EU-wide basic insurance scheme to alleviate crisis?

9.10.2014
Structural transformations do work in the medium term, but new ways are needed to stimulate the EU's economy in the meantime, commissioner László Andor says.

The second wave of the economic crisis, which started in Europe in 2011 and still continues, sets EU member states apart from the rest of the industrialised world.

While the US economy, for example, has gradually recovered in the past years, the Eurozone as a whole has experienced further decline in employment, income and social well-being.

In 2012, close to 125 million people in the EU were at risk of poverty or social exclusion and 50 million experienced severe material deprivation, up from 40 million just three years before, according to official statistics.

There are, however, remarkable differences between EU countries. While some, such as Germany and Austria, are accumulating ever bigger surpluses, many ”southern and peripheral” member states are struggling with a heavy debt burden, stagnating economy, severe social problems and mass emigration.

Asymmetric shocks but unified set of fiscal rules

According to László Andor, the EU commissioner responsible for employment and social affairs since 2010, this divergence between countries is ”unprecedented” in the EU's history.

Speaking at the University of Helsinki on Tuesday 7 October, Mr Andor argued that the main reason for Europe's present economic woes and internal imbalances is the flawed design of the economic and monetary union (EMU). Eurozone governments have not been able to revitalise their economies through currency devaluation or deficit spending, and the EU as a whole has failed to maintain sufficient aggregate demand.

– Asymmetric shocks can't be handled with a unified set of fiscal and monetary rules. The fact that you have to apply standard rules irrespective of the current economic situation has limited [EU governments'] ability to act, Andor said.

– The European central bank's potential for counter-cyclicality is constrained by its narrow mandate.

Stimulus to boost demand

In the commissioner's view, structural transformations are crucially important to improve the long-term vitality of the EU economy, but as their impacts will materialise with a 5-10 year delay, something has to be done to stimulate aggregate demand in the shorter term.

Given that EMU rules and political opposition from some member states block large-scale EU fiscal manoeuvres to this end, so-called automatic stabilisers, such as unemployment benefits and other welfare spending, play a key role.

EU-wide unemployment insurance

To support the worst-hit member states, all of which have had to cut such transfers during the crisis, Mr Andor proposes a novel idea: a common EU-wide basic unemployment insurance that would be ”topped-off with more generous national schemes”. 

In his view, this type of an EU insurance would not violate EMU rules – as long as it only applied to non-structural as opposed to structural unemployment – and it would considerably boost demand and economic activity. 

 – In terms of economic growth, the EU as a whole would always benefit, in any chosen model.

And how could such a plan be sold to the better-off member states that would fear ending up on the paying side?

– All models show that in 20-25 years, all countries would at some point be contributors and at some other point beneficiaries. The cycles go round.