1 / 9

A Common Unemployment Insurance System for the Euro Area Brussels, 9 July 2013

European Parliament: Public Hearing on Social Dimension of EMU. Dr. Ferdinand Fichtner, DIW Berlin. Head of Forecasting and Economic Policy. A Common Unemployment Insurance System for the Euro Area Brussels, 9 July 2013. Do We Need a European Transfer Mechanism?.

marsden-emerson
Download Presentation

A Common Unemployment Insurance System for the Euro Area Brussels, 9 July 2013

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. European Parliament: Public Hearing on Social Dimension of EMU Dr. Ferdinand Fichtner, DIW Berlin Head of Forecasting and Economic Policy A Common Unemployment Insurance System for the Euro AreaBrussels, 9 July 2013

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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 long-term unemployment , no incentive for governments to reduce reform efforts A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism

  7. 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

  8. 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

  9. Thank you for your attention. Dr. Ferdinand Fichtner, ffichtner@diw.de

More Related