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Brussels, 18/10/2013

New paths to the stabilization of the Eurozone

Expert conference on automatic stabilizers for the European currency area

László Andor, Aart De Geus, Álvaro Santos Pereira and Shahin Vallée.
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From left to right: László Andor, Aart De Geus, Álvaro Santos Pereira and Shahin Vallée.
All Photos: Philippe Veldeman

On October 11th, 2013, the Brussels Office of the Bertelsmann Stiftung in collaboration with the European Commission held an international expert conference on the subject of "Automatic stabilizers for the Eurozone: pros and cons of a European Unemployment Benefit Scheme." Embedded in the foundation's work for the future design of the European Union, the event dealt with the question of which fiscal instruments are needed on a European level to effectively buffer economic downward trends in individual member states in the single currency area to prevent future crises.

The expert exchange was titled "Let's think out of the box" to make clear that the event was targeted beyond the management of the current Euro and sovereign debt crisis to point out paths to avoid comparable crises in future. About 120 representatives from politics, science and civil society participated. The main speakers were Aart De Geus, Chairman & CEO of the Bertelsmann Stiftung, EU Commissioner László Andor, responsible for employment and social affairs, and Pervenche Berès, Chairwoman of the Employment Committee of the European Parliament.

In his opening speech, Aart De Geus pointed out that the idea of introducing a European Unemployment Benefit Scheme (EUBS) is an interesting but controversially debated approach to absorb asymmetric economic shocks in the Eurozone by an automatic fiscal stabilization mechanism. At the same time, such an insurance could contribute to restoring citizens' languishing trust in the EU and the Euro. From the point of view of the Bertelsmann Stiftung, De Geus continued, introducing automatic fiscal stabilizers at European level will become necessary in a longer term perspective to overcome the construction flaws of the Economic and Monetary Union (EMU). The foundation would however still weigh the pros and cons whether an EUBS is the right way to achieve this objective or whether there are more convincing proposals for alternative stabilization mechanisms. Against this backdrop, Aart De Geus expressed the expectation that the conference outcomes would help the Bertelsmann Stiftung to clarify its position on this issue.

From left to right: László Andor, Aart De Geus and Álvaro Santos Pereira

As next speaker, EU Commissioner Andor referred to the Communication on the social dimension of the Economic and Monetary Union published on October 2nd by the European Commission. The subject of "automatic stabilizers" has been on the Commission's agenda for quite a while. In the longer term, the introduction of automatic stabilizers should be considered as a necessity for the Eurozone, not just as an option. Before presenting any specific recommendations on what such fiscal shock-absorption mechanisms at the EMU level should look like, the European Commission would need to conduct an in-depth analysis of the different options. Andor finished by saying that it was exactly for this reason that the Commission had decided to join forces with the Bertelsmann Stiftung in organizing the conference.

In the following debate, all panelists shared the observation that the construction plan for the Economic and Monetary Union has suffered from fundamental deficiencies from the very beginning. To a large extent, the current crisis could be explained by these shortcomings. To overcome them and to ensure more effective crisis prevention in the future, European policy-makers should place completing the Banking Union high on their short-term agenda. In the medium- to long-term perspective, however, most speakers considered the introduction of automatic fiscal stabilizers at the EMU level as a particularly promising approach towards more effective crisis prevention.

The starting point for the debates in the different conference sessions was the European unemployment insurance model developed by Sebastian Dullien from the HTW Berlin – University of Applied Sciences. This model is restricted to non-structural unemployment and characterized by the following key features: a) All employees in the Eurozone are insured. b) The average insured wage is 80% of the average wage in each country. c) EUBS replacement benefits amount to 50% of the insured wage which can be topped up by the national insurance systems. d) The maximum benefit duration is twelve months.

Supporters of this kind of EUBS solution stressed that its establishment could provide an important incentive to create a true European labor market. Those participants opposing a European benefit scheme referred to the far-reaching harmonization requirements that would result from its introduction for national insurance systems and therefore meet strong resistance from member state governments and the social partners. Quite a few discussants addressed another risk of establishing an EUBS: Such a scheme might trigger permanent transfers from a group of net contributors to a group of net recipients. Hence, the EMU would have to tackle serious moral hazard problems since the net recipients amongst the EMU member states might be tempted to eschew necessary labor market reforms.

