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 ID: 584956
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Slide1
A Common Unemployment Insurance System for the Euro AreaBrussels, 9 July 2013
European Parliament: Public Hearing on Social Dimension of EMU
Dr. Ferdinand Fichtner, DIW Berlin
Head
of
Forecasting
and
Economic
PolicySlide2
Do We Need a European Transfer Mechanism?Ferdinand Fichtner - 09.07.2013
A Common Unemployment Insurance System for the Euro Area as Automatic 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
)Slide3
Calculating the Output Gap for Transfers is ProblematicFerdinand Fichtner - 09.07.2013A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
Classical approach: Fiscal transfers as function of the output
gapDrawbacks:
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 problemsSlide4
Calculating the Output Gap for Transfers is ProblematicFerdinand Fichtner - 09.07.2013A Common Unemployment Insurance System for the Euro Area as Automatic Transfer MechanismClassical 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 problemsSlide5
Alternative: European Unemployment Insurance SystemFerdinand Fichtner - 09.07.2013A Common Unemployment Insurance System for the Euro Area as Automatic Transfer MechanismBasic
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 paymentsSlide6
Advantages of a European Unemployment InsuranceFerdinand Fichtner - 09.07.2013
A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
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 effortsSlide7
Problems of a European Unemployment InsuranceFerdinand Fichtner - 09.07.2013
A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
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)Slide8
SourceFerdinand Fichtner - 09.07.2013A Common Unemployment Insurance System for the Euro Area as Automatic Transfer MechanismSebastian 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.deSlide9
Thank you for your attention.Dr. Ferdinand Fichtner, ffichtner@diw.de