Cost of non-Europe of the Absence of an Unemployment ... · benefits in EU MS, ascertain what are...

Directorate-General for Internal Policies

Directorate G - Impact Assessment and European Added Value

Costofnon-EuropeoftheAbsenceofanUnemploymentInsuranceScheme

fortheEuroArea

Simulationexercise

IP/G/EAVA/IC/2013-138

Contents

1. Introduction..........................................................................................................................................................................5

2. Existingsituation ...............................................................................................................................................................6

2.1 Briefsummaryofnationalsystems ..................................................................................................................6

2.1.1 Design......................................................................................................................................................................6

2.1.2 Financingandexpenditure ..........................................................................................................................7

2.2 Coordinationofexistingnationalsystems....................................................................................................8

2.2.1 EUregulationonthecoordinationofnationalsystems................................................................8

2.2.2 OtherEuropeansystemsofunemploymentbenefitcoordination.......................................10

2.3 Europeanfunds ........................................................................................................................................................10

2.4 TheUSsystemofunemploymentinsurance.............................................................................................13

2.5 Potentialeconomic,politicalandsocialrationaleforEUactiononUB......................................17

2.5.1 Theeconomictheory....................................................................................................................................17

2.5.2 Politicalandsocialrationale ....................................................................................................................20

2.6 Summaryofexistingproposals........................................................................................................................21

3. Outlineofmaintrade-offsandchallenges .........................................................................................................24

3.1 Whatsituationsshoulditcover?Whatshouldbethetrigger?........................................................24

3.1.1 Unemploymentrateandshort-termunemploymentrate........................................................25

3.1.2 Unemploymentgap.......................................................................................................................................26

3.2 WhatshouldbethefiscalruleforEUIanda countrycontribution? ............................................27

3.2.1 Asystembalancedannually .....................................................................................................................27

3.2.2 Aflexiblesystem– nofiscalrule ............................................................................................................27

3.2.3 Fiscalbalanceovertheeconomiccycle ..............................................................................................27

3.3 ShouldtherebecommonEUstandardsforUB?.....................................................................................28

3.4 Additionaltechnicalissues.................................................................................................................................29

3.4.1 Participation:EU28vsEurozone ...........................................................................................................29

3.4.2 Revenues.............................................................................................................................................................30

3.4.3 Implicationsforotherprogrammes .....................................................................................................31

4. EuropeanUnemploymentInsurance- simulationresults ........................................................................32

4.1 OPTION1:HarmonisedEuropeanunemploymentbenefit...............................................................34

4.1.1 Theharmonisedunemploymentsystemwithnofiscalrule(option1a)..........................35

4.1.2 The harmonised unemployment system with long-term country-level neutralbudgetaryposition(option1b) ..............................................................................................................................41

4.2 Thecatastrophicunemploymentinsurancesystem.............................................................................43

4.2.1 Thecatastrophicinsuranceschemewithnofiscalrule(option2a)....................................44

4.2.2 Thecatastrophicinsuranceschemewithlong-termcountry-levelneutralbudgetaryposition(option2b)......................................................................................................................................................49

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4.3 Comparisonsofoptions .......................................................................................................................................52

4.3.1 ComparisonoftheoptionsattheEUlevel ........................................................................................52

4.3.2 Comparisonoftheoptionsforselectedcountries ........................................................................53

Selectedreferences..................................................................................................................................................................62

ListofFigures,TablesandaBox

Figure1.Out-of-workincomemaintenanceandsupport,%ofGDP,Average2005-2011................. 8

Figure2.TotalunemploymentinsurancebenefitspaidbymonthandtypeofprogrammeinUS............................................................................................................................................................................................................ 16

Figure3.CountryspecificshocksintheEuroArea............................................................................................... 19

Figure4:NetcontributorstoEUBudget2012,as%ofGDP............................................................................ 20

Figure5.Short-termunemploymentinEurope...................................................................................................... 26

Figure6.Taxwedgebyfamilytypein2012.............................................................................................................. 30

Figure7.RevenueandexpenditureattheEUlevel,%ofGDP ........................................................................ 40

Figure8.AnnualandcumulativebalanceattheEUlevel,%ofGDP............................................................ 40

Figure9.RevenueandexpenditureattheEUlevel,%ofGDP ........................................................................ 43

Figure10.AnnualandcumulativebalanceattheEUlevel,%ofGDP......................................................... 43

Figure11.EUIannualrevenuesforeachcountry,%ofGDP............................................................................ 45

Figure12.RevenueandexpenditureattheEUlevel,%ofGDP ..................................................................... 48


Figure14.RevenueandexpenditureattheEUlevel,%ofGDP ..................................................................... 51


Figure16.EUIrevenuesandexpenditurepaidbyandtoSpainundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 52

Figure17.EUIannualandcumulativebalanceoftheEUundervariousoptions,%ofGDP........... 53

Figure18.EUIrevenuesandexpenditurepaidbyandtoSpainundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 54

Figure19.EUIannualandcumulativebalanceofSpainundervariousoptions,%ofGDP. ............ 54

Figure20.EUIrevenuesandexpenditurepaidbyandtoGreeceundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 55

Figure21.EUIannualandcumulative balanceofGreeceundervariousoptions,%ofGDP. ......... 55

Figure22.EUIrevenuesandexpenditurepaidbyandtoLatviaundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 56

Figure23.EUIannualandcumulativebalanceofLatviaundervariousoptions,%ofGDP............ 56

Figure24.EUIrevenuesandexpenditurepaidbyandtoIrelandundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 57

Figure25.EUIannualandcumulativebalanceofIrelandundervariousoptions,%ofGDP.......... 58

Figure26.EUIrevenuesandexpenditurepaidbyandtotheNetherlandsundervariousoptions,as%ofGDP................................................................................................................................................................................. 58

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Figure27.EUIannualandcumulativebalanceof theNetherlandsundervariousoptions,%ofGDP. ................................................................................................................................................................................................ 59

Figure28.EUIrevenuesandexpenditurepaidbyandtoAustriaundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 59

Figure29.EUIannualandcumulativebalanceofAustriaundervariousoptions,%ofGDP. ........ 60

Figure30.EUIrevenuesandexpenditurepaidbyandtoGermanyundervariousoptions,as%ofGDP. ................................................................................................................................................................................................ 60

Figure31.EUIannualandcumulativebalanceofGermanyundervariousoptions,%ofGDP. .... 61

Table1.Grossreplacementrates(GRR) ........................................................................................................................ 7

Table2.Numberofapplicationsreceived2007– 2013(Upto12August2013) ................................. 12

Table3.EuropeanSocialandAdjustmentFunds ................................................................................................... 13

Table 4. Revenue and Expenditure Associated with Unemployment Compensation, FY2001 –FY2011.......................................................................................................................................................................................... 14

Table5.Matrixofscenariosexploredinthechapter:.......................................................................................... 32

Table6.ComparisonofproposedEUIwithactualnationalunemploymentinsurancesystemsasof2010 .......................................................................................................................................................................................... 33

Table7. EUIannualrevenuesbycountry,minimum,maximumandmeanvalue,%ofGDP.......... 36

Table8.EUIannualexpenditurebycountry,minimum,maximumandmeanvalue,%ofGDP ... 37

Table9.EUIaverageannualbalanceandcumulativebalancebycountry,%ofGDP......................... 39

Table10.EUIannualrevenuesbycountry,minimum,maximumandmeanvalue,%ofGDP....... 41

Table11.EUIaverageannualbalanceandcumulativebalancebycountry,%ofGDP ...................... 42

Table12.EUIannualexpenditurebycountry,overall,since2009andthemaximumvalue,%ofGDP ................................................................................................................................................................................................. 45

Table13.Annualbalanceoverview............................................................................................................................... 47

Table14.EUIannualrevenuesbycountry,meanvalue,%ofGDP............................................................... 49

Table15.EUIaverageannualbalanceandcumulativebalancebycountry,%ofGDP ...................... 50

Table16.Matrixofscenariosexplored........................................................................................................................ 53

Box1.Experiencerating...................................................................................................................................................... 15

IP/G/EAVA/IC/2013-138 | Cost of Non-Europe of the Absence of an Unemployment Insurance Scheme for the Euro Area

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1. Introduction

ThisreportwascommissionedbytheEuropeanParliamentasoneoftheanalyticalresourcestobe used in discussion of possible creation and shape of European-level unemploymentinsurance.

Specifically, the Terms of Reference for the study stated: “The current economic crisis hasrevealed inside the Euro-zone deficiencies and/or inadequacies in social safety net andmorespecifically that national unemployment schemes are jeopardized in the current crisis, notallowing them to play their counter-cyclical role. Against this background and following thehearing organized by the Employment and Social Affairs Committee on 9 July 2013, theEuropeanParliamenthasdecidedto commissiona researchpaperon theCost ofNon-Europe(CoNE)of theabsenceofaminimumunemploymentallowance.Thebasicconceptarises fromtheideathatifaMemberStateisaffectedbyslowergrowthforaperiodthen,itislikely tohavehigherunemployment. Furtherproblemsare likely to arisesince aprolonged crisis inevitablyimpliesthatanincreasingnumberofpeoplewillbelong-termunemployed.Ifthefundingofthecompensationpaid tounemploymentworkers isEurozonewide than, it ismore likely that itcomesfromthemoreprosperousareasandbetteroffcitizens.Itisthusaredistributivetoolthatcouldcontributetostabilisation.Howeveratthisstageseveralquestionsremainopennamely;the extent, the coverage, the replacement rate the funding, and the access conditions to aminimumunemploymentallowance,(justtomentionfewofthem)andneedtobeclarified.”

The scope of the paper is as follows: “Analyse the basic characteristics of the unemploymentbenefitsinEUMS,ascertainwhataretheprospectsofintroducinganunemploymentinsuranceschemefortheEuro-zone;presentingindetailstheinstitutionaldimensionsofsuchinstrumentand, developing a simulation exercise (based on the information and data available thecontractorwillpresentatleastthreescenarios)”.

TheresultingpaperwasdraftedbetweenNovember2013andJanuary2014andisstructuredintothreeparts:

Chapter 2 analyses briefly the existing situation including a summary of the existing USunemploymentinsurancesystemsanda listofexistingproposalsfortheEuropeansystem

Chapter3outlinesmaintrade-offsandchallengesindesigningsucha system

Chapter4thenpresentsresultsofoursimulationoffourscenarios

Additionally,itcontainsanexecutivesummary,introductionandbibliography.

Giventheexistenceofseveralhighqualitystudiesoftheexistingsituationandevenoftrade-offsand challenges in designing a new European system (including, but not limited to, severalexcellentpaperscommissionedbytheEuropeanCommission),wedecidedtofocusonpracticalsimulation.Therefore,Chapter4isa bulkofthepaperandChapters2and3areassuccinctaspossible.

The report was written by a research team from the Centre for European Policy Studies.Miroslav Beblavý was the lead author together with Ilaria Maselli. Matthias Busse and ElisaMartellucci provided research assistance and some drafting of the text. Daniel Gros providedintellectualoversightandseveralkeyideas.

