In a deflationary environment, a protracted period of low or negative growth will cause the decline of both human and fixed capital, which will in turn undermine growth potential. There is evidence that unemployment caused by the cyclical downturn is becoming structural in the euro area (European Commission 2015). Given the very limited chances of overcoming such imbalances through increased labour mobility in the EU (Draghi 2014), a rule-based stabiliser mechanism becomes an appropriate solution.
If short-term shocks and private sector deleveraging cannot be mitigated by autonomous monetary policy, they have to be absorbed by fiscal policy. Structural reforms cannot be the main answer to cyclical developments. Fiscal instruments are needed not to replace but to supplement other adjustment mechanisms, like structural reforms and labour mobility (Enderlein et al. 2013).
An automatic stabiliser at the EMU level would help uphold aggregate demand at the right time (Delpla 2012), and it would prevent short-term crises from unleashing longer-lasting divergence within the monetary union (Chopin & Fabre 2013). It would provide an answer to the simple question of a disillusioned European voter: “Where is Europe when we need it most?”
At the same time, a fiscal stabiliser would not represent “more Europe” for its own sake and certainly not more intrusion of Brussels into national policy-making. It would constitute a mechanism that strengthens the autonomy of each Member State precisely by stabilising the EMU, on the basis of transparent rules.
The involvement of social partners in the governance of the fiscal capacity would provide a concrete meaning for the strengthening of the social dimension and the participatory principle, also addressing concerns about the democratic deficit and technocratic economic governance in Europe.
The main rationale for setting up such a stabilisation function for EMU is that sound fiscal policies at the national level can allow the automatic stabilisers to work more freely; however, these national fiscal stabilisers might not be sufficient to smooth the cycle within individual countries, maintain economic convergence and deliver the optimal fiscal stance for the euro area as a whole (Italianer & Pisani-Ferry 1994). This was the case during recent years when national budgets, even in countries with a sound underlying fiscal position, were overwhelmed in a very severe crisis, and the lack of national fiscal stabilisation in turn harmed the whole euro area.
Focusing fiscal transfers on mitigation of asymmetrically distributed cyclical shocks means that over the long term, all participating Member States are likely to be both contributors and beneficiaries of the scheme. But even if the balance is not exactly zero after a certain period of time, the capacity of the system to reduce the duration and deepness of economic crises would provide a more stable macroeconomic environment for all, sustain aggregate demand and therefore improve growth perspectives for the whole area.
A variety of models can be designed; however, a few key questions have to be answered. First: should the stabilisation mechanism compensate for income losses (based on the calculation of an income gap), or should it be linked to the rise of unemployment? Secondly, should the scheme function permanently (even if directions of transfers can frequently change), or should transfers be triggered by key indicators reaching a certain threshold (de facto semi-automatic stabilisation)?
5.1 An unemployment insurance scheme
The importance of unemployment as a driving indicator should be emphasised. A major advantage of basing an EMU-level shock absorber on short-term unemployment is that this indicator very closely follows developments in the economic cycle. It is easily understandable and it is easily and promptly measurable (as compared, for instance, to the output gap). People know very well that if periods of adjustment result in withdrawing support from the unemployed, the chances of new employment will diminish and the resulting human capital loss will just get greater, causing further damage to the growth potential of a country.
Common unemployment insurance in the EMU can be one of the possible instruments to improve the functioning of the single currency and, at the same time, to address the social divergences produced by the crisis. The idea and the concept of unemployment insurance is not new: in 1975, the European Commission put it forward in the Marjolin Report (European Commission 1975), arguing that such a mechanism for stabilisation and redistribution was needed if the project of a monetary union, proposed in the Werner Report (Werner 1970), was to be realised. The report suggested the option that such a scheme would generate transfers from regions with high structural unemployment to regions with low structural unemployment.
In the early 1990s, some already argued that such a scheme was necessary in view of the forthcoming monetary union, simulating its effects (Italianer and Vanheukelen 1993). They proposed a common unemployment benefit scheme, conducting an analysis at country level, and suggested that such a mechanism could be activated by a higher increase of the unemployment rates over the previous year greater than the average increase of the other EU countries, with a replacement rate of 70 %.
5.2 Recent proposals
After the establishment of the EMU, little attention was devoted to this option, until the euro crisis revealed its need.Footnote 3 The European Commission included reference to unemployment insurance as one form of automatic stabilisers in two key documents: first, in the Blueprint on the deep and genuine EMU and, 10 months later, in the Communication on strengthening the social dimension of the EMU. This also shows that the idea emerged primarily not from the social agenda of the EU but from the need to reform the EMU, in the wake of a Eurozone crisis which produced dire social consequences in large areas of the Eurozone periphery.
The idea of a basic European unemployment benefit scheme has been recently advocated by Sebastian Dullien, and it also has been analysed by the European Commission’s DG Empl with the involvement of a number of external experts. A scheme based on the concept of income insuranceFootnote 4 as one option has also been explored by the Commission, DG Ecfin.
Dullien (2013) suggested a scheme based on the payroll tax, insuring directly the unemployed across Europe and giving rise to a specific European fund which could run surpluses and deficits, according to the needs, therefore including the possibility of issuing debt.
Dolls et al. (2014) analysed different alternatives for a common unemployment insurance system for the euro area, quantifying the trade-off between stabilisation effects and degree of cross-country transfers. They suggested that contingent benefits could limit the degree of cross-country redistribution but might also reduce the desired insurance effects.
Beblavy and Maselli (2014) proposed a scheme open to all EU countries, not restricted to the euro area, of a maximum duration of 12 months, triggered by an increase of 2 % of the difference between the unemployment rate and the NAWRU, and include a clawback mechanism to prevent permanent transfers.
In 2014, the debate on automatic stabilisers entered the political arenaFootnote 5 feeding into the considerations of EMU reconstruction. The French Ministries of Finance and Economy published a brief in June 2014 (Trésor Economics 2014) supporting the establishment of common basic unemployment insurance, to consolidate euro area integration, improve the macroeconomic and financial stabilisation and move towards enhanced coordination of labour market policies. They suggested that such a scheme would need to be implemented in stages.
In November 2014, the Bank of Italy published a paper identifying the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible (Brandolini et al. 2014). The study derives empirically the combination of activation thresholds, experience rating, eligibility criteria and benefit generosity to define such a system giving rise to macro-cross-national transfers, activated by a trigger and with partial experience rating. The results of the simulations conducted suggest that even systems that do not redistribute resources between countries can have a considerable stabilisation impact in the medium run.
At the same time, also Deutsche Bank published a research briefing on this topic (Vetter 2014), stressing the problems of “moral hazard” among participating countries, arguing that mechanisms to prevent it would automatically reduce the stabilisation impact of the scheme and that the difficulties to “establish an equilibrium between net contributors and net beneficiaries in the long term” would reduce the chances of political acceptance.
In 2015, the European Commission has launched a major study to examine details and explore possible implications of EMU unemployment insurance.
In October 2015, the Italian Minister of Finance has stressed the need for “a European mechanism to mitigate the cyclical unemployment and its consequences” (Padoan 2015) and specifically proposed an unemployment insurance scheme, which would be feasible within the limits of the current treaties (MEF 2015). Such a scheme would increase convergence in labour market regulation, consolidate medium-term growth and prevent hysteresis effects. The key point of the Italian proposal is its sense of urgency accompanied by the argument that “such an instrument could be established without treaty changes”.