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With disparities in national unemployment rates reaching record levels, the debate on fiscal stabilisers in Europe has gained new momentum. Can a European unemployment insurance scheme help to absorb asymmetric shocks and bring about the desired level of macroeconomic stabilisation? What should such an unemployment benefit system look like? The contributions to this Forum explore the benefits expected from a European unemployment insurance scheme and discuss the difficulties in establishing such a policy.
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Designing a European Unemployment Insurance
Scheme
With disparities in national unemployment rates reaching record levels, the debate on fi scal
stabilisers in Europe has gained new momentum. Can a European unemployment insurance
scheme help to absorb asymmetric shocks and bring about the desired level of macroeconomic
stabilisation? What should such an unemployment benefi t system look like? 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.
DOI: 10.1007/s10272-014-0500-4
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-
sceptic forces in various EU member states and penalised
mainstream parties for incremental and largely contrac-
tionary responses to the long fi nancial and economic cri-
sis. There are some obvious conclusions the dominant and
pro-European centre-left and centre-right groups need to
draw from this experience.
It is crucial to understand that the divergence that has de-
veloped within the euro area between core and periphery
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
for further strengthening of the Economic and Monetary
Union (EMU) architecture, and in particular to strengthen
its social dimension. Ideally, the next period should see a
forward-looking, though limited, mechanism of solidarity
that would strengthen people’s and markets’ confi dence in
Europe’s monetary and political union.
Post-election momentum for reform
As the new European Parliament and Commission are be-
ing formed and key priorities for the next fi ve years are be-
ing discussed, discussion is growing about the possibilities
of reforming the existing fi scal rules of Europe’s EMU or ap-
plying them more exibly. Greater attention is being paid,
in particular, to the importance of investment for economic
growth and consequently for debt sustainability.
However, in focusing their debates on greater fi scal fl exibil-
ity in the short term, Europe’s political leaders run a major
risk of losing sight of the continuing fragility of the EMU and
its bias towards internal devaluation as the predominant
mechanism of adjustment to macroeconomic shocks.
After the March 2014 agreement on a Single Resolution
Mechanism as the pinnacle of a banking union, some seem
to consider the process of EMU reform as fi nished and are
content to shelve the other elements of the 2012 Four Pres-
idents’ report “Towards a genuine Economic and Monetary
Union”.
Settling for short-term budgetary leeway and postponing
further systemic reform of the EMU until the next moment
of crisis is a reliable recipe for minimal growth, for ongo-
ing uncertainty about the EMU’s future and for further in-
creases in citizens’ disillusion with Europe. The approach
of overselling weak solutions has been teste d with the 2012
Compact for Growth and Jobs and brought results in the
2014 European elections.
In order to strengthen economic confi dence in Europe
and people’s trust in the European project, further seri-
ous steps are needed to strengthen the EMU’s resilience
against fi nancial and economic shocks. In particular, the
EMU needs to become able to cope with economic shocks
in a way that would be acceptable from the viewpoint of the
EU’s Treat y obje ctives such a s balance d economic growth,
full employment and social progress.
A recognition that can no longer be avoided is that making
the EMU more resilient requires equipping it with a well-
ZBW – Leibniz Information Centre for Economics 185
Forum
László Andor, European Commissioner for Employ-
ment, Social Affairs and Inclusion, Brussels, Bel-
gium.
Sebastian Dullien, European Council on Foreign
Relations; and HTW Berlin, Germany.
H. Xavier Jara, Institute for Social and Economic
Research, University of Essex, UK.
Holly Sutherland, Institute for Social and Economic
Research, University of Essex, UK.
Daniel Gros, Centre for European Policy Studies,
Brussels, Belgium.
designed mechanism of fi scal transfers between member
states using the euro. Through such a scheme, it should
be possible to create a European safety net for the welfare
safety nets of individual member states, strengthening the
ability of national governments to support an economic re-
covery.
A conclusion which I draw from several years of expert de-
bates on the issue of possible EMU-level shock absorb-
ers is that the best option would be a scheme where EMU
member states share part of the costs of short-term unem-
ployment insurance.
A basic European unemployment insurance scheme would
provide a limited and predictable short-term fi scal stimulus
to economies undergoing a downturn in the economic cy-
cle – something that every country is going to experience
sooner or later.
With its automatic and countercyclical character, a basic
European unemployment insurance scheme could boost
market confi dence in the EMU and thus help to avoid re-
peating vicious circles of downgrades, austerity and inter-
nal devaluation in the eurozone. It would help to uphold do-
mestic demand and therefore economic growth in Europe
as a whole.
Like more fl exible interpretation of the EMU’s fi scal rules,
partial pooling of fi scal risks at the EMU level would provide
national governments with greater scal leeway. However,
the big advantage of achieving countercyclical stimulus on
the basis of cross-country transfers rather than more fl ex-
ible rules for national budgets is precisely in the collective
character of the EMU-level scheme.
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-
certainty about individual countries solvency both in the
short and in the longer term. In addition, a basic European
unemployment insurance scheme would strengthen the
EMU institutionally, politically and in terms of social cohe-
sion.
The end of EMU 1.0
Since the onset of the sovereign debt crisis in 2010, eco-
nomic developments in Europe decoupled from the rest of
the industrialised world. Further macroeconomic instability
and a second European recession can only be explained
by the incomplete design of the EMU. The inherited model
lacks the key instruments which countries historically used
to generate a recovery and offers nothing to replace them.
Unlike the global fi nancial crisis of 2007-09, the second
recession of 2011-13 was specifi c to Europe. When the
global crisis escalated in autumn 2008, following the fall of
Lehman Brothers, European governments agreed a coor-
dinated stimulus known as the European Economic Recov-
ery Plan, amounting to €200 billion or 1.5 per cent of GDP,
including through temporarily increased defi cits of national
budgets.
Governments paid unemployment benefi ts to people who
lost jobs, tried to maintain investments and refrained from
raising taxes. This stimulus helped Europe to overcome
the fi rst deep recession, but unfortunately could not be fol-
lowed up in many countries when the sovereign debt crisis
hit in 2010-11.
The response to the Greek debt crisis in 2009-10 already
showed the limitations of the EMU architecture to deal with
threats to its stability. An emergency loan was unnecessar-
ily delayed to avoid interference with a regional election in a
major member state. Thus the programme had to be much
larger than would have been the case if Europe had taken
collective action more promptly. Some elements of the
conditionality turned out to be excessive or even counter-
productive.
Instead of containing the crisis, the Greek bailout was fol-
lowed by similar interventions in Ireland and Portugal with-
in one year. Speculation continued about sovereign debt
restructuring and about possible exit of various countries
from the eurozone, meaning that interest rates in the euro-
zone “periphery” climbed to very high levels.
Debts from fi nancial markets were replaced by debts from
offi cial sources, which turned the eurozone into a club of
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debtors and creditors, set against each other. The elected
governments of Greece and Italy were replaced with tech-
nocratic administrations as the democratically elected
ones were unable or unwilling to implement front-loaded
scal consolidation.
However, the sacrifi ce in itself did not lead to an economic
recovery, not even if structural reforms were introduced at
the same time. Countries experiencing fi nancial markets’
distrust could not unilaterally devalue, could not call upon a
lender of last resort and could not count on any fi scal sup-
port from other member states that would enable them not
just to survive but to stimulate economic recovery.
While the euro provided some shelter in the sense that
emergency lending was always agreed for member states
losing access to fi nancial markets altogether, the euro has
also been a trap, because member states could no longer
adjust to economic shocks through tailor-made monetary
policies and devaluation in their exchange rate, while at the
same time being subject to strict rules on fi scal policy.
The fi nancial fragmentation further deepened the core-
periphery divide within the euro area. The fi scal impact of
bank bailouts added to the fi nancial problems of sovereign
borrowers, and so contributed to the destabilising trend in
the eurozone. At the same time, the lack of confi dence in
the sustainability of the eurozone resulted in capital fl ight
from less stable countries towards more stable ones, caus-
ing further polarisation. The break-up of the eurozone be-
came a real threat.
In the absence of a fi scal stimulus, a lender of last resort
or revaluation within Europe’s “surplus” countries, coun-
tries experiencing balance of payment problems inevitably
needed to undertake measures to regain cost competitive-
ness and start attracting capital again. The only option for
the “defi cit” countries consistent with keeping the euro at
that juncture was to pursue deep internal devaluation (and
in some cases accept emergency bailouts) with clearly ad-
verse effects on employment and the social situation.
The sovereign debt crisis since 2010 and the fi scal consoli-
dation strategies implemented in response to it have sub-
stantially weakened the effectiveness of automatic fi scal
stabilisers at the national level, i.e. the ability of a state to
immediately act in a countercyclical way as tax revenues
drop and social expenditure increases. Unemployment in-
creased to 11 per cent in the EU and 12 per cent in the euro
area in 2013.
Because of the lack of a lender of last resort, a central
budget or at least coordinated policies aiming to uphold
aggregate demand across Europe, the sovereign debt cri-
sis became an existential crisis of the monetary union, and
of the EU as a whole. The incomplete EMU proved to be –
at best – a structure for fair weather, but not for a fi nancial
and economic crisis.
EMU reconstruction: fi rst steps
The EU only started to emerge from the nancial whirlpool
when the ECB announced that it would be actually ready
to act as a central bank in a crisis when the integrity of the
currency is challenged. In spring 2013, the Commission
proposed a more patient approach to fi scal consolidation,
which contributed to increasing domestic demand and
bringing the eurozone recession to end.
In 2012, the Presidents of the European Council, the Com-
mission, the ECB and the Eurogroup came forward with a
long-term plan about the reconstruction of the EMU. Mon-
etary reform became a key component of the EU recovery
strategy.
Coordination of fi scal and structural policies within the EU
was strengthened through the European Semester, the
Six-Pack, Two-Pack and the Treaty on Stability, Coordina-
tion and Governance in order to reassure fi nancial markets
of the member states’ commitment to the EMU. However,
many other elements of a deep, genuine, sustainable and
legitimate economic and political union remained remote.
