What Does an EU Unemployment Benefits Scheme Offer the Eurozone?

The European debt crisis has set off a debate about deeper fiscal integration in the European Union. For a while now, there have been discussions about introducing an unemployment benefits scheme to stabilize economic development in the eurozone. Dr. Mathias Dolls, deputy head of ZEW’s Research Group "International Distribution and Redistribution", talks about the chances and risks for the eurozone associated with a common unemployment insurance scheme.

What would an EU-wide unemployment benefits scheme look like?

There are essentially two models under discussion. In the first, Member States of the eurozone agree on minimum standards for their national unemployment programmes, which are then introduced as part of an EU-wide scheme. Each Member State may pass additional national regulations that go beyond the minimum standards, allowing, say, higher replacement ratios or longer benefit periods. With this approach, the EU unemployment benefits scheme replaces a portion of national insurance programmes. The financing could be provided by social security contributions. In the second model, a European fund provides back-up insurance for the national systems. This approach has two central differences to the first. For one, the national systems remain completely intact. For another, the unemployed will continue to receive benefits from the national systems. These receive back up from the European system only under exceptional circumstances – such as during major economic crises, when the unemployment rate rises sharply.

Regardless of the model, what’s the basic value of having an EU unemployment benefits scheme?

The value depends on the extent it can absorb asymmetric macroeconomic shocks – that is to say, shocks in the eurozone that affect Member States with varying degrees of force. Our work at ZEW has shown that in the period between 2000 and 2013, around 10 per cent of income fluctuation in the labour force could have been absorbed by a European unemployment benefits scheme. Its overall anticyclical effect would have helped stabilise the eurozone.

What are the greatest risks to such a scheme and what are some ways to address them?

First and foremost, a fiscal insurance mechanism must not lead to permanent transfers between Member States. Such an outcome would meet with strong resistance in the net contributor countries, making the mechanism politically unviable. Moreover, it is important that support for political reform in countries with structural labour market problems does not weaken. If the collective unemployment benefits scheme exclusively addresses short-term unemployment caused by economic downturns, the majority of the Member States, including Germany, would be net contributors in some years and net beneficiaries in others. There are some exceptions, however. One way to reduce the likelihood of one-side transfers and counteract disincentivisingeffects would be to introduce risk-dependent country-specific insurance premiums. Another important aspect is the harmonisation of national labour market policies. Without it, the danger is large that countries with rigid labour markets will benefit at the cost of countries with flexible labour markets. Hence, participation in collective unemployment benefit schemes should be made conditional on the fulfilment of stability criteria and the passing of reforms.

How can a European fiscal union be implemented in the long term? Europe has already agreed on a stability mechanism and a bank union.

The ZEW plan for a fiscal union provides a sovereign insolvency procedure in addition to the fiscal insurance mechanism. The combination of these instruments should increase market discipline and help cushion major asymmetric shocks. Together with further reforms in the bank sector, they could place the eurozone back on solid footing. Even if these recommendations are not politically viable in the short run, it is important not to lose sight of a sustainable vision for the eurozone.