European Parliament Public Hearing on Social Dimension of
European Parliament: Public Hearing on Social Dimension of EMU A Common Unemployment Insurance System for the Euro Area Brussels, 9 July 2013 Dr. Ferdinand Fichtner, DIW Berlin Head of Forecasting and Economic Policy
Do We Need a European Transfer Mechanism? • • Common monetary policy cannot account for asymmetric business cycles • Result: business cycles are magnified • Inflationary pressure, overheating, creation of bubbles; too restrictive monetary policy for weak countries Additional Problem: reduced attractiveness of national fiscal policy • High degree of trade integration leads to a leakage of fiscal stimulus to neighbouring countries • Result: Incentive problem (domestic costs but benefits partially in partner countries) and potential magnification of business cycles • Fiscal transfer mechanism reduces economic volatility and makes a more appropriate monetary policy possible • Thereby: Higher investment activity (risk aversion) and reduced structural labour market problems (hysteresis) A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Calculating the Output Gap for Transfers is Problematic • Classical approach: Fiscal transfers as function of the output gap • Drawbacks: • • Methodological uncertainties in calculating the growth potential and output gap • Transfers are not compulsory and/or do not affect demand quickly enough • In political practice, adopted support measures are not reversed once economic situation changes • Political support is uncertain Automatic transfer mechanism in the form of an unemployment insurance largely avoids these problems A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Calculating the Output Gap for Transfers is Problematic • Classical approach: Fiscal transfers as function of the output gap • Drawbacks: • • Methodological uncertainties in calculating the growth potential and output gap • Transfers are not compulsory and/or do not affect demand quickly enough • In political practice, adopted support measures are not reversed once economic situation changes • Political support is uncertain Automatic transfer mechanism in the form of an unemployment insurance largely avoids these problems A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Alternative: European Unemployment Insurance System • • Basic idea: • Quick automatic transfer mechanism analogous to automatic stabilizer • Transfer of funds without econometric calculations and much political discretion Characteristics: • Employees pay a part of their wages into a European UIS and would receive compensation payments from this fund in the event of unemployment • Duration of payments would only cover short term unemployment (e. g. one year max) • Relatively low transfer payments (“lowest common denominator”) that can be combined with national payments A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Advantages of a European Unemployment Insurance • Automatic stabiliser: • Economic upturn: reduced purchasing power of the country • Economic downturn: increased purchasing power of the country • Strong correlation between short term unemployment and business cycle • Transfer payments immediately affect demand • No additional burdens: European UIS replaces part of national insurance systems • Low bureaucratic burden, high transparency • Controllable incentive effects : • Incentives for the unemployed to look for a new job do not change as payments from the new unemployment insurance replace domestic transfers • Countries remain responsible for longterm unemployment , no incentive for governments to reduce reform efforts A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Problems of a European Unemployment Insurance • • Risks • High payments during the introduction of European UIS could reduce the willingness to reform labour market • Permanent transfers between countries cannot completely be precluded Further limitations • Functioning automatic stabilisers on national level would make European UIS redundant – but do they work? • No solution for structural asymmetries between member states (e. g. wage negotiating systems, competitiveness, labour market regulation) A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Source Sebastian Dullien and Ferdinand Fichtner (2013), A Common Unemployment Insurance System for the Euro Area, in: DIW Economic Bulletin 1/2013. https: //www. diw. de/sixcms/detail. php? id=diw_01. c. 413722. de A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Ferdinand Fichtner - 09. 07. 2013
Thank you for your attention. Dr. Ferdinand Fichtner, ffichtner@diw. de DIW Berlin — Deutsches Institut für Wirtschaftsforschung e. V. Mohrenstraße 58, 10117 Berlin www. diw. de
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