Informal Meeting of Labour Ministers – Milan, 18 July 2014
Workshop II
EMU-wide automatic stabilizers: towards a common Unemployment Benefit Scheme?
The economic crisis has shown how a change of economic circumstances affecting differently
parts of the euro area (i.e. an asymmetric shock) could 'spill over' and affect the stability and
economic performance of the whole EMU, on its own or in conjunction with macroeconomic
imbalances and unsustainable budget deficits and debts. Due to limited possibilities for
macroeconomic adjustment between EMU countries, short-term downturns risk leading to
longer-term divergence.
Are EMU-level automatic fiscal stabilisers needed?
While social protection generally played a prominent role in compensating households'
income losses in the early phase of the crisis (2008-9) and thus helped stabilise the economy,
the stabilisation capacity was eroded in the second phase of the crisis (since 2010). This
happened due to a number of factors, including the high pre-existing levels of sovereign debt
and protracted uncertainty about the EMU's future, leading to cuts in public spending and/or
tax increases in many Member States.
In a currency union, where many traditional economic stabilisation mechanisms are not
available (notably autonomous exchange rate and interest rate), fiscal policy has a very
important role to play in alleviating the economic and social impact of asymmetric shocks.
While the current architecture of the EMU relies on decentralised fiscal policies under a rulebased framework, it does not provide for an automatic fiscal stabilisation capacity1.
The importance of a common fiscal capacity at the level of a monetary union was recognised
already in early stages of monetary policy cooperation in Europe (see, for example the
“Marjolin Report” in 1975 or the “MacDougall Report” in 1977). The Commission's
Blueprint for a deep and genuine EMU (2012), the Four Presidents' report (2012) and the
Commission Communication on strengthening the Social Dimension of the EMU (2013)
stress that the creation of an EMU-wide fiscal capacity be considered as a longer-term step to
improve the stabilisation of EMU economies, in particular in case of asymmetric shocks.
The Commission services have undertaken technical work on options for EMU-level
automatic fiscal stabilisers since 20122 and two expert conferences on the subject were
organised by the Bertelsmann Stiftung in October 2013 and June 2014 (see summary in
Annex 1). The Commission services are expected to launch a detailed study providing
1
The EU budget contributes to stabilising national budgets only in a marginal way, namely through slightly
lower national fiscal contributions due to lower imports (tariffs) and economic activity (VAT) and through
reduced requirements for co-financing of European Structural and Investment Funds' support (in the case of
'programme countries'). The European Globalisation Adjustment Fund, outside the MFF, provides small-scale
financial assistance in case of regional economic shocks.
2
DG EMPL paper on automatic stabilisers (October 2013), http://bit.ly/1pJAzSU.
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econometric simulations and a feasibility analysis of various options for a European
unemployment benefit scheme in the second half of 2014 (see Annex 2).
Main options for EMU-level automatic fiscal stabilisers
Three main types of mechanisms have been identified as options for automatic fiscal
stabilisers that could be introduced at the EMU-level in the medium to long-term: general
budgetary transfers linked to the 'output gap', reinsurance mechanisms and a supranational
unemployment insurance scheme.
1. A fiscal capacity providing for general budgetary transfers could be linked to the output
gap of a Member State, i.e. the difference between actual and potential GDP, which is
theoretically the best approximation of its position in the economic cycle. However, in
practice, the output gap is difficult to measure and is definitively established only in
several years' retrospect. It would be therefore difficult to define and authorise short-term
transfers on this basis.
2. An alternative system would be for a supranational fiscal capacity to support national
unemployment benefit systems in case of deep downturns (associated with sharp increases
in unemployment) which would exceed national capacity to ensure macroeconomic
stabilisation (the 'reinsurance' option). Such a scheme would require minimal or no
changes in the actual functioning of national systems. It would make only occasional payouts, depending on the level of the 'trigger', i.e. severity of the shock required for the
scheme's activation.
3. Another form of an EMU-level automatic fiscal stabiliser would be a basic European
unemployment insurance scheme, which would be permanently in operation and
potentially imply small changes to national systems3. The EMU-level scheme would
partially pool the fiscal risks of short-term (cyclical) unemployment through a basic
unemployment benefit financed from a common fiscal capacity. Member States would be
free to topup or extend such basic insurance according to their national circumstances.
Focusing on a 'common core' of unemployment insurance, the scheme would represent a
European safety net for the welfare safety nets of individual countries. The
macroeconomic stabilisation effect would be significant, also because unemployment
benefits target a population with a high consumption propensity and thus have a large
fiscal multiplier effect.4
Implementation issues
Many options exist for how an automatic EMU-level fiscal stabiliser based on developments
in cyclical unemployment could interact with national systems: from relying mainly on
national systems to introducing some common features (notably on eligibility rules and
activation). However, it is generally assumed that the EMU scheme should remain
complementary to national schemes and should focus exclusively on short-term
unemployment (e.g. up to 6, 9 or 12 months).
A potential implementation risk consists of possible temptation by individual Member States
to reduce their own activation efforts or loosen the supervision of eligibility conditions when
they receive funding from a common pot (so-called "moral hazard"). Hence the introduction
3
Option recently advocated by Commissioner Andor (http://bit.ly/VFwjqk, http://bit.ly/1qylhA5).
Dullien (2013) suggests that it is possible with a supranational system of unemployment benefits to reach
large marginal stabilisation effect in downturns for a reasonable size of the system (0.7 % of euro-area GDP).
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of an EMU-level scheme should be accompanied by minimum requirements on eligibility and
activation, and on the capacity of the public employment services.
Regardless the different options to be considered, the EMU-level scheme, if accurately
conceived, wouldn’t necessarily lead to moral hazard but could represent an opportunity for
Member States to demonstrate their genuine willingness to cooperate within the Euro-area.
There would be no permanent transfers as all Member States would be net contributors and
net beneficiaries over the economic cycle. To limit net transfers and ensure medium-term
balance, national contribution rates could be regularly reviewed and adjusted (so-called
experience rating and clawback mechanisms), building on examples from federal systems
across the world.
Questions for debate
1. Could the functioning of the Economic and Monetary Union be improved by the
creation of a mechanism enabling automatic fiscal transfers to countries experiencing
rising short-term unemployment?
2. What would be the best modalities for partially pooling fiscal risks of short-term
unemployment at the EMU-level? Besides the stabilization effects, could this
mechanism contribute to strengthen the overall effectiveness of labor policies so
promoting further convergence among Member States?
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