Thisisa draftversionasofJanuary31,2014.ThefinalversionisdueonFebruary28,2014aftertherelevantMembersoftheEuropeanParliamentandtherelevantEPstaffhavehada chancetocomment on the draft. The draft version does not contain executive summary,whichwill beprovidedinthefinalversion.ThefinalversionwillalsobeproofreadandeditedbyCEPSeditorsandthebibliographywillbefinalized.


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2. Existingsituation

2.1 Briefsummaryofnationalsystems

UnemploymentinsuranceschemesexistinawayoranotherinallEuropeancountries.However,nonecouldclaimthatEuropeisunitedonthisfrontsinceassoonasonestartslookingatfigures,large differences emerge between national frameworks. To understand these differences, welook atthefourmaincharacteristicsofunemploymentinsuranceschemes:

- coverageratios,meaningtheshareofunemployedworkerscoveredbytheinsurance;- coverage levels expressed as income replacement ratios, which is the share of the

previouswageprovidedbythesystem;- duration,normallyaccountedintermsofweeksormonths;- eligibilityrequirements,oftenexpressedinnumbersofweeks/monthsofcontributions

tothecommonfund.

Asshowninthissection,agreatlevelofvariationexistsinEuropeforeachitem.Thisisnottheonly source of diversity since, as a consequence of the differentmix, expenditure on incomesupportvaries,togetherwiththeorganisationoftheinsurance.

2.1.1 Design

Coverageratios

Coverage ratios are defined as the percentage share of unemployedworkers covered by theinsurance.Ifinprinciplethisisasimplemeasure,inpracticenounequivocalnumbersexistsduetothedifferentdefinitionsofbenefitsandunemploymentindifferentsurveys.

Taking EU-SILC as a reference, it has been estimated that among euro area countries in 5countriesmorethantwo-thirdsofworkersarecoveredbytheinsuranceandnamelyin:Austria,Belgium,Finland,FranceandGermany.InGreece,Italy,SloveniaandSlovenia,instead,onlyonethirdofunemployedworkersisentitledtoreceivebenefits.Remainingcountriesaredistributedsomewhereinbetweenoneandtwo-thirds(EC2013).

CoverageratiosestimatedviatheLabourForceSurveyhaveadownwardbiascomparedtoEU-SILCbutleavetherankingofcountriespracticallyunchanged(EC2013).

Incomereplacementrates

ThelevelofincomeprotectionisdefinedinmostEUMemberCountriesasapercentageoftheprevious (gross1) wage with percentages being often higher for lower earners. What is alsodifferentiatedbycountryisthereferenceperiodforthiscalculation,whichrangesfrom3to24months(EC2013).

AccordingtoECestimates,takingasareferenceasinglepersonearninganaveragewage,grossreplacement rates can range between 20% in the UK and Malta and more than 70% inLuxembourg,theNetherlands,PortugalandSlovenia,butwithmostcountriesintherange40to60%.

1 Inthree Eurozonecountriesthenetisused:Austria,GermanyandFinland.InIrelandandMaltaitisaflatrate.


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Table1. Grossreplacementrates(GRR)

GRR<40 Austria Ireland Malta

40<GRR<60 Slovakia Spain Germany Finland Cyprus

Estonia Belgium Greece Italy France

GRR>60 Netherlands Portugal Luxembourg Slovenia

Source:EuropeanCommission(2013).

Duration

TheminimumcommondenominatorissetbySlovakiaandMaltawhichensuresbenefitsfornomorethan6months.BelowoneyeartherearealsoAustriaandCyprus(7),Italy(8),IrelandandGreece(10),Portugal(11).Itreaches12monthsinEstonia,Germany, LuxemburgandSlovenia,17 in Finland, 24 in Spain and France. It goes up to 38months in the Netherlands and it isunlimitedinBelgium(EC2013).

Eligibility

In order to be entitled to the benefit, the unemployed worker needs to contribute to theinsuranceduringthetimeinemployment.Thisqualifyingperiodisoftenexpressedintermsofmonthsofcontributionoverareferenceperiod.BothvarygreatlyamongEUcountries.Theyrunfrom6monthsofcontributionovertheprevious24intheUKto12monthsovertheprevious18in Belgium. Countries very strict on this ground are for instance, aside from Belgium, theNetherlands,Slovakia,PolandandLatvia.Ontheoppositesideofthescale,nexttotheUK,canbefoundSpain,IrelandandFrance.

2.1.2 Financingandexpenditure

Unemploymentbenefitssystemoriginatesasaninsurancetoprotectworkers’incomefromtherisk of unemployment due to the business cycle. In almost all European countries thecontributiontothesystemissplitbetweentheemployerand theemployee.OnlyinDenmarkthecost is entirely born by the insured, whereas in Czech Republic, Lithuania and Poland it isentirely financed by the firm (EC 2013). Inmost cases, such contribution turns outnot to besufficient to cover the expenditure onbenefits and therefore the state intervenes tosubsidisethesystemortocoverthedeficits.Thishappensinallcountries,withtheexceptionof:Estonia,France,theNetherlands,Portugal,BulgariaandHungary,wherenoroleisforeseenforthestate.

All elements summed up, out-of-work incomemaintenance support (as officially recorded byEurostat)amountstoslightlymorethan1%ofGDPintheEUwithobviousvariationduetothecycle.Oncemore, the average ishardlyrepresentativeof themembercountriessince inmanycases expenditure constitute less than 0.5% of GDP (namely in Slovakia, Poland, the UK,Lithuania, Czech Republic, Bulgaria and Romania) or more than 1.5% (in the Netherlands,IrelandandSpain).


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Figure1. Out-of-workincomemaintenanceandsupport,%ofGDP,Average2005-2011

Source:Eurostat.

2.2 Coordinationofexistingnationalsystems

Given the large variation across different national systems, one of the few fields where noattempthasbeenmadeinthepasttoreacha levelofharmonisationispassivelabourmarketspolicies for theunemployed:nonehas everdared topropose aminimumstandardof incomesupport in Europe to provide income security in case of unemployment. Yet a form ofcoordinationexistseventhough itexclusivelyoriginates intheneedto facilitatecross-countrymobilityandthereforedefactoaffectsonlya smallshareofworkersinEurope.

ThedegreeofsocialsecuritycoordinationbetweenthedifferentnationalsystemsonEuropeanlevel is one of the key determinants of intra-EU labour migration. The EU regulation on thecoordinationofnationalsystemsandtheEuropeanSocialChartercontributemostinthisregardonEuropeanlevel.

2.2.1 EUregulationonthecoordinationofnationalsystems

Thecoordinationofnationalunemploymentbenefitswas for the first time indepth tackled inApril 2004 via a subsection within the Regulation (EC) No 883/2004 on the coordination ofsocial security systems. The aimof theprovision in the regulationof2004was toultimatelyimprove the standard of living and conditions of employment through the simplification andadvancementofthefreemovementofpersons.Earlier,in1971,theCouncilregulation(EEC)No1408/71hadbeenputinplacetoensureequivalenttreatmentandprotectionofsocialsecuritybenefitsofallEUworkers,irrespectiveofcurrentresidenceintheEUandtheemployment.ThenewregulationisbuiltonthefundamentofthepreviousCouncilregulationof1971.

Theregulationdoesnottransferdirectlyanypowersfromnationaltosupranationallevelasitbases its influenceonArticle308TEC(now352TFEU).Theregulationwasnotsettingout toamendthenationallydeterminedsocialbenefitentitlementsortheconditionunder whichtheyaregrantedwithineachdomesticframework,thusleavingdomesticsystemsintact.Coveredarevarious divisions of the social security system among them the unemployment benefitsclaimable within an EUMember State. The provisions in the regulation state that periods ofemployment spent in one EUMember Statesneed to be taken into accountwhen the person

1,1

0,2 0,2 0,2 0,3 0,3 0,30,3 0,4

0,5 0,5 0,5 0,5 0,5 0,50,6

0,9 0,91,1 1,1

1,2 1,3 1,41,4 1,4

1,6 1,7

2,1

0,0

0,5

1,0

1,5

2,0

2,5

EU27

Slovakia

Poland

UnitedKingdom

Lithuania

CzechRepublic

Bulgaria

Romania

Malta

Estonia

Latvia

Luxembourg

Slovenia

Greece

Hungary

Cyprus

Sweden

Italy

Portugal

Austria

Denmark

Finland

France

Germany(until…

Belgium

Netherlands

Ireland

Spain

%ofGDP

Out-of-workincomemaintenanceandsupport,%ofGDP,Average2005-2011


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moves toanotherEUMemberStatesandtherebyswitchingtoanothernationalsocialsecuritysystem.TheapplicablelegislationistheoneoftheMemberStatesinwhichinpersonispursuing‘a gainful activity’.With regard to unemployment insurance thismeans thatMember State inwhose system the person is currently paying into or receiving benefits must allow for theperiodsof insurance and thedurationof employment (may it be regular employmentor self-employment)whichtheyhaveaccomplishedinotherEU MemberStates“asthoughttheywerecompletedunderthelegislationitapplies”.

Furthermore, if a previously insured person becomes unemployed, thus having claims onunemploymentbenefits,and isapplying for jobs inanotherMemberState thatpersonhas theright tomove tootherMemberStates to facilitate theapplicationwhileretaininghisclaimonunemploymentbenefitentitlementsfromtheMemberStateofhis/herpreviousemploymentforaminimumof3monthswhichcanbeextendedtosixmonthsiftheinstitutionsinchargedeemsitappropriate.Theregulationonlyappliesifthetotalentitlementperiodhasnotbeenexceededduringthejob-seekingtimespendabroad.Inanycase,aftertheimparted3-6monthsgracethecredibility isno longervalidshould thepersonnotreturn to theMemberState inwhichhe isentitledtounemploymentbenefits.

Generallyallemploymentbenefitsareclaimedattheinstitutionofthecountrywherethepersonhas worked last and was residing. If the two differ entitlements are to be claimed at thecompetentinstitutioninthecountryofresidence(i.e.beingregisteredinanothercountrywhilebeingphysicallypresentforatleast1dayperweek).Thisregulationistargetedtotheneedsof“frontier workers” who regularly cross the border and prevents burden shifting among theneighbouringstates.Thisruleonlyappliesforfullunemploymentaspartialunemployedisdealtwithinthecountryofwherepart-timeworkcarriedout.

TheregulationappliesbesidetheEUMemberStatesalsototheEFTAcountriesIceland,Norway,Liechtenstein andSwitzerland. In theAnnex to the regulation several references topredatingbilateral agreements which need to honoured and specific acts with regard to individualcountriesaremade– thesemust,however,notimpedeframeworkdescribedabove.