The creation of a fi scal capacity at the level of the EMU
was clearly foreseen in the Blueprint for a deep and genu-
ine EMU, which the European Commission put forward in
November 2012. The subsequent report of the Four Presi-
dents specifi ed that such scal capacity should help the
EMU to be able to absorb economic shocks.
As a fi rst step in EMU reform, a banking union is in the pro-
cess of being implemented, which will hopefully relieve
pressure on government bailouts of major banks thanks
to the application of the bail-in principle and a Single
Resolution Mechanism at the European level, based on
a strengthened common rulebook. To the extent that the
banking union can be trusted to perform equally for all its
member states and their banks during fi nancial crises, it
would reduce the existing fi nancial fragmentation in the
Single Market.
However, our minimalist banking union will do little to miti-
gate the EMU’s bias towards internal devaluation as the
predominant adjustment mechanism during balance-of-
payments crises. Moreover, as long as sovereign debt lev-
els in Europe remain high, governments may still fi nd them-
selves forced towards pro-cyclical fi scal consolidation in
times of a downturn.
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A number of options for automatic fi scal stabilisers at the
level of the monetary union have been proposed in the liter-
ature. What most of them have in common is their focus on
mitigating short-term cyclical downturns occurring in parts
of the EMU as opposed to compensating for structural dif-
ferences among the EMU economies.
The idea of EMU-level automatic stabilisers is to be able to
respond to asymmetric shocks or endogenous pressures
in the monetary union and to uphold aggregate demand in
the short term, before factors of production can be reor-
ganised in the affected economy and recovery can resume.
In other words, the point is to maintain enough spending dur-
ing a downturn, before failed companies are turned around
or replaced by new ones and before workers who lost their
jobs can fi nd new employment. Fiscal instruments are need-
ed not to replace but to supplement other adjustment mech-
anisms, like structural reforms and labour mobility.
Structural reforms play an important role in responding
to crisis but they primarily provide a boost to long-term
growth potential, without a short-term capacity to stimulate
the economy. In the history of emerging economy fi nancial
crises, they always functioned in combination with curren-
cy devaluation.
Labour mobility in principle (in textbooks) offers a solution
to imbalances, but in reality it can only play a minor role,
especially in such a fragmented labour market as the EU.
The eurozone crisis has triggered new migration of work-
force, but often towards other continents, causing a long-
term loss of human capital for the EU.
Governments will never be able to offset an economic
downturn completely, and economic restructuring will
need to happen anyway. However, the point is to minimise
the overall economic and social damage, and to ensure
that Europes monetary fragility does not result in long-
term competitive disadvantage.
Focusing fi scal transfers on mitigation of asymmetrically
distributed cyclical shocks means that over the long term,
all participating member states are likely to be both con-
tributors and benefi ciaries of the scheme. But even if the
balance is not exactly zero after a certain period of time,
the effect that economic crises would be less deep and
last less long would be good for all countries.
What could basic European unemployment insurance
look like?
A major advantage of basing an EMU-level fi scal shock
absorber on short-term unemployment is that this indica-
tor very closely follows developments in the economic cy-
cle. It is easily understandable, and it is easily and prompt-
ly measurable (as compared to, for instance, the output
gap).
The fi scal risk of cyclical downturns could be pooled at
the level of the monetary union through basic European
unemployment insurance, which would replace the cor-
responding part of existing national schemes. The levels
of the contribution and of the benefi t should represent a
relatively low common denominator between the rules of
national schemes.1
The EMU-level scheme should clearly focus on cyclical un-
employment caused by a drop in aggregate demand, as
opposed to structural unemployment caused by skills mis-
matches, less effi cient labour market institutions and the
like.
For example, the basic European unemployment benefi t
would be paid only for the fi rst six months of unemploy-
ment and the amount would represent 40 per cent of the
previous reference wage. These exact parameters would
need to be discussed on the basis of thorough quantitative
analysis of their projected performance and in view of the
desired level of macroeconomic stabilisation.
The eligibility conditions of basic European unemployment
insurance should not be too strict, so that also workers in
short-term or part-time jobs could contribute and qualify
for corresponding support. But in any case there should be
clear conditionality in terms of the job search and training
effort.
Each member state would be free to levy an additional
contribution and pay out a higher or longer unemployment
benefi t on top of this European unemployment insurance.
What the European scheme would do is to ensure a fairly
basic standard of support during short-term unemploy-
ment.
Crucially, this basic European unemployment insurance
would help EMU member states to share part of the fi nan-
cial risk associated with cyclical unemployment. Citizens
would directly benefi t from EU solidarity at times of hard-
ship, and member states would be required to upgrade
1 The idea of a basic European unemployment benefi t scheme has
been pioneered and most clearly advocated by Sebastian Dullien (see
Sebastian Dullien’s contribution in this Forum), and since 2012 it has
been analysed by the European Commission’s DG EMPL with the in-
volvement of a number of external experts. Two conferences organ-
ised by the Bertelsmann Foundation in cooperation with DG EMPL
(October 2013 and June 2014) explored the underlying problems and
the available options in great detail.
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their employment services and labour market institutions
to the best EU standards.
The jobseekers would continue to interact with national
authorities (public employment services). However, every
month these national authorities would send to the Euro-
pean fund the basic contribution from all their employed
workers. Likewise, every month the European fund would
pay to the national authorities an amount corresponding to
the sum of all the basic European unemployment benefi t
payments to be made that month in the country.
In principle, each country would therefore make every
month an overall contribution and receive an overall pay-
ment from the European scheme. In practice, these two
could be offset and only the net balance would be paid.
The overall volume of such a basic European unemploy-
ment insurance scheme would be around one per cent of
GDP, mainly depending on the exact parameters such as
duration and level of the benefi t or the eligibility conditions.
Of course, the net transfers from or into any particular
country would be smaller, because drawdowns would be
offset by contributions and vice versa.
The question who is a net contributor and a net benefi -
ciary at any given point in time should be to some ex-
tent secondary. Sharing a currency really in many ways
means sharing a destiny, and the euro is meant to be ir-
reversible.
However, it is understandable that national politicians
would probably want to make sure that their country is not
permanently a net contributor, and especially that there are
no free-riders in the scheme, i.e. countries that would be
net benefi ciaries most of the time.
The risk of “lasting transfers” could be minimised through
two mechanisms, which already exist in federal unemploy-
ment insurance systems elsewhere in the world, namely
experience rating and clawbacks.
Experience rating means that the contributor versus bene-
ciary profi le of each member state in the scheme is moni-
tored, and the contribution or drawdown parameters can
be adjusted at the beginning of each period so as to bring
the member state closer to a projected balance with the
scheme over the medium term.
Clawbacks, on the other hand, neutralise net transfers ex
post, meaning that member states are allowed to be net
benefi ciaries for several years, but then their contribution
and/or drawdown rates are modi ed so as to compensate
for the net transfers that had occurred.
Why is basic European insurance the best option?
An automatic fi scal stabiliser in the form of basic European
unemployment insurance would have a meaningful mac-
roeconomic effect in counteracting a cyclical downturn. It
would be based on a few basic parameters agreed in ad-
vance, and its functioning would be entirely predictable
and calculable on the basis of these clear rules.
The parameters of the scheme could be adjusted in re-
sponse to actual experience. At the same time, govern-
ments, citizens and fi nancial markets would be able to rely
on the principle that an EMU country undergoing a cyclical
downturn receives a limited fi scal transfer to support the
cost of short-term unemployment.
The fact that the scheme would trigger countercyclical
transfers automatically and immediately is a major advan-
tage compared to bailout programmes or bank rescues.
These are always surrounded by uncertainty which pushes
up their cost. The basic European unemployment insur-
ance would be relatively cheap precisely because of its
automaticity.
The size, predictability and automaticity also make the ba-
sic European unemployment insurance scheme a better
alternative compared to discretionary fi scal instruments
where a fi scal transfer would be provided in exchange for
structural reforms. The “catalogue” of reforms and corre-
sponding fi nancial support under such discretionary in-
struments would be very hard to defi ne and the decision-
making process would be rather unpredictable, not to
mention the political tensions arising around the approval
of discretionary cross-country transfers.
The predictability, limited volume and limited duration of
scal transfers would also make a basic European un-
employment insurance scheme a much safer option than
various scenarios for mutualisation of eurozone countries’
sovereign debt. This feature is particularly important when
member states consider themselves in the role of a con-
tributor rather than a benefi ciary.
Finally, a scheme of automatic short-term fi scal transfers
between countries is clearly a better alternative compared
to simply granting individual member states greater budg-
etary leeway thanks to a more generous interpretation of
the EU’s existing fi scal rules.
Exempting investments in fi xed assets and human capi-
tal from the calculation of the excessive defi cit would be a
growth-friendly move in the short term. However, it would
be a short-sighted and insuffi cient step, notably in view of
the EMU’s recent experience of systemic crisis.
ZBW – Leibniz Information Centre for Economics 189
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the European Commission, the European Central Bank
and the Eurogroup.2
At lea st in the i nterpretation of some observe rs, scal ca-
pacity” is understood as introducing automatic stabilisers
at the European level. One of the often-mentioned options
2 See H. Van Rompuy: Towards a Genuine Economic and Monetary
Union, Report by the President of the European Council, Brussels
2012, European Council.
Since the onset of the euro crisis, the debate on fi scal sta-
bilisers in Europe has gained new momentum. Over re-
cent years, the term “fi scal capacity” for the euro-zone
has popped up in a large number of offi cial EU docu-
ments, including the European Commission’s roadmap
for a more complete monetary union1 and the “four presi-
dents’ report” by the presidents of the European Council,
1 See European Commission: A Blueprint for a Deep and Genuine Eco-
nomic and Monetary Union, Brussels 2012.
Greater leeway for national fi scal policies could temporar-
ily support growth in some countries which are relatively
close to the core of the eurozone, but it would not help
those who have just exited adjustment programmes or are
still implementing them.
