1. A Common Unemployment Insurance System for the Euro Area Brussels, 9 July 2013 European Parliament: Public Hearing on Social Dimension of EMU Dr. Ferdinand Fichtner, DIW Berlin Head of Forecasting and Economic Policy

2. Do We Need a European Transfer Mechanism? Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Common monetary policy cannot account for asymmetric business cycles Result: business cycles are magnified Inflationary pressure, overheating, creation of bubbles; too restrictive monetary policy for weak countries Additional Problem: reduced attractiveness of national fiscal policy High degree of trade integration leads to a leakage of fiscal stimulus to neighbouring countries Result: Incentive problem (domestic costs but benefits partially in partner countries) and potential magnification of business cycles Fiscal transfer mechanism reduces economic volatility and makes a more appropriate monetary policy possible Thereby: Higher investment activity (risk aversion) and reduced structural labour market problems (hysteresis)

3. Calculating the Output Gap for Transfers is Problematic Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism 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 Political support is uncertain Automatic transfer mechanism in the form of an unemployment insurance largely avoids these problems

4. Calculating the Output Gap for Transfers is Problematic Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism 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 Political support is uncertain Automatic transfer mechanism in the form of an unemployment insurance largely avoids these problems

5. Alternative: European Unemployment Insurance System Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism 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

6. Advantages of a European Unemployment Insurance Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism Automatic stabiliser: Economic upturn: reduced purchasing power of the country Economic downturn: increased purchasing power of the country Strong correlation between short term unemployment and business cycle Transfer payments immediately affect demand No additional burdens: European UIS replaces part of national insurance systems 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 long- term unemployment, no incentive for governments to reduce reform efforts

7. Problems of a European Unemployment Insurance Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism 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 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)

8. Source Ferdinand Fichtner - 09.07.2013 A Common Unemployment Insurance System for the Euro Area as Automatic Transfer Mechanism 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

9. DIW Berlin Deutsches Institut für Wirtschaftsforschung e.V. Mohrenstraße 58, 10117 Berlin www.diw.de Thank you for your attention. Dr. Ferdinand Fichtner, ffichtner@diw.de