EspeciallysincethestartoftheGreatRecession,suchregulationraisedthefearamongpolicy-makersof thepossibility to exploit the system (andnot only), therebygiving raise to the so-called“welfaretourism”debate.Thetruthisthatthefearofsocialwelfaretourismwithregardto unemployment benefits is very limited since a person is only entitled to the benefits thatperson has accumulated in the unemployment insurance fund in the country of employment.Thefactthatpreviousperiodsofworkinanothercountryaretakenintoaccountdoesnotposeasignificantthreat to thesocialsystemof the lasthostingcountrysince thepersonhas tohaveobtainedajobinhostcountrybeforehavingaclaimthereafter.Hence,simplymovingtoanothercountrywithoutworkwillnot inducetransfersbasedonunemploymentbenefits.

Thereisofcoursethepossibilitytodummyfirmorfakeemploymentwhichcouldentitle‘labour’migrantstounemploymentbenefits,thoughtheriskitlowastheywouldhavetoshowincometobeentitleto apercentageoftheirprevioussalary.Withregardtojob-seekingabroadfortheperiodof3(theoreticallypossibletobeextended6)monthscouldcreateanincentivetocashinon purchasing power differences, i.e. a Euro spent in Luxembourg has less purchasingpowerthan in Latvia. However, overall studies have not clearly shown substantial welfare tourismwithinintheEU(Guildetal,2013).Jobseekersarelikelytostaywheretheyhavealreadysettleddownormovetoaregionwheretheyintendtofindemploymentwiththeirskillsetratherthanwheretheirpurchasingpowerismaximisedforthenext3months.


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2.2.2 OtherEuropeansystemsofunemploymentbenefitcoordination

EuropeanCodeofSocialSecurity

TheEuropeanCodeofSocialSecuritywasinitiatedasearlyas1949andwashighlyinfluencedbythe‘SocialSecurityMinimumStandards(ConventionNo102)alreadypublishedbytheILOin1950. It is a product of the Council of Europe and therefore not part of theacquis communautaire. After years of negotiations, the ‘code’ was adopted by the Council ofMinistersin1964andcameintoforcetwoyearslater.Theaimof thecodeanditsprotocolwastoprotectminimumstandardsofsocialsecuritywhichmustbeadheredtowithinthesignatorycountries. Duration and quality of social benefits are regulated as to its minimum but eachsignatorycandecidewhatservicesorextendeddurationsthatcountryprovidesinexcessoftheminimum.Theprotocolsetstheseminimumstandardsinamannerwhichallowstheindividualsignatorytomaintainthespecificitiesithastakentofitnationalcircumstances.

With regard to unemployment benefits (article 19-24) the code defines the conditions underwhichthepersonwhosecontracthasbeenterminatedisentitledtounemploymentbenefitsanditfurtherstatesthatbenefitsshouldbepaidinperiodicalcashtransfers.Theprotocolexplicitlymentionsthatatleast50%ofallemployeesmustbecoveredbytheinsurancesysteminplace.The code furthermore emphasizes that a jobseeker (whose work pay has previously beensuspended) isentitled tounemploymentbenefitsif she/hehasbeenunable to finda ‘suitable’work.Theminimumdurationissetat13weeksduringanyperiodof12monthsintheoriginalcodebutitwasenhancedto21weeksintheAddendum2of2008.Overall,thecodeintroducesan absoluteminimumwhile leaving room for interpretationon issues suchas ‘suitablework’thuscircumventingfirmrestrictionwithregardtodetailsondomesticpolicymakers.

TheEuropeanSocialCharter

TheEuropeanSocialCharterintroducedthroughCouncilofEuropetreatyisanotherexampleofan instrument coordinating unemployment benefits and protecting social as well as humanrights.Thetreatywasintroducedin1961buthasbeenamendedin1996andcameintoforcein1999.TherevisedCharterisguardingtherighttosocialsecurity;amongthembenefitsystems,whichmustnotbediscriminatorytoanypartofsociety.TheCharteritselfsetstheframeworkwithin which unemployment insurance functions. Article 12 postulates the right to socialsecurityingeneralandmakingreferencetotheEuropeanCodeofSocialSecurityas‘tomaintainthe social security system at a satisfactory level at least equal to that necessary for theratificationoftheEuropeanCodeofSocialSecurity’.Therelevantarticle24dealswiththerightsofemployeesincaseofterminationofemploymentandbutitdoesnotspecifyanyrequirementsto be made in case of unemployment, beside the reference to the European Code of SocialSecurity.Complaintsagainstviolationscanbebroughtbeforeaspecialcommitteeevaluatingtheaccusedinfringements.

2.3 Europeanfunds

TheStructuralandCohesionFundsrepresentthemainfinancialinstrumentsinEuropetofostereconomic,socialandterritorialcohesionistheEU.

Onefundisparticularlyimportantwhenitcomestomeasuresrelatedtothelabourmarket:theEuropeanSocial Fund (ESF)which is basedonmulti-annualprogrammes.Among the “specialinstruments”- outside the multi-annual programming routine- the European GlobalisationAdjustmentFund(EGF)wasrecentlyset-up.Thereasonbehindthesemoreflexiblemechanisms


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istoenabletheEUtomobilisethenecessaryfundstoreacttounforeseeneventssuchascrisisandemergencysituations2.

EGFandESFmeasuresaresometimesusedtocomplementeachother.WhiletheEGFprovidestailor-made assistance to redundant workers in response to a specific, large-scale massredundancy event, the ESF supports strategic, long-term goals (e.g. increasing human capital,managingchange)3.

Thetwofundsthereforedonottrytocreateanincomesupportsystemfortheunemployed,butrathertocreatecomplementaryactivationmeasuressuchastraining,job-searchassistanceandoccupationalguidance.

EuropeanSocialFund

The ESF represents over 10% of the total EU budget. For the period 2007 to 2013, the ESFbudgetamountedtoEUR75billion– orclosetoEUR10billionperyear.

ESF supports a number of actions to enhance access to employment such as (ESF ExpertEvaluationNetwork,FinalSynthesisReportonAccesstoemployment,October2012):

o The modernisation and strengthening of labour market institutions, in particular

employmentservices.

o Theimplementationofactiveandpreventivemeasuresensuringtheearlyidentification

ofneedswithindividualactionplansandpersonalisedsupport,suchastailoredtraining,

jobsearch,outplacementandmobility,selfemploymentandbusinesscreation,

o Specific action to increase the participation of migrants and reduce gender base

segregation.

ESF funding is available through the Member States and regions. ESF programmes areimplemented through individual projects run by participating organisations, such as publicadministrations, companies, NGOs and social partners active in the field of employment andsocialinclusion(EuropeanCommission,2012).

In the next period (2014 to 2020), the ESF will continue to be the main EU instrument forinvestinginhumancapital.

EuropeanGlobalizationAdjustmentfund

The EGF is one of the special instrumentsnot included in theMFF,with amaximumamountfromJanuary2014to31December2020ofEUR3billion.ItmaynotexceedamaximumannualamountofEUR429million.EGFwasinitiallyestablishedforthedurationoftheprogrammingperiod2007– 2013“toprovide theUnionwithan instrument todemonstratesolidaritywith,andgivesupportto,workersmaderedundantasaresultofmajorstructuralchangesinworldtrade patterns caused by globalisation where these redundancies have a significant adverseimpact on the regional or local economy”4 . The EGF co-fund active labour market policymeasureswhichaims to facilitatethere-integrationofworkers inareas, sectors, territoriesorlabourmarketssufferingashockofseriouseconomicdisruption5.

2 http://ec.europa.eu/budget/mff/introduction/index_en.cfm3 COM(2011)608final.4 COM(2011)608final.5 COM(2011)608final.


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TheCouncil and theEuropeanParliamenthaverecentlyagreed for theEGFtocontinue in the2014-2020period(EuropeanCommission,2013).

EGFshallapplytoapplicationsbytheMemberStatesforfinancialcontributionstobeprovidedtoworkersmaderedundantmostly:

o Asaresultofmajorstructuralchangesinworldtradepatternsduetoglobalisation.

o Asaresultofaseriousdisruptionofthelocal,regionalornationaleconomycausedbyan

unexpectedcrisis.

Until2009thethresholdforthenumberofredundanciesrequiredtotriggeraccesstoEGFwas1000. The number it is now reduced to 500. This amendment was welcomed due to theparticularfeaturesofcountrieswheretheindustrialstructureiscomposedofSMEs(GHK,2011).

ThemeasuresfinancedundertheEGFmayincludeinparticular6:

a) job-search assistance, occupational guidance, advisory services, mentoring,

outplacement assistance, entrepreneurship promotion, aid for self-employment and

businessstart-uporforchangingoradjustingactivity(includinginvestmentsinphysical

assets), co-operation activities, tailor-made training and re-training, including

information and communication technology skills and certification of acquired

experience;

b) special time-limitedmeasures, such as job-search allowances, employers' recruitment

incentives, mobility allowances, subsistence or training allowances (including

allowancesforcarersorfarmreliefservices),allofwhichlimitedtothedurationofthe

documentedactivejobsearchorlife-longlearningortrainingactivities;

c) measures to stimulate in particular disadvantaged or older workers to remain in or

returntothelabourmarket

Sinceitscreationin2007,theEGFhasdealtwithatotalof110cases.SpainistheCountrythathas requestedEGFassistance for the greatestnumberofworkers, followedby Italy,GermanyandIreland.

Table2. Numberofapplicationsreceived2007– 2013(Upto12August2013)

2007 2008 2009 2010 2011 2012 2013*

8 5 28 29 24 10 6

*Note:upto12/8/2013.

Source:ECreport“title”.

So,howimportantarethetwofunds?

Aspreviouslyshown, the two funds togetherconstitutemore than10%of theEUbudget.ButwhatistheirincidenceinMemberStateseconomies?Twoconsiderationscanbemadeintermsofsize.ThefirstisthattheESFandtheEGFarehardlycomparable.EveninEstonia,whichisthecountry that benefited themost, the aidprovidedby theEGFamounts toonly0.01%ofGDP.Therefore, even if very useful to dealwithmicro adjustments andwith potentially a relevantsupportfora localeconomy,inmacroeconomictermsithasa minorimpact.

6 COM(2011)608final.


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TheESFinsteadhasnotonlya longertraditionbutalso biggerfirepower.AsindicatedinTable3,fundscangoupto0.78%ofGPD7,inPortugalforexample,duringthelastbudgetperiod.

Yet, theESF cannotbe considereda stabilising tool.As a matter of fact, it serves theoppositepurpose:itisusedtofinancesupplysidemeasuresforthelabourmarket,suchasactivelabourmarketpoliciesandjobcentres,andthereforeitsimpactismeanttoimprovethefunctioningofthelabourmarketinthelong-run.

Table3. EuropeanSocialandAdjustmentFunds

ESFallocated(2007-2013) EGFallocated(2007-2011)

MillionEuros %ofGDP Million Euros %ofGDP

CzechRepublic 4,451 0.43 0.3 0.00

Estonia 461 0.41 7 0.01

Ireland 750 0.06 10.1 0.00

Greece 5,133 0.34 2.9 0.00

Spain 11,271 0.15 43.7 0.00

Italy 14,475 0.13 66.2 0.00

Poland 11,773 0.47 400.3 0.00

Portugal 9,245 0.78 1.2 0.00

Romania 4,334 0.48 3.2 0.00

Source:http://ec.europa.eu/esf/main.jsp?catId=443&langId=en andEGFstatisticalportrait,page69.