Crucially, an “investment clause” or a softer compara-
ble mechanism would not really strengthen the resilience
of the EMU against fi nancial crises or other asymmetric
shocks. It would not fi x the problem of eurozone govern-
ments facing the fi nancial markets all on their own and be-
ing forced to respond to downturns with pro-cyclical fi scal
consolidation. In other words, it would be a poor substitute
for a genuine, sustainable solution.
If we really want to improve the functioning of the EMU, we
need to touch the fundamentals: the ECB’s mandate, and
especially the absence of a eurozone budget even at a time
when national fi scal policies are constrained by a tight fi s-
cal framework.
Conclusion
Given the constraints that membership of a monetary union
implies, it is fundamental to recreate possibilities of macro-
economic adjustment inside the eurozone whereby aggre-
gate demand and economic growth can be maintained.
If short-term shocks and private sector deleveraging can-
not be mitigated by autonomous monetary policy, they
have to be absorbed by scal policy. Structural reforms
cannot be the main answer to cyclical developments.
The tighter the coordination framework for national fi scal
policies in the EMU, the greater the need for a fi scal capac-
ity at the EMU level, unless Europe is content to completely
abandon the idea of countercyclical economic policy, and
with it the ambition of sustained improvements in employ-
ment and social outcomes.
However, given the still elevated levels of public debt in the
eurozone, the simple relaxation of requirements on nation-
al budgets would not be a sustainable solution. Expansion-
ary fi scal policy needs to be based on greater solidarity
between member states, otherwise we risk a re-run of the
recent fi nancial crisis.
An automatic stabiliser at the EMU level would help up-
hold aggregate demand at the right time, and it would
help prevent short-term crises from unleashing longer-
lasting divergence within the monetary union. It would
provide an answer to the simple question of a disillu-
sioned European voter: “Where is Europe when we need
it most?”
At the same time, a basic European unemployment insur-
ance scheme would not represent “more Europe” for its
own sake, and certainly not more intrusion by Brussels into
national policy-making. It would constitute a mechanism
that strengthens the autonomy of each mem ber state pre-
cisely by stabilising the EMU, on the basis of transparent
rules.
The coming fi ve years are probably the last opportunity for
a substantial reconstruction of the EMU. In its absence, a
de-construction will present itself as the more appealing
option for voters towards the end of the decade, with con-
sequences much more unpredictable than limited fi scal
risk-sharing in a basic European unemployment insurance
scheme.
Sebastian Dullien
The Macroeconomic Stabilisation Impact of a European Basic
Unemployment Insurance Scheme
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would be the introduction of a basic European unemploy-
ment insurance, which has been referred to in both of the
above mentioned documents and which has been further
elaborated in the European Commission’s concept for the
“Social Dimension of EMU”.3
This article discusses the idea of such a European basic
unemployment insurance, its potential macroeconomic
stabilisation benefi ts, and the main unresolved issues of
such a proposal.4 To this end, fi rst, the basic mechanism
of such an insurance scheme is described in detail. In a
second step, a simulation of macroeconomic effects is
presented under different assumptions. The fi nal sec-
tion outlines open questions and political concerns about
such an insurance system.
The basic idea
The underlying idea of the European basic unemployment
insurance is to introduce an unemployment benefi t sys-
tem at the European level that will replace part of the ex-
isting national schemes. Under such a system, a certain
share of contributions to unemployment insurance would
be paid to a European fund instead of into national sys-
tems. Under certain conditions, the unemployed in par-
ticipating member states would receive benefi ts from the
European system.
The European system would be designed in such a way
that it provides a basic unemployment insurance for
those who have been insured under the system for a cer-
tain number of months prior to unemployment. Bene ts
would be defi ned as a certain share of past earnings, up
to a certain limit defi ned as a share of a country’s median
income. These replacement payments would be limited to
a relatively short time frame, e.g. one year.
Benefi ts from European unemployment insurance would
be fi nanced by contributions based on wages and col-
lected through existing national unemployment insurance
administrations. National governments could decide to
top up the payments from the European level or extend
its coverage to other unemployed groups. If a country
decides on a top-up, these extensions would have to be
paid for by national funds, e.g. through national contribu-
tions to national unemployment insurance systems.
3 See European Commission: Strengthening the Social Dimension of
the Economic and Monetary Union, Brussels 2013.
4 This article builds heavily on the author’s earlier work on this topic
such as S. Dullien: Improving Economic Stability: What the Euro
Area can learn from the United States’ Unemployment Insurance,
in: Working Paper Stiftung Wissenschaft und Politik, Vol. FG 1,
No. 2007/11, 2007; S. Dullien: A European Unemployment Bene t
Scheme: How to Provide for More Stability in the Euro Zone, Güter-
sloh 2014, Bertelsmann Foundation.
Figure 1 illustrates this principle: in the speci c country
depicted, according to national rules, unemployment
benefi ts of 60 per cent of past earnings are paid inde -
nitely. Here, the European basic unemployment insurance
would pay 50 per cent of past income for up to 12 months
(the lightly shaded area) while national unemployment in-
surance would have to pay the rest (the darker area). From
the point of view of the unemployed, the introduction of
European unemployment insurance does not alter the
generosity of unemployment protection.
This set-up would assure a number of critical points. First,
it would make sure that the schemes generosity is auto-
matically adjusted to a country’s level of GDP per capita.
As the unemployed in poorer countries can be expected
to earn lower wages, their replacement payments would
also be lower in the case of unemployment. As the maxi-
mum benefi t level is tied to median income in a country,
maximum benefi ts in rich countries would be higher than
in poor countries.
Second, it would allow member states to keep a large
degree of discretion over the level of social protection in
their own country. If a country desires a higher level of
protection than is provided by the European unemploy-
ment insurance (e.g. as we have now in France, the Neth-
erlands or Germany), it could easily do so by topping up
the European benefi ts. The only constraint is that a single
country cannot cut the generosity of unemployment ben-
efi ts below that of the European insurance.
Third, the set-up prevents countries from shifting the
costs of long-term unemployment to partner countries.
As the basic unemployment insurance is only paid for a
limited period of time and only to those who had been in
Figure 1
Interaction of European unemployment insurance
with national unemployment insurance
Duration of unemployment in months
60
50
12
Benefits as a
percentage of
past income
National Unemployment
Insurance
European Unemployment
Insurance
24
Source: Authors calculations.
ZBW – Leibniz Information Centre for Economics 191
Forum
employment prior to unemployment, it is not paid to the
long-term unemployed.
Fourth, overall, the introduction of the system would leave
the fi scal burden for employees and business overly un-
changed. As the system just replaces part of already ex-
isting national systems both with regards to payouts and
contributions, the overall costs would remain unchanged
and, overall, the contributions towards unemployment in-
surance could be expected to remain constant.
As regards membership, ideally, the European unemploy-
ment scheme would be introduced at least for all euro
area countries. However, it could also be just introduced
for a sub-group of the euro area or for a larger group, in-
cluding countries that have a fi xed exchange rate against
the euro and hence could need some additional macro-
economic stabilisation.
Macroeconomic stabilisation
The proposed unemployment insurance would clearly
contribute to macroeconomic stabilisation within the
participating countries. In a downturn, the net amount a
country is paying into the system would fall as, fi rst, con-
tributions from this country fall with contracting employ-
ment and, second, payouts would increase with rising
unemployment. This would support purchasing power in
a country and hence stabilise GDP. In a boom, increas-
ing employment would lead to higher net payments into
the system, fi rst by higher contributions and, second by
lower payouts. This would drain purchasing power from
the country in question and limit overheating of the na-
tional economy.
While in principle such a stabilisation could also be pro-
vided by a purely national system that is allowed to bor-
row in fi nancial markets during a downturn, experience
of recent years tells us that this is not necessarily suffi -
cient. First, during the past few years, we have seen that
a downturn can be so severe and the related deterioration
of a country’s fi scal position so stark that countries are
effectively cut off from fi nancial markets and are forced
to cut expenditure pro-cyclically. Second, as euro area
countries are now subject to strict fi scal rules, room for
new borrowing even in a recession is limited.
A critical question is the size of this stabilisation impact.
Even for well-researched social security systems such as
the United States’ unemployment insurance, estimates of
the macroeconomic stabilisation effect vary greatly. For
example, a widely quoted study by Asdrubali et al. con-
cludes that US unemployment insurance has contributed
a mere two per cent to the stabilisation of the American
business cycle.5 In contrast, Vroman comes to the con-
clusion that, during the recession after 2008, US unem-
ployment insurance has bolstered almost 30 per cent of
the US downturn.6
The huge differences stem from the methodology of
measurement of stabilisation, among other things. Spe-
cifi cally, Asdrubali et al. look at average stabilisation over
the whole business cycle, while Vroman compares a sim-
ulation of the recession after 2008 without unemployment
insurance against the actually observed path of GDP and
employment with existing US unemployment insurance,
which one can dub “marginal stabilisation”. As a typical
business cycle consists of a large number of years with-
out a recession and only a few recession years, even a
signifi cant stabilisation during a recession does not nec-
essarily mean a large degree of average stabilisation over
the cycle can be detected.
For the political debate, clearly the question of marginal
stabilisation in a recession is the most sensible way of
measurement as it is of little interest whether a European
unemployment insurance helps to smooth small varia-
tions in GDP growth in average years over the cycle. In-
stead, it is the support in dire economic times which is
asked for in the debate on fi scal stabilisers.
Hence, this section tries to give a simple estimation of
the marginal stabilisation impact of such a scheme. This
simulation estimates, using simple rules of thumb, the net
impact on euro member states’ GDP and compares this
to the change in the output gap in recent recessionar y pe-
riods.
