Since 2012, when the reform of the EMU began, the possibility of and need for unemployment insurance within the Eurozone has been frequently discussed. The Five Presidents’ Report, which explains so clearly the problem of divergence, provides another opportunity to have a serious debate on this instrument, potentially opening the avenue of practical changes as well.

Options for automatic stabilisers

Most macroeconomists seem to agree today that the incomplete nature of the EMU makes it unsustainable in its current form, but there can still be a debate about what should be the next step. Some oppose automatic fiscal stabilisers either because they are automatic, while others may be hesitant because they are fiscal (and other types of risk sharing or no risk sharing at all would be preferred). Of course, this debate has to happen, but if it lasts too long, any next step can come too late to save the single currency from the coming economic storms and political challenges.

At the beginning of 2015, preference was given to three key actions in the pursuit of a sustainable recovery. A more flexible interpretation of fiscal rules was adopted, the Juncker plan was launched (creating EFSI), and the ECB embarked on quantitative easing (QE) in practice. In one year it became clear that, while useful and necessary, these actions do not add up to a full solution either separately or in combination. Nevertheless, there seems to be no end to further proxies, whether we speak about Capital Market Union (CMU) or competitiveness councils.

In discussions on Eurozone fiscal capacity, experts speak about three possible models of automatic stabilisers. They have different implications in terms of the frequency of transfers, the definition of final beneficiaries, the need for harmonization and governance, as well as the sourcing of the model.

Some experts have explored the possibility of automatic income support for situations of major economic downturns, defined on the basis of the „output gap”. Most likely, such a solution would be in conformity with the current Treaty, but it also has disadvantages. The output gap is a concept too abstract for many people, and when it is calculated, it is often corrected ex post, which risks leading to perverse outcomes. In addition, it entirely lacks a social focus (i.e. it is not certain at all that the beneficiaries of such transfers would be the more vulnerable victims of economic crises).

Reinsurance of national unemployment insurance funds is another possibility. The national capacity of dealing with cyclical unemployment would be supported, but transfers would only be triggered by major crises. Such a scheme would make a stronger and more visible impact at times of crisis, while lacking a role in case of more modest fluctuations. There is a real risk in setting the trigger too high (in terms of rising unemployment above „standard” levels), and thus making the model less effective than potentially possible.

Finally, a partial pooling of unemployment benefit systems would make an economically more advanced solution, by also defining some common minimum standards accross countries (in terms of minimum replacement ratio and duration). The minimum would not be a maximum, because member states could top up payments from the common pool and also extend coverage from their own resources. But the common pool would already have a significant stabilisation effect and it would represent EU solidarity in countries experiencing temporary hardships do to the limitations of their macroeconomic toolbox in the monetary union.

Had such insurance mechanisms existed in the EMU since the times of 1999, the establishment of the single currency, all member states would have been beneficiaries for a shorter or longer period. Countries experiencing a severe recession would have received fiscal transfers amounting to 0,5-1 per cent of their GDP, helping them to a faster recovery and ending up with less poverty and income inequality for which the EU or the euro are blamed today.

Addressing legitimate concerns

From a macroeconomic point of view, stabilisation means dealing with asymmetries and cyclicality. Since perfect ex ante solution (through policy coordination) cannot be developed, it is necessary to have an ex post possibilities, which means we need to have a fiscal capacity for shock absorption (as long as we want to remain in a transparent, orderly and rule based model). This also means introducing elements of a fiscal union, or in other words, transfers.

Those who immediately connect fiscal transfers with moral hazard should not forget that such arrangements are part of national macroeconomic systems at much larger scale. What is more, in 2013 the European Council was about to introduce fiscal transfers called Competitiveness and Convergence Instrument (CCI). The fact that this effort failed (due to the failure to connect specific structural reforms with certain amounts of fiscal transfers) should not mean that transfer in general is a non-starter and fiscal capacity would be a wrong idea. It simply means that conditionality cannot be included on a case by case basis, when the transfer has to be made, but it has to play a role at the time of entering the mechanism at the very start.

Another name for entry conditionality is harmonization, but the need for this is often exaggerated in current discussions. Since the suggested safety-net for the euro would only need to be connected with short-term (cyclical) rather than long-term (structural) unemployment, it is a relatively smaller part of labour market organization and statistics that has to be harmonized and not the whole institutional framework. The degree of harmonisation needed depends on the chosen model, but it would need to be modest in any case, since there is no proposal on the table which would want to cover unemployment in its totality.

Concerns have also been expressed about the future role of social partners, who in various EU countries play a strong role in governing unemployment insurance. Indeed, in any chosen model there would be a need for EU level governance, which could be organized in a tripartite way, giving a real and influential role to the social partners (practically to control the adjustment tools of the mechanism like experience rating and clawbacks). Just like the case of the Youth Guarantee, the EU level unemployment isurance model would need to draw on the best available practices in Europe, and in those the social partners play a significant role.

The EMU and the social agenda

Today the key question alongside economic stabilisation is how to strengthen the social dimension of the EMU and counter social divergence. Purely by setting standards without also providing support will not be sufficient. Moving towards an actual fiscal capacity therefore is crucial if we want to see change in reality and not only in principle.

Automatic stabilisers offer the solution to counter „asymmetric shocks” and resulting imbalances by having a rule-based and conditional mechanism of temporary fiscal transfers. In a long enough cycle, all member states would be net beneficiaries at some point, and the entire community would benefit from the capacity to support aggregate demand, economic activity, employment and eventually social cohesion in zones of economic downturn.

This initiative also has to be looked at from a more historic perspective. Since the very launch of the EU, the social dimension was indispensible for its sustainability and legitimacy. However, the social agenda of the EU was defined in the Delors era, and it has been primarily focusing on employment related legislation. Together with cohesion instruments in the EU budget, social legislation has ensured that the single market does not lead to a polarisation among member states and it makes real convergence possible.

However, the European Social Model is more than what the EU social agenda has covered in recent decades. All countries in the EU have the ambition to be welfare states in a sense to be able to limit unemployment, poverty and income inequality. This is an ambition born well before the monetary union was created. But the eurozone crisis has severely damaged this capacity in countries of the eurozone periphery, and the problem is linked not simply with the crisis response but the incomplete nature of the EMU.

The establishment of a minimalist monetary union produced new types of financial and social risks, and the crisis of the EMU brought the EU to massive divergence and a weakening of the national welfare systems. Such dynamics undermine public confidence in both the EU and its single currency.

If it is true, that the economics of the EU has to move beyond the Maastricht orthodoxy, it is also true that the pre-Maastricht concept of a Social Europe does not suffice either in the 21st century. The financial crisis has produced an unprecedented social crisis but social policy alone cannot compensate for the malfunctioning of the monetary union. It is the monetary union itself which needs to be repaired and reformed, and this has to be seen as a pre-condition of an effective social agenda, if not the part of that.

National welfare systesms rest on legislative as well as budgetary pillars. Today, however, it is the EMU that controls most of the parameters that frame national welfare systems (and especially the stabilising function of fiscal systems), hence social policy cannot just be a matter of subsidiarity either. The EU social agenda has to connect with a wide spectrum of policies, including economic policy coordination, structural reforms, labour and welfare legislation, and budget resources.

The point with unemployment insurance is that it is a possible element of economic and monetary reform, while it forms part of the social dimension as well. When political capital is limited, the availability of an instrument that could make positive impact on both economic and social sides of the crisis should be appreciated.