2.4 TheUSsystemofunemploymentinsurance

TheFederalUnemploymentCompensation(UC)programprovides incomesupport toworkersthatlosetheirjobforuptoamaximumof26weeksinmoststates.Approximately130.3millionjobs are covered by the program. At the end of the week of August 17, 2013, 2.9 millionunemployed workers received unemployment compensation with an average weeklycompensation of $307. Estimated expenditure on regular unemployment benefits in 2014amountsto$40.5billion(WhittakerandIsaacs2013).

Incaseofsevererecessionsandconsequenthighunemploymentinthestate,extendedbenefitscanbe launched, funded50%by the state and50%by the federal government (exceptionally100%bythelatterinthe2009stimuluspackage).

TheAmericansystemconstitutesanobviouscomparisonforthepotentialEuropeanonegiventhat the UC centralises part of the organisation but still allows each state the possibility ofpersonalisingcertainfeaturesandrequirements.

The UC is in fact a joint federal-state program financed by federal taxes under the FederalUnemploymentTaxAct (FUTA)andbystatepayroll taxesunder theStateUnemploymentTaxActs(SUTA)TheFUTAtaxrateforemployersis6%oflabourcost,butacreditof5.4%isgrantedforemployerscomingfromstatesthathaveanationalsysteminplace,whichbynowareallUSstates.Theprovisionservedasanincentiveforallstatestocreateaninsuranceasitconstituteda minimumfloorforemployerscomingfromeverystate.

Mostbusinessesaresubjecttostateandfederalunemploymenttaxes.Anestimated$6.7billioninfederalunemploymenttaxes(FUTA)and$44.47billioninstateunemploymenttaxes(SUTA)shouldhavebeencollectedinFY2011(Isaacs&Whittaker20118).Partoftheformerisusedby

7 Theallocatedbudgetfor2007-2013isdividedbythecumulatedGDPoverthesameperiod.8 UnemploymentInsurance:ProgramsandBenefits,CongressionalResearchService.


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each state to cover the administrative costs of its system and the other part finances theextendedbenefitswhenneeded.Itisworthnotingthattheemployers’contributionissubjecttoexperienceratings:firmsthatfiremorealsopaymore.

Unlike in most European countries, the US version of unemployment insurance scheme isthereforefullyfinancedbyemployers.Themechanismisbasedontheprinciplethatthosethatfiremore also need to contributemore to the fund. For the firms’ side of the labourmarket,althoughnotperfect,thesystemisorganisedasinsurance:companiesneedtoprovideseverancepaymenttoworkersandinordertodothatinsurethemselvesagainsttheriskoffiringacertainnumberofworkers(seeBoxonexperienceratingforfurtherdetails).Thesameisnottrueforemployees who do not contribute to the fund. From their point of view the benefits ratherqualifiesassocialassistance,intheformofincomeprotection.

ThesystemisadministeredbytheU.S.DepartmentofLabor(DOL).Federallawsetsbroadrulesthatthe53stateprogramsmustfollow.Theseincludethebroadcategoriesofworkersthatmustbecoveredbytheprogram,themethodfortriggeringtheEBand EUC08programs,theflooronthehigheststateunemploymenttaxratetobeimposedonemployers(5.4%),andhowthestateswillrepayUTFloans.Ifthestatesdonotfollowtheserules,theiremployersmayloseaportionoftheirstateunemploymenttaxcreditwhentheirfederalincometaxiscalculated.Thefederaltaxpays forboth federal and state administrative costs, the federal share of theEBprogram,loanstoinsolventstateUCaccounts,andstateemploymentservices(Isaacs&Whittaker20119).

Table 4. Revenue and Expenditure Associated with Unemployment Compensation, FY2001 –FY2011

Source:(Isaacs&Whittaker201110).

9 UnemploymentInsurance:ProgramsandBenefits,CongressionalResearchService.10 UnemploymentInsurance:ProgramsandBenefits,CongressionalResearchService.


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Maximumbenefit levelsvary enormously: from133dollarperweek inPuertoRico, to625 inMassachusetts11.StatescangetloansfromtheFederalUnemploymentAccountshouldtheyrunlowoffounds,butthedeficitneedstobeclearedinthelongrun.

Howwasthesystemcreated?Theoriginofthesystemdatesbacktothemid-1930s.TheGreatDepression had made clear that an income support mechanism was necessary. As aconsequence,anumberofstatesstartedtoinvestigateandmakeproposalsinthisdirection.Themainobstaclehoweverremainedthefearofemployerstolosecompetitivenesswithrespecttothe neighbouring states. This made necessary the intervention at the federal level. Witte(193612)explainsthat“Throughoutthehistoryoftheunemploymentcompensationprovisionsof the Social Security Act, there was general agreement regarding the necessity for federallegislation. Itwas recognized by everyonewho believed in the desirability of unemploymentinsurancethatlittleheadwaycouldbemadeunlessemployersinallstateswouldbesubjecttothe same (or substantially the same) costs, whether their respective states enactedunemploymentinsurancelawsornot”.

Box1.Experiencerating

Unemployment insurance in theUnitedStates is financedvia a tax foremployers that amounts to5.4%oflabourcost.Suchtaxisnothoweverafixedamountforeachemployersincethosethattendtofirelessalsopayless.Thisiscalledexperiencerating anditisbasedontheideathattheexistenceof unemployment insurance reduces the cost of firing and therefore an instrument is needed toeliminatetheperverseincentiveofincreasingthenumberofredundantworkers(MongrainRoberts2004).

Experienceratingisdefinedasperfectwhenfirmspaythefullcostoftheirlayoffs.ThetypeappliedintheUSisimperfectsincelowerandupperboundsexists,meaningthatfirmslessvolatileintermsofemploymentendupsubsidisingthemorevolatileones(Wangetal.2002).

ThetaxisbasedonaformulaandeachUSStatesisfreetodecidehowtoapplyit.Inmorethanhalfofthemthisisbasedonthereserveratio.Thesecondmostcommonformulaappliedisthebenefitratio.

The reserve ratio is the ratio between the company’s unemployment insurance account(contributionspaidminusbenefits) and the total grosswages.The reserve is cumulativeover thelifetime of the company, whereas total wages refer to the last three years. As a result, the taxincreases when more unemployed workers receive the benefit and decreases when highercontributionsarepaidintothefund.Thebenefitratioisinsteadtheratioofbenefitsdividedbytotalpayrolls over the past three years: themore benefits arewithdrawn by unemployedworkers, thehigherthetaxfortheemployer.

Theideaofexperienceratingisappliedalsoatthenationallevel:incaseoflackofliquidity,astatecanborrowfromthefederalfunds.Statesarechargedinterestonloansthatarenotrepaidbytheendof the fiscalyear inwhichtheywereobtained(2013).States facingtroubles in financingtheirowninsurance can therefore ask and obtain help from the federal fund but only in the formof a loanwhichneedstoberepaidbasedonanagreementwiththeUSSecretaryofLabour.Ifitfailstorestorethe balance between revenues and expenditure of national funds in themedium run, the federalauthoritycanraisefirms’contribution.

CantheAmericansystembeamodelforEurope?

A major concern related to the creationof a Europeanunemployment insurance system is theincentiveofmovingtocollectbenefitsinmoregenerouscountries,theso-calledwelfaremobility

11 2011data.12 EdwinWitte(1936),AnHistoricalAccountofUnemployment InsuranceintheSocialSecurityAct.


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orwelfaretourism.DoesithappeninNorthAmericawhereastrongincentivetodothatisgivenbythefactthatthereisa largedispersionintheweeklybenefitgrantedbydifferentstates?Inotherwords,cananunemployedTexanworkercollectsbenefitsinMassachusettswherehe/shecan receiveup to$674perweek? Eligibility rules of theMassachusetts government explicitlymention13 that„ifyouworkedinanotherstate,youshouldapplyforunemploymentinsuranceinthatstate“. Thereare residencyrequirements inplace in individualstatesthoughas faraswewereable to tell, there isno federalrequirement.However,given theshapeof theUSsystem,stateshaveincentivesnottoattractunemployedrecipientsofthebenefit.

One of the added values of the federal system lies in the possibility to extend benefitsexceptionallyincaseofsevererecessionsinoneormorestates,namelywhenthestabilisationtool ismost needed. This happens via the extended and emergency benefits,with the formerpartially and the latter completely financed at the federal level. Extended benefits are thegeographicalredistributivepartofthesystem.

Figure2. TotalunemploymentinsurancebenefitspaidbymonthandtypeofprogrammeinUS.

Source:BousheyEizenga, 2011.

Ifinprincipletheruleconstitutesa safebackupfora systemthatisnotverygenerous(atleastcompared to European standards) this is something that could hardly be implemented ina European perspective. The reason is that such extensions requires quick decision makingwhich is more difficult to implement in Europe given the multi-level governance and thenecessitytoapplyasubsidiarityprinciple.

A less remarked but interesting aspect about the American system is its capacity to strike abalancevis-a-visindividualstatesoverthecycle:eachstatecanindeedborrowfromthefederalcashpotinhardtimesbuttheseremainindeedloansandassuchneedtobereturned.Thisinprincipleensuresthattheobjectiveofstabilisingincomewhenmostneededisnotmissed,butatthe same time avoids free-riding. If a state is unable to repay the loan, the employers’contribution is in fact automatically raised. This is, for instance, what happened recently inCaliforniawhosefundcurrentlyrunsadeficitofalmost10billiondollars.14

13 http://www.massresources.org/unemployment-eligibility.html14 http://www.edd.ca.gov/About_EDD/pdf/edd-uiforecast13.pdf


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All in all therefore, the American system is particularly interesting, not only for thecomparabilityofitslabourmarkettotheEuropeanoneintermsofsizeandskillslevels,butevenmoresobecauseitthemixofthreecompromises/results:

- Thestabilisationcapacitybasedontheshort-termsupportcombinedwiththepossibilityforeachstatetoborrowfromthecentralcashpotifnecessary.

- Thecreationofacommonminimumstandard,notintermsofprovisionwhere eachstateis free to set its optimal level of protection, but in terms of employers’ contributionnecessarytofinancethepolicy.

- Theexperienceratingwhichpunishescompaniesthatfiremore.

2.5 Potentialeconomic,politicalandsocialrationaleforEUactiononUB

The purpose of the unemployment insurance is, from the purely economic point of view, toprovideacounter-cyclicalstabilisationmechanismtotheeconomy,andfromthesocialpointofview to alleviate the pain of unemployment by providing income security. Economic theorysuggests that higher insurance can increase wages and extend the unemployment spell byraising thereservationwage,whichisthe lowestwagerateatwhichaworkerwouldacceptajob.Empiricalevidencesuggeststhattheexactdesignofsuchpolicymatters,inparticularhowbenefits decrease with duration and towhat extent they are complemented by active labourmarketpolicies(Blanchard,Jaumotte,Loungani201315).Theexactdesignisimportantfromthemicroeconomicpointofview.Butwhataboutthemacroeconomicaspects?Inamonetaryunionespeciallytheyareatleastasimportanttojustifytheadoptionofsuchpolicy.