Estimating the stabilisation impact for the euro area
comes with additional problems, the most diffi cult of
which is that there is no data readily available on which
share of the unemployed would actually receive benefi ts
under a European unemployment insurance. While data
on short-term unemployment by duration and country is
regularly published by Eurostat, simulating the payouts
from the system with great precision would require de-
tailed data on employment and earnings history, which is
not available. Without this data, only rough approxima-
tions of both the number of unemployed covered by Euro-
pean unemployment insurance and the average amount
of benefi ts can be made.
5 See P. Asdrubali, B.E. Sorensen, Y. Oved: Channels of Inter-
state Risk Sharing: United States 1963-1990, in: Quarterly Journal of
Economics, Vol. 111, No. 4, 1996, pp. 1081-1110.
6 W. Vroman: The Role of Unemployment Insurance as an Automatic
Stabilizer during a Recession, Washington DC 2010, Urban Institute.
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Following previous work on this topic, two options are
chosen to get around this problem: in one scenario, it is
assumed that a fi xed rate of 50 per cent of the short-term
unemployed (with an unemployment duration of less than
one year) receive unemployment benefi ts from the Eu-
ropean system (“constant coverage ratio”). In a second
scenario, it is assumed that the number of unemployed
receiving benefi ts equals the change in short-term un-
employment over the past 12 months plus one-fi fth of the
existing level of short-term unemployment in a country
(“time-varying coverage ratio”).
In order to simulate the impact, one needs to make some
more settings. Based on previous works,7 the following
settings have been chosen:
All employees in the EMU are insured; they contribute a
share of their wage up to a certain threshold, linked to
each country’s average income.
The average insured wage is 80 per cent of the average
wage in each countr y.
The replacement payment is 50 per cent of the insured
wage.
Unemployment insurance can build up reserves and
borrow in the capital market.
• Unemployment benefi ts are paid for 12 months.
The macroeconomic multiplier of disbursed unemploy-
ment benefi ts by the European scheme is one.8
Cross-country spillover effects are neglected.
7 See S. Dullien: Improving Economic Stability …, op. cit.; and S.
Dullien: A Euro Area-Wide Unemployment Insurance as an Auto-
matic Stabilizer: Who Benefi ts and Who Pays?, paper prepared for the
European Commission, DG EMPL, Brussels 2013.
8 Generally, one could expect a higher multiplier from unemployment
insurance payments, as is documented by the Congressional Budget
Offi ce: Unemployment Insurance in the Wake of the Recent Reces-
sion, No. 4525, 2012, available at: http://www.cbo.gov/sites/default/
les/cbofi les/attachments/11-28-UnemploymentInsurance_0.pdf; or
M. Zandi: A Second Quick Boost from Government Could Spark Re-
covery, in: Edited excerpts from July 24, 2008 testimony before the
U.S. House of Representatives Committee on Small Business, 2008;
and can also be shown in the IMF’s multi-countr y macroeconomic
model as presented in C. Freedman, M. Kumhof, D. Laxton, J.
Lee: The Case for Global Fiscal Stimulus, IMF Staff Position Note
SPN/09/03, Washington 2009. However, the multiplier for a European
scheme as proposed here would work slightly differently. As E(M)U
unemployment insurance replaces (part of) national expenses, it
would allow governments to spend funds in a different fashion. As it
is not clear from the outset how national governments would use this
degree of freedom, the actual multiplier might be smaller than from
targeted transfers alone. Hence, a multiplier of one seems to be an
adequate estimate.
Table 1 presents the results of a simulation run for the
euro member states with data from 1999 to 2012. It lists
a number of important recessionary periods in the euro
area since 1999 as well as the observed change in the
output gap. In the last two columns, it lists the impact on
GDP through the unemployment scheme in relation to the
change in output gap under the two assumptions on the
coverage ratio. This number is a summary measure of the
macroeconomic stabilisation impact and can be read as
follows: if in a recession the actual output gap of a coun-
try moved from +1 per cent of GDP to -2 per cent of GDP
and the simulated impact of the European unemployment
insurance would have been 0.5 per cent of GDP, the stabi-
lisation effect would be 16.6 per cent (0.5 per cent divided
by three per cent).
Not in the table, but also of importance, is the overall vol-
ume moved through the system. For the assumption of a
constant coverage ratio, the simulated fi nancing require-
ments would amount to about €50 billion annually or a
contribution of 1.3 per cent of insured wages. For the as-
sumption of a time-varying coverage ratio, the simulated
nancing requirements would amount to about €26 billion
annually or a contribution rate of 0.7 per cent.
What we can see in the table is that the scheme would
have provided a sizable stabilisation impact at least in
some important cases. For example, in the case of Spain,
the system would have bolstered (depending on the as-
sumption of the coverage ratio) between about 20 and 30
per cent of the recession of 2007 to 2009 and an even
larger share of the recession of 2011 to 2012. Interest-
ingly, it is not only countries with traditionally high levels
of unemployment that would have experienced a strong
macroeconomic stabilisation, but also the Netherlands in
2002 to 2004 or after 2011.
Open issues
One should not hide, however, that the proposal of a
European basic unemployment insurance comes with a
number of not completely resolved questions. The most
pressing issue is to get more reliable estimations of the
exact payouts. In order to do so, one would need to get
access to (confi dential) micro-level data of employment
and earnings history in the different euro area countries.
Here, more research needs to be done and the coopera-
tion of national governments would be needed to provide
a clearer picture.
Second, at least under a set-up with uniform contribu-
tion rates, there is the danger that some countries might
become net payers or net receivers of funds over an ex-
tended period of time. For example, under the framework
ZBW – Leibniz Information Centre for Economics 193
Forum
Country
Start year
recession
End year
recession
Change
output gap
in percent-
age points
Stabilisation effect
in % of the observed
economic downturn
Constant
coverage
ratio
Time-
varying
coverage
ratio
Belgium 2001 2003 -1.6 9.8 14.0
Belgium 2007 2009 -4.5 1.7 4.8
Germany 2001 2003 -3.0 4.5 5.5
Germany 2008 2009 -6.0 1.0 2.6
Spain 2007 2009 -6.2 17.8 28.7
Spain 2011 2012 -0.8 31.5 62.9
France 2008 2009 -4.2 4.0 9.2
Ireland 2008 2009 -5.3 11.5 22.6
Italy 2001 2002 -0.9 2.3 8.5
Italy 2008 2009 -5.3 1.5 1.7
Italy 2011 2012 -1.7 7.8 18.8
Netherlands 2002 2004 -1.1 17.2 24.0
Netherlands 2008 2009 -4.7 2.0 5.5
Netherlands 2011 2012 -1.4 4.9 11.8
Austria 2001 2002 -0.5 31.7 75.3
Austria 2008 2009 -4.8 2.2 5.6
Portugal 2001 2003 -3.5 6.1 10.5
Portugal 2008 2009 -2.7 6.1 13.7
Portugal 2010 2012 -2.9 13.7 18.1
Finland 2001 2002 -1.5 4.2 11.4
Finland 2007 2009 -10.4 1.4 4.1
Finland 2011 2012 -1.2 0.4 0.6
Greece 2001 2002 -1.5 0.0 0.7
Greece 2008 2011 -10.5 5.5 6.4
Latvia 2007 2009 -23.7 5.0 9.7
Estonia 2007 2009 -21.2 4.1 8.6
described above, the Netherlands would have been a
country which would have contributed cumulatively sev-
eral points of GDP to the system over 1999-2012. In con-
trast, Spain would have been a net recipient to the extent
of several per cent of GDP, mainly because of the strong
increase in unemployment after 2008.
Such permanent net transfers are a cause of politi-
cal concern. One option here would be to work with a
clawback mechanism which would automatically adjust
the contribution rates to the European system in single
countries if it is found that a country has become a net
payer or net contributor over an extended period of time.
While the danger of such an additional element would
be that it makes the system more complicated and that
the macroeconomic stabilisation impact is somewhat re-
duced, it would clearly increase the political acceptance,
especially in countries which potentially could become
net payers.
Third, a certain risk of moral hazard remains. Some au-
thors have argued that introducing such a European un-
employment scheme would create adverse incentives not
to pursue important structural reforms in countries with
sclerotic labour markets. This argument is not very con-
vincing: usually, it is long-term unemployment that is seen
as being mostly effected by labour market reforms, and
the cost of long-term unemployment even under a Euro-
pean unemployment insurance remains completely the
responsibility of a single member state. Moreover, it is a
well-known fact of labour market research that more fl ex-
ible labour markets (not sclerotic labour markets) show a
larger increase in short-term unemployment in a reces-
sion, as fi rms can more easily fi re their workers.9 Hence,
it could even be argued that introducing a European un-
employment insurance increases the incentive for fl exibi-
lising the labour market as some of the short-term costs
of reforms would then be covered at the European level.
Thus, there is no reason to expect that the incentives for
reforms of a country’s labour markets are weakened.
However, there is another element of potential moral haz-
ard: if a signi cant share of unemployment benefi ts for the
short-term unemployed is paid for at the European level,
there might be the danger that national unemployment
administrations do not put the same effort into placing the
unemployed into new jobs as they would if they had to
bear all costs for unemployment. This is a problem that
has been observed empirically in some federal systems of
unemployment insurance, for example in Belgium. Hence,
more research is needed on how to coordinate and set
minimum standards on efforts to put the (short-term) un-
employed back to work for participating countries in a Eu-
ropean unemployment insurance scheme.
In conclusion, European unemployment insurance pro-
vides an opportunity to equip the euro area with an effec-
tive fi scal stabiliser. However, the proposal needs more
work before it can be proposed as a legislative act.
9 See R. Faccini, C.R. Bondibene: Labour Market Institutions and
Unemployment Volatility: Evidence from OECD Countries, Bank of
England Working Paper, No. 461, London 2012; O. Blanchard, P.
Portugal: What Hides Behind an Unemployment Rate: Comparing
Portuguese and US Labor Markets, in: American Economic Review,
Vol. 91, No. 1, 2001, pp. 187-207.
Table 1
Macroeconomic stabilisation by European
unemployment insurance under different
assumptions of coverage ratios
Source: Authors calculations.