As an alternative to an EUBS that would be easier to implement in the short term, Henrik Enderlein from the Hertie School of Governance in Berlin presented the concept of "Cyclical Shock Insurance". This automatic stabilization mechanism would be triggered by differences in the "output gap" (i.e. the difference between the potential and the actual GDP) of EMU members. According to Enderlein, there would be two key advantages of his proposal: on the one hand, his model would provide for a balance between revenue and spending at the end of every year; on the other hand - and different from an EUBS - there would be no need to change the EU Treaty for the introduction of "Cyclical Shock Insurance".

The third option for an automatic fiscal shock absorption mechanism at the EMU level was suggested by Daniel Gros from the Centre for European Political Studies (CEPS) in Brussels. He suggested a European Reinsurance Fund to support member states' unemployment benefit schemes. Rather similar to the highly decentralized US model, the main responsibility for financing the system and paying benefits would remain at the level of individual EMU member states. Like "emergency benefits" financed by the US federal administration, a European reinsurance fund would only grant support to EMU member states and their insurance systems if they were severely affected by an economic shock. As regards the revenue side, member states would have to pay regular contributions to this fund.

Participants of the conference

During four working sessions in the afternoon these different options for automatic stabilizers at EMU level were discussed in greater detail, with a special focus on the pros and cons of a European Unemployment Benefit Scheme. The workshop participants considered the introduction of an EUBS as a serious option for stabilizing the Eurozone. At the same time, most experts agreed that using the US system as a blueprint for such a solution would only make sense to a certain extent. The US system does not provide for any horizontal transfers between the 50 states due its decentralized structure. Only in times of severe crisis does the "emergency benefit" function of the federal budget compensate for the comparably low fiscal stabilization impact resulting from this lack of horizontal transfers. Due to the extremely small EU budget, however, vertical transfers could not play a comparable role in the fiscal stabilization of the Eurozone. Accordingly, a European Unemployment Benefit Scheme would have to rely to a much stronger extent on horizontal transfers between EMU members than the US system to show a significant stabilization impact. Another key challenge that was lively discussed was the diversity of national social security systems. Quite a few participants made the point that implementing an EUBS would first require a certain convergence of national systems, i.e. a convergence of these systems based on binding European minimum standards. A third issue featuring in the afternoon sessions was the potential risk resulting from the introduction of an EUBS for the cohesion of the EU as a whole. Some experts stressed that an unemployment benefit scheme at the EMU level could further widen the gap between the ins, the pre-ins and the outs, i.e. those member states already belonging to the Eurozone or striving to become EMU members and those member states that are not interested in joining the single currency.

The high-level speakers of the concluding session focused on the political feasibility of implementing shock-absorption mechanisms throughout the Eurozone and offered an outlook on pending key questions. All of them agreed that the discussion about "automatic stabilizers" has just started in the political realm and ought to be intensified before this project will become reality in a medium- or longer-term perspective. To enhance the likelihood of their introduction, the complexity of each of the mechanisms presented at the conference should be further reduced and particular attention should be paid to the question of how to combine the different proposals. Furthermore, priority should be given to approaches that would allow for the introduction of automatic stabilizers without changes to the EU Treaty. All speakers stressed that the social partners, i.e. employers and trade unions, must be actively involved in the political debate to achieve any progress. The Members of the European Parliament were asked to address the issue of the EMU's insufficient shock-absorption capacities in the upcoming campaign for the European elections in 2014.

As part of its project work on how to complete the Economic and Monetary Union and how to shape the future EU, the Bertelsmann Stiftung will further elaborate on the issue and pay special attention to the possible design of automatic stabilizers for the Eurozone. In a next step, we will analyze the results of the one-day expert conference to define our follow-up activities. To inspire a wider public debate, the Bertelsmann Stiftung has asked Sebastian Dullien to prepare a book publication describing his model for a European Unemployment Benefit Scheme in detail. The book will be published by the end of this year.

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