Threeconsiderationsareimportantinan international-macroperspective:

- Thecoordinationissue- Fiscalconstraints- thetriggerofthepolicy– symmetricandasymmetricshocks.

Tothepurelyeconomicones,oneneedstoaddthepoliticalandsocialconcerns:theexistenceofaformofEuropeansolidarityandredistributionwithintheContinent.

2.5.1 Theeconomictheory

(A)symmetricshocksandcoordinationfailures

Problem arises in a monetary union when an asymmetric shock occurs. Textbook case16:asymmetric demand shock, negative in France and positive in Germany. As a consequence,unemployment increases in the former and goes down in the latter. Two mechanisms canpotentiallyleadtoautomaticre-equilibration:wageflexibilityandmobilityoflabour.Howdoesunemployment insurance interfere with each?Will it facilitate or hinder wage flexibility andlabourmobility?WoulditchangeiftheUIisorganisedattheEuropeanlevel?

Inprinciple,anunemploymentinsuranceschemewillhamperbothadjustmentmechanisms:thebenefitwill keep the reservationwage at a certain level,more or less high depending on thereplacement rate compared to thepreviouswage.Thenational unemployment insurancewillalsolimitcross-countrymobility:notonlyitlowerstheincentivetolookforajobingeneral,but

15 “Labour Market Policies and IMF Advice in Advanced Economies during the Great Recession”, IMFDiscussionNote.16 DeGrauwe,EconomicsofMonetaryUnion.


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even more so in another country because the unemployment workers may need to give uphis/herbenefit.

ThelatterproblemwouldbesolvedshouldaEuropeansystembeinplace:unemployedworkerscouldcollect thebenefits independentlyof thecountry they look fora job.Withregard to thefirstissue,thereservationwage,itdoesnotmatterfortheadjustmentintherecessioncountry,whetherthebenefitispaidatthenationalorEuropeanlevel.

But how likely are actually asymmetric shocks in Europe? The academic literature gives theimpression that this is a steady issue in Europe. The remaining differences in the Europeaneconomies(differentspecializationofproduction,differentlabourmarketregulations,differentdemographicsanddifferentnationallevelmacroeconomicpolicies,etc.)makeeconomiesreactdifferently to external shocks.Asymmetric shocks therefore seem tobe amatter of regularitywhileonlythesignificanceoftheseshocksvaries.

The OECD (201017) underlines that recent asymmetric shocks in Europe were mainlyattributable to the catching up processes of certain economies. However, there are stillconsiderabledifferencesbetweentheeconomiesthatcouldeasilycausenewimbalances.Eventhoughthecommoncurrencyhasincreasedintegration,thereremainmanypotentialsourcesofasymmetric shocks: These could be different demographic developments, asymmetricproduction trends, remaining inequalities in the regulation and flexibility ofwages andpricesanddifferencesinemploymentprotection.TheOECDthereforerecommendsaEuro-zonewidecoordination of such issues or far going structural reforms that may lower the risk ofasymmetricshocks.

InarecentpublicationfromtheIMF18 itisarguedthatboomandbustsoccurveryregularly inanunequalpatternacrossEuropeandthatthisdispersionofnationalspecificgrowthisnotreallyshowingatendencytoapproachacommonEuropeanlevel.

DeGrauwe(201319)observes thatwhilemonetarypolicyhasbeencentralized, therestof themacroeconomic policies remained in national hands, “producing idiosyncratic movementsunconstrainedby the existenceof a commoncurrency.Hence, there are fewpolicyoptions tobringnationalboomsandbustsintolinewithanykindofEuropeandevelopment.Evenworse,thecommoninterestratethatmaybetoolowforboomingcountriesandtoohighforcountriesin recession even exacerbates asymmetric developments. Therefore, at first the convergenceprocessinEuropehastobefinished.Andalreadythatprocessappearstobeasymmetricitself”.

17 OECDEconomicSurveys- EuroArea2010,pp.72ff.18 Allardetal(2013),TowardaFiscalUnionfortheEuroArea,IMFStaffDiscussionNote13/09.19 DesignFailuresintheEurozone:Cantheybefixed?,LSEEuropeinQuestionDiscussionPaperSeriesNo.57/2013.


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Figure3. Countryspecific shocksintheEuroArea

Source:Allardetal(2013)

The case of symmetric shocks ismore straightforward and poses fewer challenges to policy-makers. In case of recession in fact themain decision to take iswhether to use the fiscal ormonetary stimulus or a combination of the two. Yet, because of the specific nature of theEuropean construction sub-optimal equilibria can be reached also in this casedue to the factthattheformerisdecidedatthenationallevelandthelatterbyasupranationalinstitution,theECB, with an independent mandate. An EMU-wide (or Euro-wide) unemployment insurancecouldthereforesolvethecoordinationproblembyrelyingonaautomaticstabiliser.

Budgetconstraints

Togetherwiththeriskofasymmetricshocksandcoordinationfailures,athirdmacroeconomicargumentmaycallfortheneedofEU/EMU-wideautomaticstabilisers:toughbudgetconstraints.

The euro-crisis showed that risk premia on sovereign debt can diverge significantly. Startingfrom2010,itbecamenotonlydifficultbutalsoveryexpensiveforsovereignsintheperipheryofEurope to borrow on themarket. High interest rates thereforemake the financing of publicexpenditure,which can easily include expenditure on labourmarket policies in times of highunemployment rates, very expensive. A government that faces tough fiscal constraints mayconsequentlybefacedwiththechoiceofcuttingincomesupportmeasuresatthetimewhentheyareneededthemost,thatiswhenunemploymentissoaringandvacanciesarelimited.Moreoverthere isa possibility for largeshocks frombecomingself-sustaining throughpro-cyclical fiscalpolicyandnegativefeedbackloop.Backstoppingnationalsystemscouldbea wayofpreventingsucha feedbackloopfromdeveloping.

The creation a supra-national fund (in whatever form) where countries and/or workers &employers contribute during sunny seasons could avoid such a trap. In this case in fact, thefunding of passive labour market policies would come from a supranational authority andthereforeitwouldnotbeaburdenforthenationalbudgetascountrieswouldhavetocontributetoitonlyduringupswings.


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2.5.2 Politicalandsocialrationale

DemonstratingEuropeansolidarityina visibleandtangiblewayforEUcitizens

The crisis and its aftermath has been a testing time for the European ideals and for thecredibility of both national and European institutions in eyes of the European citizens.IntroductionofanEUIsystemcoulddemonstrateEuropeansolidarityinawaythatisvisibleandtangible for European citizens (unlike some of themore abstract European interventions) ona permanentbasis.Ofcourse,desirabilityofsucha stepisa matterforpoliticaldecision.

Permanent/long-termredistributionacrossEU

TheEuropeanUnionalreadyhaslimitedfiscalredistributionmechanismsthoughtheyaresmalland their redistributive roles is not explicitly geared towards reducing disparities betweenmemberstates.Ononehand,thenationalbalancevis-a-vistheEUbudgetcanbesubstantialfora smallsetofsmallandpoorcountries.Thedefactolistofnetcontributorsandnetbeneficiariesalsoappearstoberelativelystable

Figure4:NetcontributorstoEUBudget2012,as%ofGDP

Source: EuropeanCommission2013EU,BudgetFinancialReport2012

In this rationale, EUI would be an additional special case of a permanent or long-termredistributionmechanismbetweencountriesoftheUnion.Consultationsduringpreparationofthepapermadeitclearthatwhilea degreeofpersistencyinEUItransfersmightnotbealwaysavoidable,permanentorlong-termredistributionisNOToneoftherationalesforcreatingsucha scheme.Indeed,itcouldbeevenseenasaproblemtoavoidifpossible.

-1

0

1

2

3

4

5

SE DE DK UK NL FR AT FI IT CY ES IE BE MT RO SI CZ SK EL PT PL BG HU LU LV LT EE

Net contributors in % of GDP, 2012


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Desirabilityofcommonstandards

Desirabilityofcommonstandardsinsocialpolicyisa contestedissueinEuropeanaffairsandis,intheend,a politicalchoice.InthecaseofEUI,theissueofcommonstandardscancutbothwaysthough. One could argue for minimum standards in order to prevent social dumping andguaranteeequalsocialrights.Bythesametoken,onecouldarguefor„maximum“standardstopreventhystheresisand moralhazard.

SupportinglabourmobilitywithintheEU/eurozone

A relatively uncontested goal of EUpolicy is to stimulate labourmobilitywithin the Union. Itcould, therefore, be a prima facie rationale for a joint unemployment insurance system.However,asexplained in thischapter, thecurrentEU forcoordinatingsocialsecuritysystemsalreadyensuresthat:

- qualificationperiodsfromvariouscountriesarecummulated- anunemployedcanmovetoa differentcountryandstillreceiveunemploymentbenefits

(upto3months,canbeextendedto6months)

TheEUregulationcouldbebeefeduponthesecondissueandthusstimulatemobility,butthiscouldbedone throughamendmentof the existing regulation if needed. So further support oflabourmobilitycanbea consequenceofEUI (if itstrengthensequalityofrights/portability),butnotinanimportantway.

Consequently,allourproposalswilladdrestheshockabsorberrationaleastheprincipalrationalfor EUI. However, to provide a variety on more contested issue, only some proposals willaddresstherationalesofdemonstratingEuropeansolidarityina visibleandtangiblewayforEUcitizens and providing common standards. On the other hand, the proposalswill not seek, asoverriding rationales, to promote permanent/long-term redistribution across EU thoughpotential persistent transfers are not an automatic no go. By the same token,wewill largelyleavetheissueofsupporting labourmobilitywithintheEU/eurozoneoutofouranalysis.

2.6 Summary ofexistingproposals

With the establishment of the EMU demands have been voiced for a common Europeanunemployment insurance scheme, in one form or another, to provide a feasiblemitigation ofasymmetric shocks. These proposals varied from small fiscal budget freely used in domesticspending over funds based on the output gap to true mutual unemployment schemes. TheselectionofproposalbelowprovidesabroadoverviewofexistingideaswhicharedirectlyortosomeextentrelatedtotheEUIproposal.

In 1993,MajocchiandReydeliveredaproposalwithintheMacDougallreportadvisingtoimplement a “conjunctural convergence facility” oncemoremitigating asymmetric shocks. Incontrast toother scheme, this system isnot triggeredautomatically, thusbeingdependentonthe evaluation of fellowmember states to rule out idiosyncratic causes unrelated to externalshocks.Thefundwouldprovideloansandgrantstothestrugglingstatewhichinturncouldpaybenefitsorinveste.g.inadditionaltraininghencebringingdownunemploymentrates.

