A European unemployment benefit scheme

A European unemployment benefit scheme

Empty talks or a soon-to-be reality?


On 21st October, the Centre for European Economic Research (ZEW) hosted an event focused on the possible implementation of a common unemployment insurance system (EMU-UI) and its potential impact on the overall EU unemployment rate.

Given the toll that unemployment is taking on Europe and, especially, on youngsters, such a scheme would be, at least in theory, extremely beneficial for a number of people in several countries. Of course, these kinds of debate on such controversial topics, touching upon financial commitments from the Members States, always incur the risk of becoming just nice words up in the air. Nevertheless, it is important to raise awareness on the topic, but also to keep pushing for the adoption of concrete steps.


Let’s start with some healthy talks

During the event, ZEW’s research group introduced its position paper presenting two possible courses of action in introducing the EMU-UI. The first option considers the possibility of creating a common benefit system that covers short-term unemployment and offers a basic level of income by replacing the national benefits system up to a certain extent. This means that if Iacopo, who is Italian, loses his job, he would receive a % of European unemployment benefit and a % of an Italian one for a few months, let’s say one year. Good for Iacopo! But if Iacopo doesn’t find a new job after one year, well “good luck, Iacopo!”, because long-term unemployment would not be covered by the scheme. The rationale is in the desire to limit the risk of permanent redistribution of resources between Member States and retaining incentives for national policy-makers intervention.

Alternatively, the second option contemplates the implementation of a common scheme that would kick-in in the case of a large unemployment shock in the Euro Zone. These contingent benefits would be designed in such a way to maintain the short-term national benefits systems and only manage financial flows between European fund and national benefits systems. This means that if there is a sudden economic crisis with huge loss of jobs, and Iacopo loses his job, then he would benefit from Italian unemployment benefits activated by the European reserves in the EMU-UI.


But the EMU-UI scheme can be risky…

Supporters of a centralised EMU-UI believe that this system would provide vulnerable households with the means to afford a respectable lifestyle and in the meanwhile, it would mitigate the asymmetric shocks. Moreover, the EMU-UI would not only improve the flexibility of the European monetary union, but it would also greatly benefits the public perception of the EU in its social dimension. This means that not only Iacopo would have better living-conditions and would probably feel more protected by the EU, but also Italy and other countries would converge more economics-wise.

The main concern is that the EMU-UI would see a one-way flow of funds from the wealthiest States to the ones that have historically undergone economic distress. So, to clarify, the risk is that Iacopo continues to benefit from the money that, for example, Germany and other wealthy countries keep inputting in the scheme. Additional concerns are related to moral hazard issues such as administrative manipulation or adverse incentives that a benefits system of this kind could bring to national governments. In few words, we have an adverse incentive when this scheme, instead of reducing the Italian unemployment rate, has opposite results from the ones expected by the policy makers, meaning raising it.

youth unemployment rate in EU - March 2015
This chart shows the youth unemployment rate in the European Union in March 2015. Source: https://www.statista.com/chart/3644/youth-unemployment-still-unrelenting-in-europe/


So, wrapping up on the thoughts on the EMU-UI.

Overall, the EMU-UI system is a promising and interesting policy proposal, especially given the pressing issue of unemployment. For sure, the implementation of such a scheme will persist as one of the most important topics on the economic agenda.

A doubt that keeps surrounding the EMU-UI lays in the ability of the EU to put in place such an ambitious project. We are in a historical period that sees the EU struggling to create political support even behind its basic principles. The suggestion to foster any kind of harmonization of Member States’ structures or pushing forward a more extensive fiscal integration would find strong political opposition.

However, to fight the increasing EU skepticism we need to see the EU taking risky and bold decisions. It may be the only way to keep this long-term project right on track.


by Iacopo Simonelli


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