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A new fiscal policy for the EU: the European unemployment insurance

The setting up of a European anti-unemployment scheme could be a powerful stabiliser and a driver of structural reform in the labour market. Can we convince the Germans? // Un assegno europeo di disoccupazione rappresenterebbe una rete di protezione contro le crisi e spingerebbe molti paesi a riforme del mercato del lavoro. Una proposta per farlo digerire ai tedeschi
A new fiscal policy for the EU: the European unemployment insurance

Seven years into the financial crisis, the European economy is still struggling to recover. Unemployment levels in Europe have reached a historic high rate. In Italy 60% of the population aged between 24 and 65 is currently in employment, 66% in France, and 58% in Spain. In Germany, in contrast, the employment rate is well above 77%.

Taking up the presidency of the EU council, Italian prime minister Matteo Renzi announced a new agenda for growth and a new political vision for Europe. One of the priorities should be the introduction of a pan-European unemployment insurance scheme. The dichotomy “austerity vs spending” frames much of the political debate in Europe, fuelling discontent and diffidence across the continent. This dichotomy is, however, misleading.

Countries saddened by high public debt – like Italy – have no alternative to keeping balanced budgets, but European integration cannot move further without a critical appraisal of the current system of economic governance. Europe’s lack of adequate fiscal instruments precipitated the economic crisis into a negative spiral for many of the southern European countries. The lack of bold ex ante actions resulted in a deeper recession and heavier social and economic cost ex post. Europe needs new fiscal instruments to prevent cyclical crisis from degenerating into negative spirals.

The setting up of a common minimum employment insurance scheme for the Eurozone countries could act as an economic stabiliser during any future period of downturn. How could this work? A recent study by the Centre for European Policy Studies in Brussels reviewed the different options on the table. The scheme – funded by member states – would provide further resources to national governments when unemployment rates reach a predetermined level.

As it is often the case, the political and economic feasibility of any such scheme will depend on how it will be designed to work in practice. Two key elements need to be decided at the political level. First, whether the fund should support member states only in case of deep crisis or also with moderate levels of unemployment. The latter would be, in practice, a harmonization of existing national unemployment insurances. Second, it should be decided whether the scheme would amount to a permanent transfer of resources among member states, or would be a limited insurance mechanism where contributions by individual countries balance out in the long term.

The European Parliament endorsed the setting up of a European unemployment insurance in 2014 but there is no consensus over this instrument among member states. Germany is not in favour of resource transfers among countries. To win over the more reluctant countries, the fund should not be designed as system for transferring resources, but rather as an insurance against cyclical crisis for all member states.

The lack of a common European unemployment insurance has already produced additional costs for all member states. A study published by the think tank Bruegel suggested that in Spain the existence of such fund could have mitigated the downturn by almost 25%, reducing the cost of the crisis by approximately 11 billion euros. In Greece and Ireland it would have resulted in a reduction of the cost of the crisis by 1.6 and 2.3 billion, respectively. Overall, over 15 billion in lost GDP could have been saved.

The European unemployment insurance would also be a powerful driver of structural reform at national level. Italy, for example, does not have a national unemployment scheme. Much of its welfare spending goes into protecting jobs in large industries rather than protecting workers. In order to tap into this scheme, Italy will have to reform its welfare system by cutting spending on outdated industry subsidies (“cassa integrazione”), and establishing a universal unemployment insurance subject to active labour policies.

Umberto Marengo is a researcher in International Relations and EU Public Policy at the University of Cambridge

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