Intereconomics 2014 | 4
194
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scheme as a benchmark. We also measure the addi-
tional aggregate effect of an EMU unemployment insur-
ance scheme (EMU-UI) in protecting household incomes
when someone becomes unemployed.
The present analysis does not consider how the EMU
unemployment benefi t would be fi nanced or admin-
istered.4 These aspects are of course critical for the
design of an effective scheme, its political acceptabil-
ity and its practical implementation, not least because
they could add to the income stabilisation properties
that we identify here in considering only the effect on
benefi ciaries. Nevertheless, understanding the relative
effects of the EMU scheme across countries with vary-
ing existing systems and labour markets is one impor-
tant fi rst step.
Key dimensions of national unemployment insur-
ance benefi ts
Existing unemployment benefi t systems vary widely in
many dimensions, making comparisons and assess-
ments quite complex as well as posing challenges for
any attempt to suggest pathways to greater harmoni-
sation. Esser et al. provide an excellent summary of the
2010 systems.5 The dimensions that are likely to have
the most effect on the amount of bene t received by any
particular person in unemployment are:
1. Eligibility in terms of meeting the minimum required
amount of work or contributions; the period in which
these occurred may matter too.
2. Eligibility in terms of other conditions (e.g. employment
status (employed or self-employed), type of employ-
ment contract, age).
4 Nor does it explore the inter-temporal implications of establishing an
insurance fund at EMU level, or th e effect of introd ucing triggers to t he
benefi t design parameters (level, duration, etc.) depending on macro-
economic conditions. Each of these has the potential to increase the
between-country stabilisation effect.
5 I. Esser, T. Ferrarini, K. Nelson, J. Palme, O. Sjoberg: Unem-
ployment Benefi ts in EU Member States, Uppsala Center for Labor
Studies Working Paper 2013:15, 2013.
It is increasingly recognised that for the Economic and
Monetary Union (EMU), and the European project more
generally, to be successful and sustainable there is a
need for greater risk sharing across member states in
order to provide better shock absorption against asym-
metric economic fl uctuations.1 As part of a strategy to
meet this need, an unemployment bene t system at the
level of the EMU countries has been discussed.2 This
would serve as an insurance mechanism to smooth
uctuations in income across member states.3 It could
also serve to strengthen income security for the unem-
ployed themselves. To the extent that the EMU unem-
ployment benefi t added to existing coverage, or was
more generous than existing systems (through higher
level payments or longer duration, for example), national
automatic stabilisers would be strengthened and the in-
dividual income protection of the unemployed and their
families would also be improved, potentially enhancing
social cohesion.
Existing national unemployment benefi t schemes vary
greatly in many dimensions. This makes the notion of an
EMU scheme that refl ects current national provision but
provides an additional cross-country insurance and sta-
bilisation function, rather challenging. Alternatively, one
can think of the EMU scheme as deliberately reducing
the differences in extent of income protection for the un-
employed across countries to some extent (levelling up
rather than down).
The aim of this article is to contribute to the debate by
providing evidence about the additional potential ben-
efi ciaries of an EMU unemployment benefi t of a specifi c
design, if it were to provide a minimum standard for the
level and structure of benefi t in each country and as-
suming that where existing provision is more generous
(in any dimension) this remains in place. We examine
who additionally benefi ts, thereby identifying gaps and
inadequacies in existing national systems using the EMU
1 European Commission: A Blueprint for a Deep and Genuine Econom-
ic and Monetary Union: Launching a European Debate, COM(2012)
777 fi nal, 2012.
2 European Commission: On Automatic Stabilisers, DG-EMPL Working
Group paper, 2013, available at: http://ec.europa.eu/social/BlobServl
et?docId=10964&langId=en.
3 See S. Dullien: A Euro-Area Wide Unemployment Insurance as an
Automatic Stabilizer: Who Benefi ts and Who Pays?, paper prepared
for European Commission (DG-EMPL), 2013.
H. Xavier Jara and Holly Sutherland
The Effects of an EMU Insurance Scheme on Income in
Unemployment
ZBW – Leibniz Information Centre for Economics 195
Forum
An EMU unemployment insurance
There are many possible designs for a European or EMU
unemployment benefi t system. The scheme that we ana-
lyse here is based on the assessment of key design is-
sues set out in a paper prepared by a DG-EMPL working
group.7 The EMU-UI benefi t would:
be available to all currently employed and self-em-
ployed up to age 64;
• be payable from the fourth month of unemployment
up to the twelfth month;
• depend on having made contributions on earn-
ings during at least three months in the previous 12
months;
be paid at a level based on 33 per cent of average
earnings in the country OR 50 per cent of previous
(most recent) own gross monthly earnings, with no
oors or ceilings; we consider these two alternative
options (“fl at” and “proportional”) separately;
7 European Commission: On Automatic Stabilisers … , op. cit.
3. For those eligible, the level of payment. This may be
proportional to previous earnings (either net or gross
of income tax and/or social insurance contributions)
or another reference income base, with or without
oors and ceilings; or fl at rate. It may also depend on
the length of the period of contributing, and vary over
the period of eligibility.
4. The duration of entitlement.
Table 1 summarises the key characteristics of the
schemes in 2012 in the ten countries that we consider
in the analysis. The minimum contribution period varies
from four to 12 months. In addition, in most countries
these contributions can have been made over a longer
period and the implicit proportion of time contribut-
ing to qualify for benefi t can be as low as 14 per cent
(France: four months out of the previous 28) or as high
as 75 per cent (Latvia: nine months out of the previous
12).6 Other conditions exist in some countries, such as
lower age limits and the type of labour contracts cov-
ered. In general, the self-employed are not covered by
unemployment insurance (and do not pay contributions)
but could be eligible for particular types of unemploy-
ment assistance benefi ts in some countries. The benefi t
payment is fl at rate in Greece and is calculated as a per-
centage of previous earnings in a reference period in the
remaining countries. This period may be the same as the
contribution period or it can be shorter, sometimes that
of the last earnings payment. In Finland, Germany and
Austria the earnings base is calculated net of income tax
and social insurance contributions. The percentage that
is applied ranges from as high as 75 per cent in Italy in
the rst months of unemployment to as low as 20 per
cent (Finland) or 25 per cent (Italy) for earnings above an
upper limit. In Germany the percentage depends on the
presence (67 per cent) or absence (60 per cent) of chil-
dren. In many countries there are minimum levels of con-
tribution or payment and/or maximum payments. The
latter can substantially reduce the replacement rate for
higher earners. The level of payment in many countries
reduces through time and within the 12 months consid-
ered in this paper in Estonia, Italy, Latvia and Portugal.
The duration of entitlement depends on several criteria
in some countries. Table 1 shows the maximum duration
for “standard cases”, but in many countries special cas-
es (based on age or length of contribution, for example)
apply, extending duration up to or beyond the 12 months
considered in this paper. Only in Latvia is the maximum
duration shorter than 12 months in all cases.
6 See European Commission: On Automatic Stabilisers … , op. cit., Ta-
ble 8.
Table 1
Key characteristics of unemployment benefi t
systems in 2012
Country
Contribu-
tion period
(months)aPayment
Duration
(months)b
Ger many DE 12/24 67-60% of net; ma x. 12
Estonia EE 12/36 50% falling to 40% of
gross; min., max. 12
Greece EL 6/14 Flat rate 10 (12)
Spain ES 12/60 70% falling to 50% of
gross; min., max. 24
France FR 4/28 40% of gross; min., max. 24
Italy IT 12/24
75% falling to 60% of
gross; 25% above an earn-
ings limit; min., max
8 (12)
Latvia LV 9/12 50-65% of g ross; reduces
with duration 9
Austria AT 12/24 55% of net; min., max. 9 (12)
Portugal PT 12/24 65% falling to 55% of
gross; min., max. 11 (12)
Finland FI 8/28 45% of net; 20% above an
earnings limit 17
Notes: a Months of contributions/period in which contributions can be
made; b“Standard” maximum duration (typical maximum duration taking
account of age and other criteria, where this is longer).
Source: MISSOC, July 2012.
Intereconomics 2014 | 4
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Simulating transition to unemployment is particularly
practical in order to simulate the policy rules determining
entitlement to unemployment benefi ts. Most national un-
employment insurance systems are based on previous
earnings, and this information is unavailable in the data
for the currently unemployed. In our analysis, previous
earnings for the new unemployed are simply recorded
as the earnings before their transition to unemployment.
Figure 1 shows the month-by-month entitlement to the
national and two alternative EMU-UI schemes for a per-
son who has been on national median earnings with a
full contribution history and maximum unemployment
benefi t duration. By design, the EMU-UI schemes only
kick in month four. In Estonia, Italy and Portugal, the na-
tional UI provision drops somewhat within the year, and
in Latvia it falls to zero in month ten. In all countries, ex-
cept Latvia, the proportional EMU-UI is worth more than
the fl at EMU-UI. In Greece and Latvia both the fl at and
the proportional EMU schemes are worth more than the
national scheme in each of months 4-12, while they are
worth less than the national provision in each month in
Spain, France, Portugal and Finland. In Germany, Esto-
nia and Austria, only the proportional EMU-UI scheme
is more generous than the national benefi t; this is due to
the fact that the level of payment of the national scheme
is based on net earnings in Germany and Austria, and
because the national benefi t amount decreases after
month three in Estonia.
These illustrative calculations for stylised situations pro-
vide some indication of the nature of the effect of the
EMU-UI schemes. For example, it seems likely that the
EMU-UI schemes would have little effect in Spain, while
they would have a major effect on incomes in unemploy-
ment in Greece and Latvia.
Moreover, the additional entitlement provided by the
EMU-UI will differ across the earnings distribution and
to different extents across countries. The fl at EMU-UI
would result in higher entitlements than the proportional
scheme at the bottom of the distribution, while the pro-
portional scheme would perform better at the top. To
explore whether this is so, and to compare how actual
populations in each country would be affected, the next
sections analyse the effect of paying unemployed peo-
ple any additional benefi t from the EMU-UI that would
exceed the national benefi t in each month. This is ana-
lysed as an average over the year.
