European Council on Foreign Relations

What happened to the idea of a European unemployment insurance?

It only takes an hour to travel from Berlin to Brussels but despite the short distance the debates on European issues that take place in both cities could not be more diverse. A case in point is the idea of a European unemployment insurance. The concept of such an insurance could help countries in crisis as it would absorb some of the costs of a sudden and deep recession. A European unemployment insurance – instead of a national one - would cover the costs connected to the increase in unemployment and would leave more money in the national budgets to stabilise national economies during a recession. It is a possible way to realise the so-called “fiscal capacity” (a term that made it into quite a few EU documents) which is supposed to help euro countries to deal with idiosyncratic shocks. (here is a more detailed explanation of how the concept could work)

A debate in Brussels…

In Brussels the idea seems to be gaining traction: In December 2012 the “four presidents” mentioned the idea of a common unemployment insurance for the eurozone in their roadmap “Towards a Genuine Economic and Monetary Union”. This year the European Commission has picked up the topic. On October 2, the Commission issued a communication titled “Strengthening the social dimension of the economic and monetary union“ which includes a long reference on a unemployment insurance. Last week, the European Commission’s DG employment and the Bertelsmann foundation organised a one-day conferencewith a focus on whether a European unemployment insurance could help Euro countries to deal with asymmetric shocks.  And the Commissions’s DG employment also published a proposal for a common EMU unemployment insurancebased in large parts on two short studies they had asked me to write in 2012 and early 2013. Although the idea is met with some criticism it seems to me that a constructive debate is happening in Brussels, and support for the idea is also increasing.

This by itself is quite astonishing. When I first presented the concept of a eurozone unemployment insurance back in 2007 (followed up with a series of articles with Daniela Schwarzer from the SWP in Berlin) nobody seemed to care. At that point, the common narrative was that EMU was working fine without a fiscal capacity and that no one would be interested in pushing such an idea anyway. Now this has changed. As one of the policy-makers among the participants of last week’s conference in Brussels put it: “The idea is here to stay, even if it is not implemented.”

No debate in Berlin…

The debate is very different when you travel to Berlin. If you listen to German officials (interestingly, widely absent from the Bertelsmann conference in Brussels), the European unemployment insurance has zero chance to be implemented. Internal discussions in the German finance ministry actually debunk the whole idea of ‘fiscal stabilisers’. Stabilisers, after all, can only work if there are transfers, even if only temporary, and this idea runs completely against what the German finance ministry is willing to accept at the moment.

Instead, the debates in the German finance ministry focus on how one could push the German idea of “contractual agreements” into the EU budget reform. The idea is not to transfer money to countries that need to prop up their ailing economies in the recession or which have high unemployment, but rather it is about paying countries after they have implemented certain predefined structural reforms. German officials go as far as thinking about dismantling existing transfers from the EU budget in order to have more funds available for their “Lisbon reforms  with sticks and carrots” [named after the Lisbon process of supply side reforms]. The feeling in Berlin is that all transfers are a way of the French to get into the Germans’ pockets.

The sad part of the story is not that the German position means that it is unlikely that a sensible fiscal capacity for the eurozone will be created. Much more worrisome is that the German position shows that there is a genuine lack of understanding of discourses elsewhere in Europe.

Actually, officials at the finance ministry seem not even be aware that the rest of Europe does not perceive Germany as the great benefactor. This week at another conference I met an intelligent participant (name and nationality not to be disclosed) seriously claiming that the Germans had a ‘master plan’ to impoverish the rest of Europe to get cheap labour which in turn would secure their competitiveness. While, of course, this is nonsense, it shows how parts of Europe perceive the German position.

Unfortunately, for any sensible policy proposal, you first need to agree on a common problem analysis. If the Germans and their partners do not even understand the other sides’ arguments for certain policy proposals, a well-functioning European monetary union will remain out of reach.

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