EU unemployment insurance would require full labour market integration

A European unemployment insurance system would require deeper eurozone integration. [fdecomite/Flickr]

The implementation of a European unemployment insurance system could begin with the creation of a eurozone budget; a time-consuming but popular idea, according to the French Council of Economic Analysis. EURACTIV France reports.

The idea of a common system of unemployment insurance within the eurozone is taking off. The need to strengthen the budgetary policy of the single currency area to cope with systematic shocks appears to come into direct conflict with member states’ reservations about further economic integration.

But the establishment of a common unemployment insurance scheme within the eurozone, with its own budget, could be the thread that binds the currency union together, deepening eurozone integration and giving it a real social dimension.

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“This proposal for unemployment insurance would, for example, be less difficult for Germany than the coordination of budgetary policies,” said Agnès Bénassy-Quéré, a member of the French Council of Economic Analysis (CAE) and co-author of a note entitled Which Fiscal Union for the Euro Area?”

Another advantage is that this kind of insurance could be put together as an extension of the European Stability Mechanism (ESM), and so would not require treaty change. With treaty change currently a taboo subject in the EU, this is indispensable for the success of any programme.

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Following the American example

Published on 18 February, the analytical note co-authored by Bénassy-Quéré, Xavier Ragot of the French Economic Observatory (OFCE) and Guntram Wolff of Bruegel, an economic think tank, argues the case for a European unemployment insurance system based on the American model, which already exists at federal level.

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According to the analysts, the American federal insurance system supported the states to the tune of 0.4% of GDP between 2008 and 2011. “This system has worked in the United States, despite strong variations in the levels of cover offered by the different states, by providing 20 weeks of additional cover to the unemployed in states that are having economic difficulties,” Ragot said.

In fact, unemployment benefits in the US, which are not so long-lasting as those provided by most European countries, varies from 30% of the previous salary in Illinois to 60% in New Jersey.

“This kind of federal system plays an automatic stabilising role and helps to smooth the process,” Ragot explained.

Crisis system

In practice, a European unemployment insurance system (EUI) based on this model would be able to take over from national systems to extend the period of cover, but only in periods of crisis.

The non-systematic nature of the system would also get around the need to organise a permanent transfer system between countries where unemployment rates are low, like Germany, to those where they are high, like Spain. For Ragot, this would be “politically unacceptable”.

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This system would not tackle structural unemployment, but instead would respond to spikes in the unemployment figures. “With its high but relatively stable unemployment figures, France would not necessarily benefit from this fund,” Bénassy-Quéré explained.

Harmonisation needed

If the disparities between US states mirror those between the members of the eurozone, further convergence of the different EU labour markets appears to be a prerequisite for the success of this scheme.

“It is difficult to imagine an EUI without prior minimal harmonisation of labour markets,” the note stated, adding that changing the eurozone into a “fully-fledged federation will take a long time”.

For Bénassy-Quéré, doubts over the mechanism’s borrowing capacity represent another possible bottleneck. “One question that arises between the lines is this: can this fund run a deficit? If it is not authorised to do this, it may not be able to fulfil its function in a time of crisis. But on the other hand, if it is allowed to take on debt, that means that it will be able to issue European debt, or eurobonds,” she said.

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The idea of countering the weaknesses of Europe's social systems by establishing a common unemployment insurance mechanism, as well as an unconditional basic income, is becoming more popular.

These systems could equip the eurozone to tackle the high unemployment levels that it has experienced since the beginning of the economic crisis, which has slowed the recovery.

According to Eurostat, 21.944 million people were unemployed in the European Union in December 2015 (9%), of which 16.750 million (10.4%) were inside the eurozone.

French National Assembly

French Council of Economic Analysis

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