At the same year Italianer & Vanheukelen (1993) developed the idea of stabilizationmechanismbasedonthenationaldeviationsintheannualchangeoftheunemploymentratetothe EMU average. Unlike Majocchi & Rey (1993) the stabilization mechanism has automaticfeatureeventhoughtheauthorsproposetocapthereceiptsto2%ofGDP.Theyalsoproposeatoned-down version in which the transfer are only triggered once a certain threshold issurpassedinordertoonlyactivatethemechanismincaseofsignificantasymmetricshocksi.e.notsmoothingsmallwavesbutrather“tsunamis”.


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Bajo-Rubio & Diaz-Roldan (2003) developed an European unemployment insurancesystemwhichfunctionsonmonthlybasesasittakesthechange overthepast12monthsasthereferencevalue to trigger thedispersionofbenefits. It is redistributionscheme inwhicheachcountrypaysin(1%oftaxrevenues).Paymentaremadetothosecountrieswhichexperiencearise in theirunemployment rate, however thismechanism is only set in action if at least onecountry is experiencing adrop in theunemployment rate, thus testifying to the sourceof thenegative changes as an asymmetric shock. Each month the receiving member state uses thetransferred funds to support the unemployed. Bajo-Rubio & Diaz-Roldan raise another rulewhichcouldbeappliedtoreducetheriskofmoralhazardbylimitingthenumberofconsecutivemonthsinwhichacountryisabletoreceivefunds.

Enderleinetal(2013)donotdirectlycallforaEuropeanunemploymentinsurancefundbutratheraCyclicalAdjustmentInsuranceFund(CAIF)whichisoncemorebasedontheoutputgapmethodology.Theyare,howeversuggestingthattheoutputgapasamaintriggercouldbecomplemented by indicators such as inflation rates and short-term (cyclical) unemployment.Theyhavenotincludedtheunemploymentindicatorintotheircalculationssincetheystatethat“short-termunemploymentisaproblematicindicatoraslongaslabourmarketinstitutionsareintherealmofnationallegislation”.Ofcoursetheoutputgapshasitsdrawbacksaswellandtheneteffectovertheperiod1999-2014wouldhavebeenverysmall(<0.25%ofGDP).

Sutherland(2012)proposestocreateatrueEUinsurancefundwhichisbuildatEUlevelandpaidinbyemployersoremployeesoralternativelyanunemploymentbenefitsystem.TheEUbenefitswouldsetaminimumstandardforthememberstateswhichcould,inseverecasesof crisis, be complemented by supplements and extensions. National channels of raisingcontributionsanddistributingthebenefitsshouldbeutilizedtominimiseadministrativecosts.Thepapersuggeststoleavethedecisionbywhichmeans(e.g.tax)tocollectthecontributionuptoeachindividualmemberstate.Theauthordoesnotprovideasimulationoftheimpactofsuchasystemconcerningnetbenefitsordetailsonneithercoveragenorreplacementrate.

Delpla (2012)presents in thispaper for theseminar 'EU leveleconomicstabilizers’anunemployment insurance scheme for the Euro Area as one part of the toolkit in the widerEuropeanreformprogram.Hisunemploymentbenefitsschemediffers fromtherestsince it isnot a replacementorbase fornational onesbut rather a supplement.Theunemployedwouldonlybeentitled tothesupplement iftheEuropeanLabourContractwasadheredtoandif thesum of national and EA benefits to not exceed the maximum threshold, thus preventing atransferfromlessgenerousstatetocountrieswithhighlygeneroussystem.Thereceiptwouldbepaidforbyannualcontributionequalto1%ofGDP.Depla’ssystemnotonlyintroducestheEuropeancomponenttotheunemploymentinsurancescheme,astheothersdo,itfurthermoreattachesasocialcomponentbylimitingthetransferscontrarytoincomegaps.

IntheirBruegelPolicyContributionPisani-Ferrietal(2013),pursueaEuropean(EMU)unemployment insurance for the same reason as Dullien, i.e. a fiscal stabiliser. Contrary toDullien, theyproposesetan insurancesystem leviedonacorporate incometax fullycoveringtheexpenditures.AnEAwideappliedcorporatetaxrateof12.6%isestimatedtosufficetocoverthe averageEA costs forunemployment insurance (1.8%ofEAGDP).Unemploymentbenefitscouldbecoveredinfullbythisbudgetwitheachmemberstatetransferringrevenuesfromthefirst 12.6% tax on corporate income. The distributional effect could potentially be significantsince revenues collected for 12.6% tax may not domestically suffice to cover the x% ofunemploymentbenefits– Pisani-Ferrietal.showthatthiswouldbethecaseforIrelandin2010.Inanotherexercise theauthorscalculate themagnitudeofunemploymentbenefits in thenewcommonsystemifreceiptsaredependentonasetbasevalue(1.5%ofGDP)plusafactorofthedeviation of the individual unemployment rate from the EA. Consequently, Portugal (lessgenerousnationalunemploymentbenefitssystem)wouldreceivemorefinancialresourcesthanneeded to cover the benefits, thus creating fiscal stimulus package, whereas Ireland would


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experience theopposite.The commonunemployment insurance isnot covereddirectly in thepaperbutrathermovedtotheappendixanddoesnotgivedetailstheextenttowhichbenefitsarecoveredonasupranationallevel.

The most comprehensive and in-depth potential architecture of a Europeanunemployment insurance system has been proposed by Dullien (2008, 2012, 2013) with theultimateaimto absorbnegativebudgetaryeffectsofshort termunemploymentcausedby thebusiness cycle or asymmetric shocks though not by structural unemployment. The insurancefundwouldbefinancedthroughapayrolltaxandthepaymentsaswellcontributionswouldbecollectedby thenationalagencies inorder tousetheexisting frameworkandavoidadditionalbureaucratic costs. A minimal standard of unemployment benefits would be covered on theEuropean level while each member state is free to choose the services/benefits that stateprovides,nationally,ontopofthesupranationalcoverage.Heproposesaminimumof12weekswith a replacement rateof 50%. Inhismodelhe shows the theoretical impact such a systemwouldhavehadonthecrisis-riddenSpainaftertheburstofthehousingbubble. Thetransfer,according to Dullien, could havemitigated almost 25% of the downturned in the immediateaftermathofthecollapse.Theissueofmoralhazardisacknowledgedbutperceivablyalleviatedinhissystemsince theEUIonlycoversaminimumfarbelowthecurrentreplacementrateonnational level, thusmaintaining the incentive structure to implement labourmarket reforms.The EUI is envisaged to remain balanced in the long runwithout clear net receivers and netcontributors.Oneelementwhich is intendedtopreventaone-way financial flow is toexcludeseasonal unemployment within his scheme. Dullien’s proposal has frequently been used as abasis forpolitical demandsofparties andother institutions (seeBonin2013orBrantner andGiegold,2012).

Grosetal2014(forthcoming)suggestthecreationofaEuropeanre-insuranceschemeformajordeviationsfromlong-termunemploymentrates. Thebasicideaistotransferfundstofinance unemployment benefits from the centre to the periphery when unemployment ismeasurably higher than normal. The system therefore qualify as a catastrophic insurance fornationalunemploymentbenefitsfunds.


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3. Outlineofmaintrade-offsandchallenges

In the first chapter of this report,we provided a general overview of existingpassive labourmarketpolicies inEuropeandcomparedthemto theUnitedStates.Wealso listedexistingEUcontributionsinthefieldandsummarisedpoliticalandeconomicargumentbehindthecreationof a European Unemployment Insurance system. We concluded by summarising existingproposals.

Asmentionedinthepreviouschapter,welookattwomainproposals:theharmonised Europeanunemploymentbenefit,developedbySebastianDullienandthecatastrophicinsurancescheme,proposalputforwardbyCEPS(Grosetal,forthcoming). Theharmonisedscheme consistsofaninsurance fund financedthroughapayroll tax (collectedbynationalagencies)andspent foraminimumstandardofunemploymentbenefitsthatappliesinthesamefashiontoallEuropeaneligibleworkers.The ideaof thecatastrophic insurancepropose a aradicallydifferentsystembasedonre-insurancefund whichwillbeusedonlyincaseofsevererecessions,inlightofthefactthat‘businessasusual’downturnsarealreadywellcoveredbyexistingpolicies.

Thischapterisdividedintotwomainparts.Inthefirst,welookatthreekeypolicydimensionsrelatedtoa potentialEuropeanunemploymentinsurance:

- Thresholdanda ceilingforitsactivation:anysystemofunemploymentinsuranceneedstodefineunderwhatconditionsitis triggered.Thisalsomeansthatanindicatorneedstobechosenforthispurpose.

- CommonstandardsfortheEU:shouldtheybeenforced? Ifso,whatwouldtheybe?- Fiscal rule: should the EUI have a balanced budget on annual basis, cyclically or not

necessarilyatall?

Inthesecondpartofthischapter,wediscussthreeadditionaltechnicalissues:

- Participation: should it involve compulsorily all EU or euro area countries or bevoluntary?

- Funding:howshoulditbeorganised?Whatisthesource?- Implications for other labour and EU policies: should the EUI also be concernedwith

active labour market policies? Is there any overlap with, for instance, the EuropeanSocialandGlobalisationAdjustmentfunds?

3.1 Whatsituationsshoulditcover?Whatshouldbethetrigger?

DecidingunderwhichcircumstancestheEUIshouldbeactivated,representsanimportantstepindesigning theEuropeanUnemployment Insurance. .In fact, The EUI could eitherbe appliedwith a “business as usual” approach or be activated only in exceptional circumstances. If the“harmonised option”wouldbeputinplace, it wouldbeactivatedwhenevera worker becomesunemployed for a given number of weeks. Conversely, the so-called catastrophic insurance”proposal would kick in only under, exceptional economic shocks such as severe recessionswherepublicfinancesareputtingunderstressbyalargerdemandof unemploymentbenefits.

Asexperiencedduringthelastcrisis, expenditureonpassivelabourmarketpoliciesclimbeduptoapproximately3%ofGDPinSpainandIreland,fromrespectivelythe1.5and0.9%of2007.


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The setting-up of the “catastrophic” option would imply the adoption of a reference set ofindicators.We analyse the possible options among the following list of indicators: the outputgap,theunemploymentrate,theunemploymentgapandtheunemploymentratio.

3.1.1 Unemploymentrateandshort-termunemploymentrate

Unemployment rate is prima facie the most natural choice, because it is indeed meant forassessmentofemploymentpolicies. Inaddition,itis asolidindicator,giventhatitisbasedonahead-count20.However,itpresents someissues

Firstofall, it is importanttonote thata significantpartofunemploymentrate isunrelated toshort-termshocks and is of structural nature.Thegroupofunemployedwhichmeasures it ismade of twomain groups: thosewhose unemployment duration is a small natural transitionfromajobtoanotherandthosewithalongeroneduetothefactthattheirskillsdonotmatchexisting vacancies. The former has a short-term nature, whereas the latter is much morepersistent and requires enormous effort to be curbed. A policy that does not take structuraldifferenceintoaccountwould,asaconsequence,giverisetoa ratherunbalancedflowoffundsovertime.Thisisa problemassuchifonefocusesontheredistributionrationaleratherthanthecushioningofshocksrationale.However,since thecushioningargumentappears tobe amongthekeyargumentforthecreationofEUI,wedonotrecommendusinga headlineunemploymentrate.

