a feasible and effective tool to tackle future asymmetric shocks within the EMU. It would give a “human face” to the EU integration process, with policies that have a concrete and far-reaching impact in the everyday lives of the EU’s citizens. Making social policies and employment among the main pillars of the EMU would ensure that extra labour market flexibility is balanced by adequate levels of social protection. A renovated debate on a basic EUI would thus help to address the Eurozone’s weaknesses and to strengthen the long-term sustainability of the common currency. An EUI would not be the silver bullet for all the EMU’s fiscal problems, but it could definitely give a clear signal that the union is moving ahead and not going into reverse.