Nova workboard

a blog from young economists at Nova SBE

In good times and in bad, in sickness and in health: A common Unemployment Scheme for European Citizens?

Nearly a decade of economic crises in Europe has shown how incomplete and vulnerable the institutional setting originally set up to create the monetary union is to country-specific shocks. Economists have long discussed the (dis-)functions of the Euro Area as an optimal currency area (OCA), a theory that describes the functionality of a common monetary system. The Euro has especially been criticized for its lack of means of fiscal policy, considered a vital for an OCA and essential to accompany monetary policy if asymmetric shocks remain across the area – and divergences during the Euro crisis have shown they do.

A frequently discussed tool that can contribute to this issue is a common European unemployment benefit system (EUBS), prominently favoured by the European Commission. Whereas an EUBS could take several forms – Beblavý and Lenaerts describe 18 alone – the basic structure remains the same: For citizens, an EUBS would work as a risk-sharing device very like the national schemes they know now.
For countries, however, an EUBS could work as a strong stabilizer in times of crisis that prevent further slumps in fiscally stressed situations as during the Euro crisis when a vicious cycle of economic downturns and austerity measures fed into each other – that an EUBS could help breaking.
If a country faces a sudden shock to unemployment, an EUBS would supply the unemployment benefits that would usually burden the state finances in a situation of crisis, freeing it from needs of fiscal tightening or even allowing it to pursue counter-crisis measures.

Even systems relative small in volume – 6-month duration and 30% benefit replacement rate – could bring along large stabilization benefits.
Such a tool would not only support a country’s domestic economy but also reduce economic fluctuations across Europe, fostering more stable growth. Furthermore, the implementation of an elaborate supranational system would force the convergence of national labour markets, promoting labour integration and mobility, another OCA criteria, on the way.

Besides economic gains, an EUSB would also have the potential to be a tool of European solidarity and identification.
A common EUBS would commit Europeans to a path of shared prosperity and stability, inciting a feeling of solidarity as peoples sharing a fate in good as in bad times. It would send a strong signal that the EU is not only an institution for global companies or educated people hopping between countries but a solidary union that devotes common resources and capabilities to support some of society’s neediest

Despite a general understanding and agreement on overall stabilizing, positive economic effects, it will face political upwind, amongst others, from Germany, as the Commission is well aware. Some Germans have long held the (rightfully doubtable) self-image of paying for the EU. Memories are short-lasted and not long ago, Germany was considered the sick man of Europe. Commission calculation’s show that Germany stands to benefit from an EUBS in times of downturns as much as any other country – not to speak of the benefits of a more stable political and economic environment.

Robin Bohn

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Author: studentnovasbe

Master student in Nova Sbe

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