Benefi ciaries
Among those potentially gaining from the introduction of
an EMU-UI, it is important to distinguish between those
be treated in the same way as the existing national
unemployment insurance in the rest of the tax-benefi t
system (i.e. whether it is taxable or included in the in-
come base for the assessment of other benefi ts);
translate into a higher overall provision each month by
the amount that the EMU-UI entitlement exceeds that
due from the national benefi t.8
Simulating the effects of an EMU-UI using EUROMOD
Our analysis makes use of EUROMOD, the tax-benefi t
microsimulation model of the EU based on EU-SILC mi-
cro-data, to evaluate the potential of an EMU unemploy-
ment insurance benefi t to improve the income protection
to the unemployed for ten of the 18 member states of the
EMU: Germany, Estonia, Greece, Spain, France, Italy,
Latvia, Austria, Portugal and Finland.9 Our simulations
use the 2012 tax-benefi t system, including 2012 national
unemployment insurance schemes as the starting point
for our analysis. Labour market and other behaviour is
assumed to be the same before and after the introduc-
tion of the EMU-UI, as is the behaviour of other house-
hold members when a person becomes unemployed.
The strategy used in this paper in order to evaluate the
potential effect of an EMU-UI consists of moving people
from work into unemployment and re-calculating their
new disposable income both with and without introduc-
ing the EMU-UI, hence capturing the implications of tax
and benefi t systems under their new labour market sta-
tus.10 The national and the EMU-UI benefi ts are simu-
lated as separate policies in EUROMOD on a month-by-
month basis. Each month the simulated EMU-UI benefi t
is compared to the national provision, and the analysis
focuses on the additional amount provided by the EMU-
UI: the amount that exceeds the national bene t. In or-
der to provide a generalisable assessment of the effects
of existing unemployment benefi t systems and what an
EMU benefi t could add, we calculate the effects for all of
those currently in work on the basis that everyone has an
equal chance of becoming unemployed under unknown
economic conditions.
8 Our results can be interpreted as showing the net effect of an EMU-UI
substituting for the fi rst tranche of national benefi t (and extending it
if the EMU-UI entitlement is more generous), and with national provi-
sion remaining, topping up to the existing level, if this exceeds the
EMU-UI provision.
9 For more information about EUROMOD see H. Sutherland, F. Fi-
gari: EUROMOD: the European Union Tax-benefi t Microsimulation
Model, in: International Journal of Microsimulation, Vol. 6, No. 1, 2013,
pp. 4-26.
10 See: H.X. Jara, H. Sutherland: The Implications of an EMU Un-
employment Insurance Scheme for Supporting Incomes, EUROMOD
Working Paper Series, EM5/14, 2014.
ZBW – Leibniz Information Centre for Economics 197
Forum
Figure 1
Entitlement to unemployment insurance benefi ts for those previously on median earnings by month
in euros
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123456789101112
Finland
National UI EMU-UI Flat EMU-UI Proportional
Source: Own calculations using EUROMOD version G1.4.
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the national schemes. In Latvia (and Portugal to some
extent) the less stringent contribution conditions of the
new EMU-UI explain the high proportions. Among those
new unemployed who would be receiving the national
benefi t, relatively large shares would receive some extra
benefi t at some point in the year from the EMU-UI, ex-
cept in Spain, France, Portugal and Finland. The share
is more than 50 per cent in Estonia, Greece, Italy, Latvia
and Austria, and for the proportional scheme in Germa-
ny. Larger shares of the new unemployed bene t from
the proportional scheme than the fl at rate scheme, ex-
cept in Greece and France.
Income protection
We measure the increase in income protection due to
the higher coverage or increased generosity in one or
more dimensions using the “income stabilisation coef-
c i e n t a s d e ned and used in Bargain et al.11 The in-
come stabilisation coeffi cient measures the proportion
of gross income from work lost due to unemployment,
which is retained by the unemployed person in the form
of increased benefi ts and reduced taxes. Figure 3 shows
the coeffi cient of income stabilisation due to the national
tax-benefi t system as a whole, as well as the additional
effect of the EMU-UI. In Estonia, Greece, Italy and Latvia
under the current system on average about 50 per cent
of the gross income from work that is lost on becom-
ing unemployed is retained by the unemployed person
11 O. Bargain, M. Dolls, C. Fuest, D. Neumann, A. Peichl, N.
Pestel, S. Siegloch: Fiscal Union in Europe? Redistributive and
Stabilizing Effects of a European Tax-Bene t System and Fiscal
Equalization Mechanism, Economic Policy, Vol. 28, No. 75, 2013,
pp. 375-422, Equation 12.
who would benefi t while being also entitled to (and re-
ceiving) national unemployment insurance benefi ts and
those not entitled to the national provision. As such,
the effect of an EMU-UI on the former group provides
an indication of the gains in terms of increased benefi t
amounts and/or duration provided by the EMU-UI, while
the effect on the latter captures the increase in terms of
coverage with respe ct to natio nal s che mes. Figure 2 p re-
sents these results, where benefi ciaries are defi ned as
the proportion of the potentially unemployed who would
receive an additional payment from the EMU scheme at
some point in the 12 months following becoming unem-
ployed. The fi gure shows the effect for both the fl at rate
EMU-UI and that which depends on the person’s own
previous earnings (shown in the chart as “%”). The share
of potentially unemployed who would bene t from either
version of the EMU-UI varies widely across countries,
from nearly 92 per cent in Latvia for both versions of the
scheme down to less than three per cent for the fl at rate
EMU-UI in Spain and between fi ve and ten per cent for
the two schemes in France. The rate is particularly high
in Latvia because everyone who qualifi es receives ad-
ditional benefi ts in months 10-12.
The extent to which benefi ciaries do not already re-
ceive some national UI benefi ts varies and is substan-
tial in Greece, Italy, Latvia and Portugal and smaller
elsewhere. The high proportion of benefi ciaries among
non-recipients of national provision in Greece and Ita-
ly is mainly related to the important proportion of self-
employed in the labour force, which are not covered by
Figure 2
Benefi ciaries: those who would receive additional
benefi t through the EMU-UI in case of an
unemployment spell
percentage of those currently in work
Note: As indicated by the different shading, some of the people poten-
tially receiving an additional EMU provision would also receive some na-
tional provision, some not.
Source: Own calculations using EUROMOD version G1.4.
0
10
20
30
40
50
60
70
80
90
100
flat % flat % flat % flat % flat % flat %flat % flat % flat % flat %
DE EE EL ES FR IT LV AT PT FI
Receives national UI No national UI
Figure 3
Income stabilisation coeffi cient: additional effect of
EMU-UI for all people currently in work, in case of an
unemployment spell
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
flat % flat % flat % flat % flat % flat % flat % flat % flat % flat %
DE EE EL ES FR IT LV AT PT FI
Without EMU-UI With EMU-UI
Source: Own calculations using EUROMOD version G1.4.
ZBW – Leibniz Information Centre for Economics 199
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average effect seen across countries. First and most im-
portant, the existing national UI schemes vary widely in
design in many dimensions. In those countries where the
national UI is more generous than the EMU-UI in most
dimensions (e.g. contributions conditions, payment,
etc.), the EMU-UI has little effect (e.g. France, Finland
and Spain). On the other hand, in countries where any
dimensions of the national scheme fall far short of the
standard set by the EMU scheme, the EMU-UI has a
strong effect (e.g. in Greece, Italy and Latvia). The sec-
ond driving factor is the characteristics of the potentially
unemployed and the extent to which they differ across
countries. In particular the proportion that is self-em-
ployed or otherwise excluded from the national scheme
is an important determinant of the potential extension in
coverage of the EMU-UI (e.g. Greece and Italy).
Our results are relevant in two distinct ways. First, they
can provide a measure of the extent to which a common
EMU-UI could replace the existing national UIs, poten-
tially providing a cross-country insurance mechanism
with minimised cost or gainers and losers. However,
due to the diversity of national systems in many dimen-
sions, designing a common scheme without losers and
at low cost would be a challenge. Second, if the aim is
to add to the protective and stabilising effects of exist-
ing UI schemes, as well as providing a cross-country
insurance mechanism, then our results provide some
rst insight into the size and distribution of the effects.
Inevitably this means increasing the generosity in one or
more dimensions in the countries with the less gener-
ous (e.g. Greece), inclusive (e.g. Italy) or long duration
(e.g. Latvia) schemes. However, according to our results,
there would be bene ciaries in all or most countries, un-
derlining the potential of EMU schemes to cover gaps of
national benefi ts for specifi c population groups.
in the form of reduced taxes and increased benefi ts,
particularly unemployment insurance. The coeffi cient is
larger in the remaining countries, reaching 75 per cent in
Germany.12 The EMU-UI has the effect of increasing the
degree of income stabilisation, with the pattern across
countries similar (although not identical) to that seen for
new benefi ciaries. The largest additional stabilisation
is in Greece, Latvia and Austria under the proportional
EMU-UI scheme (by 23 to 24 percentage points in each
case). There are also sizeable effects with the fl at rate
EMU-UI in Greece and Italy (nine points) and Latvia (19
points) and with the proportional EMU-UI in Germany
and Estonia (ten points) and Portugal (nine points).
Concluding remarks
The EMU-UI as described in this article would add to
the stabilising effects of tax-benefi t systems when un-
employment rises. These effects would occur partly
through providing additional income from UI received by
the unemployed in their fi rst year out of work; and partly
by extending coverage of UI to groups currently exclud-
ed and to those with insuffi cient contributions to qualify
in systems requiring high levels of these.
These effects vary in size by country and also with the
specifi c EMU scheme. The fl at rate EMU-UI, set at 33
per cent of average earnings, tends to particularly ben-
efi t the lower paid, while the proportional scheme, based
on 50 per cent of own last earnings, particularly benefi ts
the higher paid. Two factors drive the differences in the
12 These estimates of within countr y income stabili sation are higher than
those shown by some other studies. This is because in our analysis
we focus on the effect of unemployment on incomes in the fi rst year of
unemployment when entitlements to UI benefi ts are at their highest.
