The case for a European Unemployment Insurance

by Miroslav Beblavý & Vladimír Bilčík

 

A debate dating back to the 1970s

Since the 1970s, we are aware of the fact that the European Monetary Union requires alternative and transnational mechanism to address asymmetrical shocks and cyclical economic fluctuations. While Europe is slowly recovering from one of the most severe crises it has ever experienced, there have been widespread calls for reform. These calls have focused especially on the EMU, whose fundamental weaknesses were uncovered in the global financial crisis of 2008 and the subsequent Eurozone crisis that lasted for several years.

With the introduction of the EMU, countries lost control over their monetary policy, which is now managed centrally. National fiscal policy has remained in place and been viewed as a mechanism to prevent economic shocks and to mitigate their impact on employment and incomes. Yet during the crisis, this combination of monetary and fiscal policy proved to be insufficient. Other instruments, including labour mobility or wage flexibility, were not so powerful either. Market failures, current account imbalances and spillover effects have raised additional concerns about the solidity of EMU and re-focused attention on EMU reform. Whereas most Member States are equipped with powerful automatic stabilisation mechanisms that are very responsive to shocks, the EMU does not have such an instrument.

While there is a broad expert agreement that the EU (or at least the Eurozone) would benefit from a macroeconomic stabilization function and the 5 Presidents’ Report gave this argument political support already back in 2015, there has been no decisive action by the Juncker Commission on either the European Unemployment Benefit System (EUBS) or any other form of stabilization instrument. The new Commission should move this issue forward and propose concrete follow-up action.

A case for EUBS

In previous research (Beblavý, Marconi and Maselli 2015), we concluded that large shocks are possible and that they have dramatic social consequences. We further explained that unemployment insurance “[…] represents a type of expenditure that is quintessentially anti-cyclical; it has a (presumably) good fiscal multiplier and it is activated automatically in the event of recession.”

In  more recent work (Beblavý and Lenaerts 2017), we concluded that an EUBS would be a complement rather than a substitute for the other instruments and market mechanisms. An EUBS can be designed in many ways, for achieving specific policy objectives. A fundamental distinction that can be made is that between the equivalent and genuine EUBS variants. Both the genuine and equivalent EUBS variants have their merits, and the choice of one of them would be based on political grounds.

A genuine EUBS pays out benefits directly to any eligible unemployed individual and collects contributions from employers and employees (who contribute an equal share). Genuine EUBS function continuously. These variants would Europeanise the existing national schemes and thus require considerable harmonisation among them. Harmonisation and minimum standards would be essential for the stabilisation capacity of the EUBS and would help to mitigate moral hazard.

Equivalent EUBS variants function very differently: all financial transfers would occur between the supranational fund and the Member States (which would only receive a pay-out when the EUBS is triggered). The equivalent EUBS would thus ‘reinsure’ the existing national unemployment benefit schemes (NUBS). Equivalent EUBS could leave a lot of flexibility to the Member States, but this crucially depends on the extent to which conditions are imposed on how governments can spend the funds received from the supranational fund and whether there are minimum standards for the NUBS.

A EUBS could contribute to macroeconomic stabilisation and efforts to address unemployment, encourage labour mobility, stimulate upward convergence and support the further development of ‘Social Europe’ along several dimensions. In general, the stabilisation impact of an EUBS is found to be relatively limited due to the small scale of the scheme (which would typically be less than 1% of EU GDP). Equivalent EUBS variants generally perform better in stabilisation terms than genuine EUBS variants. This result can be explained by the focus of the equivalent EUBS on the crisis years, while genuine EUBS would operate continuously.

Other findings that result from the simulations are that experience rating and clawback are effective mechanisms to prevent permanent transfers.

Conclusion

The interdependence of European economies, underlined by the functioning of the single market, leads us to believe that effective pushback against looming crises and threats requires a Europe-wide shock absorber. It brings to the forefront the current political debate on creating the post of a European Finance Minister, a European Tax Authority and European Budget Council.

We argue that one of the shock absorbers is an EUBS, but in order for it to be effective, we need to strive for minimal labor market harmonization. In this respect, given that harmonizing national benefit scheme systems may be challenging, an equivalent EUBS seems the most plausible as it requires the least harmonization.

 

 

Vladimír Bilčík is the second-listed candidate of Progressive Slovakia & TOGETHER-Civil Democracy for the European parliamentary election. He heads the EU program at the Research Centre of the Slovak Foreign Policy Association (SFPA) and lectures on European integration and international relations at Comenius University in Bratislava. He has researched and published on Central European EU member states, EU foreign and security policy and European neighborhood policy. Vladimír Bilčík has studied at Swarthmore College (BA), the University of Oxford (MPhil), and the Institute of Political Science of Charles University, Prague.

Miroslav Beblavy is Senior Research Fellow at the Centre for European Policy Studies, Brussels, where he heads the unit “Jobs and Skills”. Since 2017 he is the Chairman of the Slovakian party SPOLU – civil democracy. Miroslav Beblavy is a Member of the Slovak Parliament. Between 2002 and 2006, he was the State Secretary of the Ministry of Labour, Social Affairs and Family in Slovakia. Until 2014, Miroslav was also the Associate Professor of Public Policy at the Comenius University in Bratislava, Slovakia. His areas of interest include employment and social policy, education policy, fiscal policy, governance and corruption. He holds an M.Litt. and a PhD in Economics from the University of St Andrews, and a B.A. in Finance from Economic University, Bratislava.

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