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?
•
Thereby: Higher investment activity (risk
aversion) and reduced structural labour
market problems (hysteresis)
2
0
Source: European Central Bank, DIW calculations.
Taylor rate = 1 + 1,5*inflation + employment gap.
A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
Ferdinand Fichtner - 09.07.2013
2012
2011
2010
-2
2009
Fiscal transfer mechanism reduces economic
volatility and makes a more appropriate
monetary policy possible
4
2008
•
Result: Incentive problem (domestic
costs but benefits partially in partner
countries) and potential magnification of
business cycles
6
2007
•
High degree of trade integration leads to
a leakage of fiscal stimulus to
neighbouring countries
8
2006
•
Taylor rule periphery
Taylor rule Germany
2005
Additional Problem: reduced attractiveness of
national fiscal policy
10
2004
Inflationary pressure, overheating,
creation of bubbles; too restrictive
monetary policy for weak countries
2003
•
ECB Main Refinancing Rate
Taylor rule core
2002
Result: business cycles are magnified
2001
•
Money and Inflation
(ratio; % y-o-y)
2000
•
Common monetary policy cannot account for
asymmetric business cycles
1999
•
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
•
•
Output gap estimates over time
(% of Potential GDP)
4
Political support is uncertain
Automatic transfer mechanism in the form of
an unemployment insurance largely avoids
these problems
Germany
3
2
1
0
-1
-2
-3
-4
-5
-6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD Economic Outlook, several issues.
Last observation: 2012.
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:
•
•
•
•
•
Output gap estimates over time
(% of Potential GDP)
4
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
Spain
2
0
-2
-4
-6
-8
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD Economic Outlook, several issues.
Last observation: 2012.
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
Diagram of a European Unemployment
Insurance System
(% of previous disposable income)
70
60
50
National
insurance
benefits
40
30
20
European
unemployment
insurance
10
0
12
•
Month in unemployment
Source: Dullien and Fichtner (2012; 2013).
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
Unemployment rates in Europe
(ppt. deviation from euro area average)
Germany
Economic downturn: increased
purchasing power of the country
15
•
Strong correlation between short term
unemployment and business cycle
10
•
Transfer payments immediately affect
demand
5
•
No additional burdens: European UIS replaces
part of national insurance systems
0
•
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
France
Italy
Spain
Netherlands
-5
-10
2001
2003
Source: Eurostat.
Last observation: May 2013
A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
Ferdinand Fichtner - 09.07.2013
2005
2007
2009
2011
2013
Problems of a European Unemployment Insurance
•
•
•
•
Unemployment rates in Europe
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
(ppt. deviation from euro area average)
Germany
France
Italy
Spain
Netherlands
15
10
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)
5
0
-5
-10
2001
2003
Source: Eurostat.
Last observation: May 2013
A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism
Ferdinand Fichtner - 09.07.2013
2005
2007
2009
2011
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