For thisreasonweproposenot touse theoverall unemploymentratebut theshort-termone.Thiswouldbeconsistentwiththe fact thatunemploymentbenefitsgenerallydonotcover theentireunemploymentspell,butratherhavea maximumlengthofeligibility21.

Short-termunemploymentrate,definedasupto12monthsofunemploymentwasonaverage4%duringtheperiod2003-2012.Inthefollowing casesitexceeded6%:

- InGreecein2011-2012- InSpain:before2004,since2008- InEstoniain2009-2010- InLatviabetween2009and2012- InLithuaniabetween2009and2011- InPolandupto2004- InCyprusandPortugal:since2012

InterestinglyenoughthelistdoesnotcovertheIrishGreatRecession.

20 Thehead-countisnotbasedontheentireworkingpopulation:onlyasmallshareofitisinterviewedinthelabourforcesurvey.ButthemethodologyissolidandagreedatEUlevelviaEurostat.21 Belgium,where unemployment benefits are provided until theworker finds a newoccupation is anexception.Inallcountriesduringthepasttwodecadessystembecamelessandlessgenerousinordertocreatetheincentivetoreducethelengthoftheworktoworktransition.


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Figure5. Short-termunemploymentinEurope

Source:Eurostat,LabourForceSurvey.

3.1.2 Unemploymentgap

Another option is to use distance from the national “norm”. In other words, EUI would beactivatedifthedifferencebetweenactualunemploymentandthenormexceedsacertainvalue.

The reference value could be either a long-term historical average or some a measure ofstructural unemployment like theNAWRU, the non-acceleratingwage rate of unemployment.While these latter twooptionsmightappearsimilar, theyareconceptuallydistinct.Moreover,eachhasobviouslyadvantagesanddisadvantages.

Usinghistoricalaverageminimizesuncertaintyorinterpretationissues,butitbringsa difficulttrade-off.Ifthereferenceperiodisfairlyshort(5-10years),thenthe„norm“canbeinfluencedupwardsbya prolongedeconomicslumpandthuslimittheimpactandrationaleofEUI.Ifthereference period is longer than that, then it brings penalization for successful labourmarketreformduringthecrisis.

Theseissuescouldberesolvedbyusingameasureofstructuralunemployment,liketheNAWRUthatwouldcorrect/augmentthelong-termaveragewitha morenuancedassessment.

Thisoptions,alsocomeswithadownside.Moreprecisely,itintroducesa degreeofcontestabilityand discretion due to the fact that the NAWRU ismore difficult to estimate than the simpleunemploymentrateandassuch,itissubjecttoex-postrevisions22.

22 Asimilarproblemhasbeendocumentedfortheestimationandsubsequentseriesofrevisionsfortheoutputgap.

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3.2 WhatshouldbethefiscalruleforEUIanda countrycontribution?

In the previous sections of this chapter we have analysed two key technical aspects thataccompany the conceptionof a cross-national systemofunemployment insurance: the triggerandthereferenceindicator.Thenextimportantstepisconsistsindealingwiththefiscalsideofthesystem.Firstofall,shouldaruleexistatall?Orshouldexpenditurebebalancedatanannuallevel? Isan intermediateoptionpossible?Additionally,howshould thesystemtreatacountrythatisinpersistentdeficitvis-à-visthesystem?

3.2.1 Asystembalancedannually

Westartbyanalysingoneextremeoption:asystemthatisbalancedeveryyear.Inotherwords,whateveriscollectedduringtheyearisalsoredistributedacrosscountriesduringthesameyear.Asaconsequencethesystemwouldnotrunanydeficitbutneitheranysurplus.

Suchoptionwouldhaveonemainattractiveness:itwouldavoidproblemsrelatedtothecapacityof the EUI to borrow in case of deficit: borrow, how much? On the market or from othergovernments?

Butapartfromthis,thecaseforanannuallybalancedfundisweak,especiallygiventhetechnicalcomplications. Theoretically an annual distribution would be in principle possible but highlyproblematic inpractice.Suchanapproach, in fact,wouldrequirepermanentcalibrationof thesystemonanannualbasis,leadingtounpredictabilityanduncertaintyatthenationallevel,thuseliminatingtosomeextenttheveryrationaleforEUI.

A further argument against this option is the riskof symmetric shocks (e.g.GreatRecession).Without the possibility to borrow or use reserves, the system would end up transferringresourcesbetweencountriesundergoingdifficulties.

3.2.2 Aflexiblesystem– nofiscalrule

Thesecondextremeoptionistheruleofnotimposingarule:thecriterionoftheEUIwouldnotbe subject to ex ante decision on its fiscal rule. Deficits and/or possibility to recur to extrafunding, beside the national annual contributions, are therefore not ruled-out. The mainadvantageisthepossibilitytoensurethegreatestflexibilitytodealwitha varietyanddifferentcombinationsof(symmetricandasymmetric)shocksincluding.

Yet,anopen-endedcommitmentremainsdifficulttoimpose.Ontheonehanditwouldhardlybeconsideredpolitically acceptable.On theotherhand, itwould imposes technical challenges intermsofconsistencieswiththeexistingEU7-yearbudgetaryframework.

3.2.3 Fiscalbalanceovertheeconomiccycle

Weconsiderasthirdan intermediateoption inwhich thesystem wouldbebalanced,butonlyovertheeconomiccycle.Inotherwords,thefund wouldbeabletorunsurplusesannuallybutwouldneedafiscalbalanceoverthemediumterm.

Suchapproachcouldbematerialisedintwoways:

- toeachcountrycorrespondsanaccountintheFundwhichhastobe balancedoverthemedium term. In case of necessity – or severe unemployment – the Fund wouldintervene to contribute to the expenditure on unemployment benefits, but under the


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condition that the loan ispaidbackbasedon an agreementwith the central authoritythatmanagesthesystem.

- Alternatively,countrieswouldbeallowedtorundeficits/surplusvis-à-vistheEUI,evenoverthemediumterm,aslongastheyhavetobalanceeachotherout.

We recommend sticking to the first approach.The reason is that it strikes a fair compromisebetween two needs: being strongly anti-cyclical and limit the scope for permanent transfersacrosscountries.

Howtoachievethebalance?Thiscouldbedoneontherevenueaswellontheexpenditureside.In the first case re-balancing would occur via an automatic increase of each countries’contribution after a certainnumberyearsofdeficit.Alternatively, it couldbe achievedon theexpenditure side by automatically limiting EUI transfers, again, after a certain time. TheAmerican experience strongly pushes in favour of the former: a balancing path based on anautomatic increase of the national contribution. In the US in fact, as explained in Chapter 2,states can borrow from the federal account if needed meaning that they do not receivepermanenttransfersfromthecentralaccount.Moreover,iftheyfailtorepaytheloanthefederalsystemisauthorisedtoincreasetheemployers’contributionforthatstateinordertoacceleratethespeedoftherebalancingpath.

3.3 ShouldtherebecommonEUstandardsforUB?

AsexplainedinChapter1,automaticstabilisersexistinallEUcountries.Europeanscanactuallyclaim having invented them: the first law to set up a public compulsory unemploymentinsurancesystemwaspassedinGermanyunderBismarck’sgovernmentinthe1880s.Certainly,differenceexistsintermsofgenerosityandcoverageratios forexamplebutsomehowwhat iscertaininEuropeisthataformofincomeprotectionisgrantedtoamajorityofworkersincasetheybecomeunemployedforreasonsindependentoftheirwill.Onemayasktherefore:wouldn’tit be easier to create a commonEuropean standard rather than creating a28+1 system?Thiswouldleavethecurrentsystemintactandavoidthecreationofanewadhocbureaucracy.

Thereismorethanoneargumentinfavourofthisoption.Asidefromsimplicity,harmonisationwouldsubstantially increaseEurope’svisibilityandsupport thanksto thecreationofastrongand perceptible social standard. Harmonisation could happen de jure, via for example aregulationonminimumstandardsforunemploymentbenefits,ordefactobysettingupa unifiedEuropean benefit partially or completely replacing national systems. In eitherways, commonstandards would need to be agreed for the key dimensions of unemployment insurance:coveragerates,replacementratios,durationandeligibility.Similartowhatwas suggestedbytheEuropeanCommission (EC2013), apossible standard couldbe: 75% ofunemployedworkerscovered,withareplacementrateofatleast50%ofgrosswagefor1yearandcommoneligibilityrules.

Yet, this standard is already very ambitious. Only in term of duration, the provision of suchbenefitforoneyearwouldimposeachangeinthesystemof7countrieswherethedurationisbetween6and11months23.Moreover,theexperiencewithharmonisationundertheCouncilofEurope instrumentsprovedtobequitedisappointing as it boileddown to an agreementon averyshortminimumduration(21weeks,fromtheinitial13)for50%ofemployees.

Finally andmost importantly, the creation of a common standardwould achieve aminimumsocial goal but it would fail to accomplish the macroeconomic mission of creating asupranationalstabilisationmechanismbutnotnecessarilyallowingtransfersbetweencountries.

23 SlovakiaandMalta(6months),AustriaandCyprus(7),Italy(8),IrelandandGreece(10),Portugal(11).


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3.4 Additionaltechnicalissues

Three cornerstonesoftheEUIsystemhavebeendeeplyanalysedintheprevioustwosections:thetriggertogetherwiththeindicator,commonstandards andthefiscalrule.Inthislastsectionwe go through three additional points. The first is participation: is the EUImeant for all EUcountriesoreurozone?And isparticipationcompulsoryorvoluntary?Thesecond is funding:whether it should be pay-as-you-go or have a funded element. The third is the interactionbetweentheunemploymentinsuranceandotherrelatedlabourmarketpolicies,aswellasotherEUexisting programmesrelatedtothesocialdomain.

3.4.1 Participation:EU28vsEurozone

Another issue to be discussed in the conceptualisation of a supranational unemploymentinsurancemechanism is itsmembership.Which EU countries are entitled to participate? Andshouldmembership to the systembe considered compulsoryor voluntary?Ananswer to thisquestionispossiblebut,again,notsimple.

Statisticallyspeaking,the larger thegroupthebetter:abiggergroupofcontributors/potentialuserswouldmake the fundmore solid by the simple law of large numbers. A large group ofcontributorswould entail that over a longperiodof time, if shocksoccur randomly, everyonewill benefit from participation and therefore have an interest in joining. An EU-wide schemewould also be logical from a legislative point of view as the same rule would apply to allcountries24.

Nonetheless, we are aware that enhanced cooperation is possible and in case of lack ofagreementamong28countriesitremainsavalidoption.Insuchcase,thesecondbestoutcomewould be an agreement between countries that are part of themonetary union. Such groupneeds to includememberstates that,aspartof theiraccessionagreement,aredeemedto jointhe EMU (Sweden, Poland, Czech Republic, Hungary, Romania, Bulgaria and Croatia) plusDenmarkandLithuaniagiventhatithasafixedpegwiththeeuro.