Daniel Gros
A Fiscal Shock Absorber for the Eurozone? Insurance with
Deductible
Since the onset of the sovereign debt crisis, the argu-
ment for a system of fi scal transfers to offset idiosyn-
cratic shocks in the eurozone has gained adherents.
This paper argues that what the eurozone really needs
is not a system that offsets all shocks by some small
fraction, but a system that protects against shocks that
are rare, but potentially catastrophic. A system of fi s-
cal insurance with a fi xed deductible would therefore be
preferable to a fi scal shock absorber that offsets a cer-
tain percentage of all fi scal shocks.
Even before the euro crisis started, it had been widely
argued that the eurozone needed a mechanism to help
countries overcome idiosyncratic shocks. The experi-
ence of the crisis itself seemed to make this case over-
whelming, and throughout the EU institutions it is now
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taken for granted that the eurozone needs a system
of fi scal shock absorbers. For example, the Report of
the President of the European Council calls for: “Stage
3 (post 2014): establish a well-defi ned and limited fi s-
cal capacity to improve shock absorption capacities,
through an insurance system set up at the central
level”.1
Following this line of thought, a number of shock ab-
sorber mechanisms have been proposed recently.
These mechanisms usually stipulate that a certain per-
centage of each upswing or downturn in the economy
should be offset by payments to a central fund.2 But this
approach neglects a key insight from the economics of
insurance.
Insurance and convexity
Insurance is useful when the cost of unpredictable
events is convex – when a shock of twice the magnitude
of another one causes more than twice as much dam-
age. The standard case for insurance at the microeco-
nomic level is simply that utility functions are assumed
to be concave (and hence the cost of losing income
convex). The euro crisis has vividly illustrated that the
costs of large shocks can be more than proportionally
large, especially when a shock impairs access to fi nan-
cial markets. In this case, consumption smoothing is no
longer possible, or very expensive. The case of Greece
has also shown that the social cost of very large, “cata-
strophic” shocks can be extremely severe, because a
shock that leads to insolvency creates other problems,
including widespread bankruptcy costs. By contrast,
the small shocks that were prevalent during the “Great
Moderation” did not involve large costs, as temporary
shocks to output or income can be smoothed at a low
cost via savings or borrowing in the capital market.3
1 H. Van Rompuy, J.M. Barroso, J.C. Juncker, M. Draghi: To-
wards a Genuine Economic and Monetar y Union, Report to the Euro-
pean Council Meeting, 13/14 December 2012.
2 See, for example, S. Dullien: A Common Unemployment Insurance
System for the Euro Area, in: DIW Economic Bulletin, Vol. 3, No. 1,
2013, German Institute for Economic Research, Berlin; or H. Ender-
lein, L. Guttenberg, J. Spiess: Making One Size Fit All Design-
ing a Cyclical Adjustment Insurance Fund for the Eurozone, Notre Eu-
rope Policy Paper 61, Paris 2013, Notre Europe.
3 There is some confusion in the literature on the purpose of shock
absorbers. In principle, the ultimate motive for insurance should be
to smooth consumption over time. But most empirical analysis con-
centrates on the variability of income (GDP). P. Asdrubali, B.E.
Sorensen, O. Yosha: Channels of Interstate Risk Sharing: US
1963-90, in: Quarterly Journal of Economics, Vol. 111, No. 4, 1996,
pp. 1081-1110, are among the few to analyse how variations in in-
come are transmitted to variations in consumption. D. Furceri, A.
Zdzienicka: The Eurozone Crisis: Need for a Supranational Fiscal
Risk Sharing Mechanism, IMF Working Paper 13/198, Washington DC
2013, IMF, build their proposal on this approach.
There are thus good reasons why social loss functions
are assumed to be convex. Most optimal control models
simply assume a special form of convexity, namely that
the social loss function is quadratic in output (or output
compared to its equilibrium level4).5
Insurance with deductible fi rst best
A widespread practice in the insurance industry is to of-
fer clients full coverage only above a certain deductible
or threshold. This approach should be applied to the
discussion about the need for a shock absorber for the
eurozone as well.
The basic idea behind insurance with a deductible can
be illustrated easily: Figure 1 shows the usual quadrat-
ic social loss function (grey line) as the square of the
shock which is hitting the economy (e.g. the increase in
unemployment or the fall in GDP) on the horizontal axis.
This is what the economy would be subject to in the ab-
sence of an insurance mechanism.
With a (partial) shock absorber that offsets a certain
percentage of the shock (as proposed by Enderlein et
4 See O. Blanchard, S. Fischer: Lectures on Macroeconomics,
Cambridge MA 1989, MIT Press, Chapter 11.
5 P.P. Benigno, M. Woodford: Optimal monetary and scal policy: a
linear-quadratic approach, ECB Working Paper 345, Frankfurt 2004,
European Central Bank, derive this functional form somewhat more
generally. For a critique, see T. Mayer: The Macroeconomic Loss
Function: A Critical Note, CESifo Working Paper 771, Munich 2002.
Figure 1
Welfare loss with a (partial) shock absorber versus
insurance with deductible
Source: Own calculations.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Welfare loss
Size of shock
Welfare loss no insurance
With deductible (large shocks only)
With shock absorber
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al.)6, the welfare impact of all shocks is lower, as indi-
cated by the light green line.
An alternative to a shock absorber is to introduce a de-
ductible, but to fully compensate all shocks above that
threshold. The resulting welfare loss as a function of
the shock is indicated by the dark green line (where the
threshold was set at one).
The actuarially fair price for both insurance policies will
of course depend on the parameters of the probability
density function of the shocks, the percentage of the
shock absorbed, and the deductible.
In Figure 1, the difference between the welfare losses
under the two approaches can be determined as the
difference between the areas between the dark green
and the light green lines to the left and to the right of the
point where they meet. The example drawn here sug-
gests that the area to the right is much larger, but the
two areas must be weighted by the probability of these
shocks occurring. It thus seems that a priori it is not
possible to say whether a shock absorber or an insur-
ance contract with a deductible is superior.7
However, there exists a general theorem that insur-
ance with a deductible is superior. Arrow “proved that
if we stay within the class of contracts with the same
expected loss, EU [expected utility] maximizers pre-
fer a contract with full (100%) insurance above a fi xed
deductible.”8
6 H. Enderlein, L. Guttenberg, J. Spiess: Making One Size Fit
All … , op. cit.
7 Formally, the cost of a shock absorber under which a fraction alpha
of any shock, x, is absorbed by the insurer is given by alpha*E(x). If
welfare losses are a quadratic function of the shock, one can calcu-
late the following expected loss es: (1) no shock abs orber – in this case
the welfare loss would be propor tional to the variance of the shock,
i.e. E(x2); (2) shock absorber – in this case the welfare loss would be
propor tional to the variance of the shock attenu ated by the fraction al -
pha, or (1-alpha)2*E(x2); (3) insuran ce with deductible – in this case, the
welfare loss would be given by the sum of two elements: for a shock
smaller than the deductible (indicated by gamma) one has to take the
expected value of x2, but for larger shocks (i.e. x > gamma) the welfare
loss will be just equal to gamma2 (which has to be multiplied by the
probability that x > gamma).
8 T. Russell: Catastrophe Insurance and the Demand for Deductibles,
manuscript, Santa Clara University Department of Economics, Santa
Clara CA 2004, p. 2. See also K. A rr ow : Optimal Insurance and Gen-
eralized Deductibles, in: Scandinavian Actuarial Journal, 1974, No. 1,
pp. 1-42. See C. Gollier, H. Schlesinger: Arrows Theorem on the
Optimality of Deductibles: A Stochastic Dominance Approach, in:
Economic Theory, Vol. 7, 1996, pp. 359-363, for a more general ver-
sion of the theorem about the optimality of full insurance above some
xed deductible.
An illustration: normally distributed shocks
The advantage of insurance with a deductible over a
shock absorber (with the same premium) can be illus-
trated graphically using the most widely used functional
form concerning the distribution of the shocks, namely
that they are normally distributed. This is often a con-
venient assumption to solve linear quadratic problems,
but has the disadvantage that, for the normal (Gauss-
ian) distribution (or probability density function) of the
shock, one can only calculate numerically the truncated
variances and expected values that one needs to eval-
uate the welfare losses and the actuarially fair cost of
providing either a shock absorber or insurance with a
deductible.9
Figure 2 thus shows the difference between the welfare
loss under a shock absorber and insurance with a de-
ductible as a function of the deductible in terms of the
standard deviation of the distribution of the shock. The
size of the shock absorber was in all cases adjusted so
that the actuarially fair price of both contracts was the
same.
It is apparent that in Figure 2 the difference is always
positive, i.e. the welfare loss is always lower under an
insurance contract with a deductible, as proven more
generally by Arrow.10
9 Another drawback of the normal distribution is that reality has “fat
tails” – large events occur more of ten than one would expect if the
distribution were normal.
10 K. A rr ow : Optimal Insurance and Generalized Deductibles, op. cit.
Figure 2
Difference between social losses shock absorber
versus insurance with deductible
0
0.01
0.02
0.03
0.04
0.05
0.06
00.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6
Size of deductible (as multiple of the standard deviation of the shock)
Difference in social welfare losses
Source: Own calculations based on data provided by Claudius Gros.
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Figure 2 also shows a general property of insurance
with a deductible. The value of such an insurance con-
tract depends on the size of the deductible: if it is zero
the contract provides full insurance; whereas if the de-
ductible is infi nity there is no insurance at all. This also
implies that the difference between a shock absorber
and insurance with a deductible must go towards zero
as the deductible goes to zero (in this case, the shock
absorber will have to go to full shock absorption); and
it must also go to zero as the deductible goes towards
infi nity, since at that point there will be little difference
between the two types of insurance.
