A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Andor, László et al. Article — Published Version Designing a European unemployment insurance scheme Intereconomics Suggested Citation: Andor, László et al. (2014) : Designing a European unemployment insurance scheme, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 49, Iss. 4, pp. 184-203, http://dx.doi.org/10.1007/s10272-014-0500-4 This Version is available at: http://hdl.handle.net/10419/106778 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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The contributions to this Forum explore the benefi ts expected from a European unemployment insurance scheme and discuss the diffi culties in establishing such a policy. László Andor Basic European Unemployment Insurance – The Best Way Forward in Strengthening the EMU’s Resilience and Europe’s Recovery The recent European elections visibly strengthened Euro- risk of losing sight of the continuing fragility of the EMU and sceptic forces in various EU member states and penalised its bias towards internal devaluation as the predominant mainstream parties for incremental and largely contrac- mechanism of adjustment to macroeconomic shocks. tionary responses to the long fi nancial and economic cri- sis. There are some obvious conclusions the dominant and After the March 2014 agreement on a Single Resolution pro-European centre-left and centre-right groups need to Mechanism as the pinnacle of a banking union, some seem draw from this experience. to consider the process of EMU reform as fi nished and are content to shelve the other elements of the 2012 Four Pres- It is crucial to understand that the divergence that has de- idents’ report “Towards a genuine Economic and Monetary veloped within the euro area between core and periphery Union”. is a threat to the existence of the single currency and to the stability of the EU as a whole. Consequently, there is a need Settling for short-term budgetary leeway and postponing for further strengthening of the Economic and Monetary further systemic reform of the EMU until the next moment Union (EMU) architecture, and in particular to strengthen of crisis is a reliable recipe for minimal growth, for ongo- its social dimension. Ideally, the next period should see a ing uncertainty about the EMU’s future and for further in- forward-looking, though limited, mechanism of solidarity creases in citizens’ disillusion with Europe. The approach that would strengthen people’s and markets’ confi dence in of overselling weak solutions has been tested with the 2012 Europe’s monetary and political union. Compact for Growth and Jobs and brought results in the 2014 European elections. Post-election momentum for reform In order to strengthen economic confi dence in Europe As the new European Parliament and Commission are be- and people’s trust in the European project, further seri- ing formed and key priorities for the next fi ve years are be- ous steps are needed to strengthen the EMU’s resilience ing discussed, discussion is growing about the possibilities against fi nancial and economic shocks. In particular, the of reforming the existing fi scal rules of Europe’s EMU or ap- EMU needs to become able to cope with economic shocks plying them more fl exibly. Greater attention is being paid, in a way that would be acceptable from the viewpoint of the in particular, to the importance of investment for economic EU’s Treaty objectives such as balanced economic growth, growth and consequently for debt sustainability. full employment and social progress. However, in focusing their debates on greater fi scal fl exibil- A recognition that can no longer be avoided is that making ity in the short term, Europe’s political leaders run a major the EMU more resilient requires equipping it with a well- Intereconomics 2014 | 4 184 Forum designed mechanism of fi scal transfers between member Unlike the global fi nancial crisis of 2007-09, the second states using the euro. Through such a scheme, it should recession of 2011-13 was specifi c to Europe. When the be possible to create a European safety net for the welfare global crisis escalated in autumn 2008, following the fall of safety nets of individual member states, strengthening the Lehman Brothers, European governments agreed a coor- ability of national governments to support an economic re- dinated stimulus known as the European Economic Recov- covery. ery Plan, amounting to €200 billion or 1.5 per cent of GDP, including through temporarily increased defi cits of national A conclusion which I draw from several years of expert de- budgets. bates on the issue of possible EMU-level shock absorb- ers is that the best option would be a scheme where EMU Governments paid unemployment benefi ts to people who member states share part of the costs of short-term unem- lost jobs, tried to maintain investments and refrained from ployment insurance. raising taxes. This stimulus helped Europe to overcome the fi rst deep recession, but unfortunately could not be fol- A basic European unemployment insurance scheme would lowed up in many countries when the sovereign debt crisis provide a limited and predictable short-term fi scal stimulus hit in 2010-11. to economies undergoing a downturn in the economic cy- cle – something that every country is going to experience The response to the Greek debt crisis in 2009-10 already sooner or later. showed the limitations of the EMU architecture to deal with threats to its stability. An emergency loan was unnecessar- With its automatic and countercyclical character, a basic ily delayed to avoid interference with a regional election in a European unemployment insurance scheme could boost major member state. Thus the programme had to be much market confi dence in the EMU and thus help to avoid re- larger than would have been the case if Europe had taken peating vicious circles of downgrades, austerity and inter- collective action more promptly. Some elements of the nal devaluation in the eurozone. It would help to uphold do- conditionality turned out to be excessive or even counter- mestic demand and therefore economic growth in Europe productive. as a whole. Instead of containing the crisis, the Greek bailout was fol- Like more fl exible interpretation of the EMU’s fi scal rules, lowed by similar interventions in Ireland and Portugal with- partial pooling of fi scal risks at the EMU level would provide in one year. Speculation continued about sovereign debt national governments with greater fi scal leeway. However, restructuring and about possible exit of various countries the big advantage of achieving countercyclical stimulus on from the eurozone, meaning that interest rates in the euro- the basis of cross-country transfers rather than more fl ex- zone “periphery” climbed to very high levels. ible rules for national budgets is precisely in the collective character of the EMU-level scheme. Debts from fi nancial markets were replaced by debts from offi cial sources, which turned the eurozone into a club of While individual stimulus by countries with high debt-to- GDP ratios may run the risk of triggering further fi nancial crises, solidifi cation of the monetary union through the creation of a common fi scal capacity would reduce un- László Andor, European Commissioner for Employ- certainty about individual countries’ solvency both in the ment, Social Affairs and Inclusion, Brussels, Bel- short and in the longer term. In addition, a basic European gium. unemployment insurance scheme would strengthen the EMU institutionally, politically and in terms of social cohe- Sebastian Dullien, European Council on Foreign sion. Relations; and HTW Berlin, Germany. The end of EMU 1.0 H. Xavier Jara, Institute for Social and Economic Research, University of Essex, UK. Since the onset of the sovereign debt crisis in 2010, eco- nomic developments in Europe decoupled from the rest of Holly Sutherland, Institute for Social and Economic the industrialised world. Further macroeconomic instability Research, University of Essex, UK. and a second European recession can only be explained by the incomplete design of the EMU. The inherited model Daniel Gros, Centre for European Policy Studies, lacks the key instruments which countries historically used Brussels, Belgium. to generate a recovery and offers nothing to replace them. ZBW – Leibniz Information Centre for Economics 185 Forum debtors and creditors, set against each other. The elected sis became an existential crisis of the monetary union, and governments of Greece and Italy were replaced with tech- of the EU as a whole.