Figure 2 refers to the case of the shock having a stand-
ardised Gaussian distribution. In this case the differ-
ence reaches a maximum if the deductible is equal to
one (one standard deviation). In other words, a deduct-
ible equal to one standard deviation of the shock pro-
vides the situation where the advantage of this type of
contract is largest.
Issues related to implementation
Any insurance system against shocks at the macroeco-
nomic level faces a number of implementation challeng-
es. Insurance against macroeconomic shocks is different
from “normal” insurance for an individual or a household.
For example, insuring a house against fi re or a car
against accidents involves clearly de ned risks. Any-
body who has rented a car has been asked whether she
wants to take out additional insurance to cover the ex-
cess waiver of usually x hundred dollars or euros. If a
house catches fi re or the car is involved in an accident,
the “event” can be clearly defi ned and the damage can
in principle at least be objectively assessed.
This is much more diffi cult in macroeconomic terms.
Here it is diffi cult to defi ne both the “event” and the
damage it entails. For example, if one considers a key
indicator of macroeconomic costs, namely unemploy-
ment, one has to make an initial choice whether to look
at the headline unemployment rate, or only short-term
unemployment because one might argue that long-
term unemployment is determined by labour market
institutions and its level does not give an indication of
a shock, but rather of the ef ciency of labour market in-
stitutions in general. Further, both long- and short-term
unemployment rates may be infl uenced by the eligibility
and generosity of unemployment benefi t in a country,
because only registered employment is measured.
But even the level of short-term unemployment also
has a certain basic component which is infl uenced by
the “churn” in labour markets as there will always be
a number of workers who quit to look for a new job.
This raises the question of how to defi ne a “shock” to
(short-term) unemployment. This is a dif cult question
to answer if one considers how many different national
policy measures might affect unemployment, not only
changes in social welfare policy but also discretionary
changes in fi scal policy. It is thus diffi cult to distinguish
between variations in the unemployment rate which are
due to national policy choices and exogenous shocks
which are outside the control of national policy makers.
The purpose of any European shock absorption system
would presumably be to help member states deal with
outside shocks, rather than offset the negative impact
from domestic policy choices.
At the empirical level one has to take into account the
wide differences in the level and variability of unem-
ployment rates in Europe. One way to defi ne a shock
would be to take an increase in the rate above the
medium-term average over the past. For a country like
Austria, where the unemployment rate has for a long
time been close to ve per cent, an increase to seven
per cent would represent a major event. By contrast,
for Spain an increase from the longer term average of
around 15 per cent to 17 per cent would not constitute
something unusual. A simple remedy is a shock meas-
ure which looks at the relative change, say a 20 per
cent increase, in the unemployment rate.
Another way to defi ne a shock would be to measure the
increase in unemployment relative to the variability of
the rate in the country concerned.11
Comparison with the US
The US has a system in place in which large economic
shocks are traditionally recognised at the federal level
and where Congress generally establishes emergency
programmes to extend unemployment benefi t
when the
11 In thi s case insurance i s triggered if the un employment rate ri ses more
than a certain multiple, γ, of the standard deviation above the average
historical unemployment rate. Formally, the insurance threshold for
country i at time t would equal
stURit > stURȚ + γσstURi
Where stURit and stURȚare respectively the current unemployment
rate and the mean historical unemployment rate (defi ned over the rel-
evant time interval, e.g. ten years). The standard deviation is given by
σstURi. M. Beblavy, D. Gros, I. Maselli: Reinsurance of National
Unemployment Bene t Schemes, Centre for European Policy Stud-
ies, study prepared for DG Employment, forthcoming, provide numer-
ical simulations of such an insurance scheme.
ZBW – Leibniz Information Centre for Economics 203
Forum
US economy faces a deep recession.12 This was the case
with the 2009 American Recovery and Reinvestment Act
(known as the stimulus bill). States are then refunded for
part or all of unemployment insurance paid to individuals
after their fi rst 26 weeks of unemployment.
Although this emergency benefi ts programme is avail-
able for all states, it also provides a de facto shock ab-
sorber for regional shocks since even in the US unem-
ployment is often regionally concentrated and states in
which unemployment is much higher than the national
average benefi t much more.
For shocks of the more asymmetric type where indi-
vidual states are experiencing an economic downturn
while the national economy is performing well relief is
available from the so-called Permanent Extended Ben-
efi ts Program. This programme extends unemployment
insurance beyond 26 weeks for between another 13 to
20 weeks depending on conditions states have to fulfi l.
Costs are split 50-50 between the federal and state gov-
ernments. The programme is triggered if the unemploy-
ment rate is above ve per cent and has increased by
more than 20 per cent relative to the same p eriod in each
of the two preceding years. If necessary, state govern-
ments can cover their part with loans from the federal
government.
In this sense the US has a system under which the feder-
al government provides support during really bad times.
Outside major recessions and specifi c situations at the
state level, unemployment insurance remains a respon-
sibility of the states.
Conclusions
Many observers and policymakers now argue that the
eurozone needs a system of fi scal shock absorbers and
often refer the US as the example to follow. But the im-
portance of fi scal policy in absorbing regional shocks is
often over-estimated.
Recent studies by the IMF fi nd that about 20 per cent of
shocks to state income are offset by the US federal fi scal
12 C. Stone, W. Chen: Introduction to Unemployment Insurance,
Center on Budget and Policy Priorities, 2013, available at: http://www.
cbpp.org/fi les/12-19-02ui.pdf.
system.13 Financial integration provides a much greater
degree of shock absorption.
But a fi scal shock absorber mechanism which smoothes
only one-fi fth of the shock would have been of limited
value in the euro crisis. Offering a country whose output
falls by one per cent (relative to the eurozone average) a
transfer of 0.2 per cent of GDP would not have changed
the nature of the crisis. A country hit by a very large shock
(like Ireland) would receive a larger transfer, but the prob-
lems would not be substantially different. By contrast, in a
system of insurance with a deductible, of say one per cent
of GDP, the country hit by a small shock would receive
nothing. But most of any large shock – everything above
the one per cent deductible – could then be fully offset.
What the eurozone really needs is not a system that off-
sets all shocks by some small fraction, but a system that
protects against shocks that are rare, but potentially
catastrophic. The many minor cyclical shocks that do not
impair the functioning of fi nancial markets can then be
dealt with via borrowing at the national level.
The European Stability Mechanism – the eurozone’s res-
cue mechanism – does not provide the needed insurance
function because it only provides loans, which have to be
repaid with interest, rather than a transfer when a shock
materialises. A system of direct fi scal transfers among
euro area states appears at present politically impossi-
ble. The discussion has thus focused on unemployment
insurance and how a European or euro area system could
mitigate the impact of idiosyncratic shocks.
The main thrust of this contribution is that one should
concentrate on providing support in the case of large
shocks, which is implicit in any insurance mechanism
with a deductible. One way in which one could achieve
this aim would be to create a system of reinsurance for
national unemployment insurance systems, under which
the national systems would pay regular premiums to a
central eurozone fund. This fund would then support the
national system in countries where the unemployment
rate suddenly increases above a certain threshold. This
is the type of absorption capacity that the presidents of
the EU should be considering – not merely copying the
way the US federal fi scal system appears to offset a
small proportion of all shocks.
13 IMF: Toward a Fiscal Union for the Euro Area, prepared by C. Allard,
P. Koeva Brooks, J.C. Bluedorn, F. Bornhorst, K. Christo-
pherson, F. Ohnsorge, T. Poghosyan and an IMF Staff Team,
Washington DC 2013; IMF: Toward a Fiscal Union for the Euro Area:
Technical Background Notes, Washington DC, September 2013.
... In a developed economy with a high proportion of service industry jobs, this higher wage flexibility leads to higher price flexibility. These economic factors leave the US with a number of additional shock absorbing functions which are lacking in the EU; namely, higher labour mobility, wage and price flexibility (Dullien, 2014). ...
... The eurozone's economic situation actually makes a centralised fiscal policy even more desirable than in other federations such as the United States and Canada. With reduced internal labour mobility, sticky prices and wages (Blanchard & Summers, 1986) and incomplete financial markets, Member States are currently forced to rely on insufficient monetary policies to prevent asymmetric shocks (Dullien, 2014;Brandolini et al., 2016). ...
... we might also look at the citizen level. We propose an EUBS funded through a payroll tax, taken by existing UI agencies in each Member State (Dullien, 2014). This will mean that all those employed, and all employers, doing business in the eurozone area would automatically be a mandatory part of the scheme. ...
Preprint
Full-text available
A policy paper to advocate for a European Unemployment Benefits System
... Take, for example, various proposals for EU-level unemployment reinsurance schemes, which pay out whenever there is a significant year-on-year increase in unemployment in member states. See, for example, schemes suggested by (Arnold, Barkbu, Ture, Wang, & Yao, 2018;Carnot, Kizior, & Mourre, 2017;Dolls, 2019;Dullien, 2014). For purposes of comparison, let us single out a proposal that is, I believe, the most promising. ...
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... Our work provides some insights into the possibility of enhancing social protection through an extension of national UI schemes to all categories of workers. Alternatively, EU initiatives, such as the Unemployment Benefit Reinsurance Scheme, advocated by a number of academics and policy makers (Andor et al., 2014; Von der Leyen, 2019), have been discussed as potential mechanisms to harmonise national UI schemes and to strengthen income stabilization within and across countries, if This article is protected by copyright. All rights reserved. ...
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... This reticence also affected any moves in the direction of mutual supports in social insurance schemes, such as a joint unemployment insurance scheme that had been advocated by many economists (see e.g. Andor et al. 2014) and would have provided a first pillar of an 'automatic stabiliser' at the EU level. Rather than these being seen as instruments that are based on an 'insurance motive'-i.e. a 'shock' that could hit any of the countries, the public viewed the occurrence of vulnerable positions as being consistently associated with one set of countries (the 'debtor'/'deficit' countries) while other countries (the 'creditor'/'surplus' countries) were seen as largely immune from such shocks. ...
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