On the issue of voluntary versus mandatory participation, economic theory would stronglyrecommend to put in place a mandatory system. Such system, independently on how it isorganised technically, would work as a supranational insurance between existing nationalinsurances.Incaseofvoluntaryparticipation,aproblemofadverseselectionwouldariseasonlythose with a higher probability of recurring to it will participate. To avoid this basicmicroeconomictypeoftraptherefore,werecommendamandatoryEUoreurozone-widetypeofsystem.

Oneexceptioncouldbemade,againborrowedfromtheAmericanexperience.Inthe1930swhenthe American system was put in place, no country was obliged to set up a nationalunemployment insurance policy. Yet all countriesdid over time becausewherever no systemwasinplace,a payrolltaxwasimposedtoemployersinanycase.Thiscreateda strongincentiveforallstatestosetuptheirownsystemandcollectthattaxtofinancea policytheycoulddesign.

Alastissuetobeconsideredonthisfrontiswhetherconditionalityshouldbeappliedintheuseoffunds.Thepossibilityforthesupranationalauthoritytohaveasayonhowcommonfundsareusedwouldhelpmorereluctantcountriestoacceptthecreationofacommonsystem,especiallyin a situation where there is a high cross-country heterogeneity in the provision of incomesupportincaseofunemployment. Adistinctionneedstobemadebasedonthetypeofsystem.Under theharmonizedEuropeanunemploymentbenefit, proposal, therewouldbenoneed toapply conditionality as the creation of a EUI would go hand in hand with a form of

24 Forthisreason,webaseour simulationontheassumptionthatallEUcountriesjointhesystem.


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harmonisationofnationalsystemsvia thecreationofacommonminimumstandard;whereasunder the catastrophic insurance conditionality could be applied. We do not recommend itsapplication,however, inlightofthefactthatitwouldnotaltercalculationsonvolumeoffiscaltransfersanyway,butonlyinfluenceshowtheseareused,weleavethediscussionopen.

3.4.2 Revenues

Forthesakeofthedesignofsoundpublicpolicies,thediscussionontherevenueofthesystemdeserves as much attention as its spending. We divide it into two sub-questions. The firstconcernsthetypeoftaxationthatshouldfinanceit.Thesecondiswhetherthefundshouldbe“pay-as-you-go”(PAYG)versusfunded.

The necessary revenue to finance the EUI can be generated via three forms of taxation. Oneoption is a dedicated tax on consumption or on labour. The second main alternative is acontributionfromnationalgovernments’notdirectlylinkedtoaspecifictax.

Giventheheavy labour taxation insomemember states, it isquestionablewhetheradditionallabourtaxationisadvisable.Figure6 shows thatthetaxwedgeisparticularlyhighineurozonecountrieswithhighunemployment.Ofcourse,onecouldarguethatEUIlabourtaxationwillonlyreplace national one. However, EUI funded through labour taxation would generally tend toincrease labour taxation at least in countries with high unemployment because the highergenerosityofthecommonsystemaswellastheirhigherunemploymentwouldtendtoleadtohigherratesoftaxation.

Figure6. Taxwedgebyfamilytypein2012

Sources:OECDEconomicOutlookVolume2012.

On theother hand, suchoption creates intuitive and robustproportionbetweenbenefits andcontributions.ForthisreasonwewillbasethesimulationoftheDullien’smodelonthistypeoffinancing.

Adedicatedrecurrenttaxdoesnotmakesenseforthecatastrophicinsurancemodel,wherethebenefits are highly irregular and fiscal relationship solely between the EUI and national

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governments,so,inthatproposal,wewillproposetofundEUIthroughcontributionsbynationalgovernmentsnotspecificallylinkedtoacertaintax.

Intermsofpay-as-you-govsfundedsystem,thePAYGsystemwouldbebasedon:

- contribution equivalent to average LONG-TERM expected annual expenditure of thesystem

- such a system would need to make two decisions: what to make with surpluses anddeficits

- inourmodel,wewillassumethatsurpluseswillberetainedtocoverfuturedeficitsandthatdeficitswillbecoveredbya bridgingloan

In other words, even PAYG system can deliver surpluses and deficits that lead to anaccumulatedfundorliability,buttheyareincidentalandtemporary.

Ontheotherhand,afundedsystemwouldbebasedon:

- annualcontributionthatwouldbepaiduntila predeterminedamountisaccumulated- contributionswouldberestartedonlyifcontributionsfellbelowthethresholdagain

Theaccumulationoffundingwouldthusbebydesign.

PAYGis lesscostly thana fundedsystemduringthe initialperiodas itdoesnotseektoaccumulateapileof cash first.However, fundedsystemcanbemoreeasilyanticyclicalbothforindividualcountriesandthesystemasawhole.

3.4.3 Implicationsforotherprogrammes

Unemploymentinsuranceatthenationallevelfundsnotonlypassivelabourmarketpolicy(i.e.unemployment benefits), but also active labour market policy measures. Therefore, a logicalquestioniswhetherandhowtheEuropeansystemshouldincorporatethat.

Fora varietyofreasons,wedonotrecommendthat theEUI incorporateactive labourmarketpolicy financing.GiventheroleofotherEuropean financial instrumentsandtheroleof otherEuropeanpolicyinstruments,thiswouldonlyaddtocomplications.Therefore,ourproposalsarebasedonexpectationsthatotherprogramswouldcontinue.

Nevertheless, the creation of a EUI raises the opportunity to revisit existing instruments atEuropean level in the social domain and offers the possibility to re-discuss them in order tocreate a coherent systemofEuropean social policies. Itwas argued in chapterone that bynomeans neither the European Social Fund nor the Globalisation Adjustment Fund can overlapwith the EUI. However, if put together they could create the backbone of European labourmarket policies, in away that is consistentwith flexicurity principles. The EUIwould ensureincomeprotection,whereastheESFwouldfocusonemployment(orre-employment)protectingbycontributingtothefundingofactivelabourmarketpolicies.TheGAFwouldthencontinuetobeusedtofacilitatestructuraladjustmentswhichhitmoreharshlyspecialcategoriesofworkers,suchasblue-collarsandthelow-skilled.


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4. EuropeanUnemploymentInsurance- simulation

results

Inthis chapterweanalyseindetail thetwomainexistingproposalsforthesetupofaEuropeansystem of unemployment benefits. We will show what size of expenditure and necessaryrevenuesthesetwooptionswouldentail.Beforemovingtothisandindependentlyontheexactdesign, it isworth summarising the ideal characteristics of such system. There are obviouslymanytrade-offsbutconsideredthatinsuranceschemeshavebeeninplaceinEuropeformorethanacentury,enoughhasbeenlearnedfromexperiencetodesignanappropriatemechanism.Inouropinion,ideally,theEUIshould:

- Beorganisedinsuchwaythateachcountryhasitsfundsbalancedover thecycle- InvolveallEUmemberstates- Isbasedonmandatoryparticipation

We present results of our Excel-based simulations of how the European unemploymentinsurancewouldwork.Wequantify4scenariosasshowninthefollowingtable.Thesescenariospresent two radically different versions of the EUI and then tweak them. Option 1 is theharmonised Europeanunemploymentbenefit,whichwouldcoveralleligibleEUcitizensandatleast partially replace current national unemployment insurance. Option 2 is the catastrophicunemployment insurance for states, where national unemployment insurance systemswouldremainintact,butmemberstateswouldgetfinancialassistancefromtheEUsystemonlyiftheyexperienceda bignegativeunemploymentshock.Forboth options,wequantifya simpleversion(called a/) and a version with long-term country-level budgetary neutrality (called b/). Thesecondoptionwasaddedtoallowavoidingtransferunionifthatisanimportantpolicyobjectiveinsettingupthesystem.

Table5.Matrixofscenariosexploredinthechapter:

Nolong-termcountry-levelbudgetaryneutrality

Long-termcountry-levelbudgetaryneutrality

Harmonised Europeanunemploymentbenefit

Option1a Option1b

Catastrophicunemploymentinsurance

Option2a Option2b

Source:Authors’ elaboration.

Wefocusedontwoprinciplesinsettinguptheoptions:simplicityandcomparability.Simplicitymeans that we tried to keep the option design as simple as possible to allow readers tounderstandhowthesimulationworks.Comparabilitymeanssettingupbothoptionsandbothapproachestocountry-levelbudgetaryneutralityina similarwayandcalibratingthemsimilarly.This enablesustoeasilycomparethemandseesimilaritiesaswellasdifferences.

Thesimulationisbasedonhistoricaldata,startingin1999andendingin2012,whichgivesus14yearsofthesimulation.Forsomecountries,therearesomemissingvalues,butthisdoesnotmateriallyinfluenceresults.Thus,thesimulationshowshowtheEUIwouldhaveworkedifthesemechanisms would have existed at the time. Since it is an intellectual exercise, it includes


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countriesthatjoinedinthe2004and2007waves(andCroatiain2013)asiftheyhadbeenEUmembersat the time.Thepoint is toshowpotentialeffectsofEUIbasedonhistoricaldataasa counterfactual, not to simulate history. The decision to start in 1999 was based ona combinationofdataavailability(particularlyforthenewmemberstates) andthesymbolismofeurozonestartin1999.

Calibration of the EUI expenditure (generosity) was based on findings in Chapters 2 and 3.CalibrationoftheEUIrevenuewassetuptoachieveroughfinancialbalanceoverthelongrun.

Foreachoption,weshow:

- Thesizeofthecontributiontothesystem- Thesizeofthecontributionpaidbythesystemtothecountry- Theannualbalanceatthecountry-level,i.e.thenetstimulusprovidedbyEUI- Thecumulativebalance,i.e.long-termbalanceofeachcountryvis-a-vistheEUI

Ontopofthis,wealsoillustraterevenues,expenditures,annualandcumulativebalanceforthesystemasa whole.

Froma methodologicalpointofview,itshouldbeemphasizedthatExcel-basedsimulationhasadvantagesandlimits.Thekeyadvantageisthatwecansimulatea varietyofoptionsatboththeEUandcountrylevelwithlimitedresourcesandquickly.Itissuitableforcalculationofrevenuesandexpenditures andtogiveaflavourofhowimportantthesystemwouldbecomparedtotheexistingnationalstabilisers.

On the other hand, it is not a general or partial equilibriummodel thatwould show dynamiceffectsofsucha systemonthememberstates,nor fortheEUeconomyasawhole. Nonetheless,whatemergesfromthesimulationis thatthesizeofthestimuluswouldinanycasebenotlargeenoughtohavematerialsubstantialsecond-ordereffects.

As a source of data, we used AMECO, the annual macro-economic database of the EuropeanCommission'sDirectorateGeneralforEconomicand FinancialAffairs.

Forsomecountries, wehadtosimulateshort-termunemployment dataforsomeyears.Thiswasdonebycalculatingshareofshort-term unemployment inoverallunemployment foravailableyearsandthenextrapolatingformissingyearsfrom theoverallunemployment.

Before presenting the fiscal effects of the simulation, let us now present comparison of thegenerosityofthesimulatedEuropeanunemploymentinsurancewithcurrentnationalsystems.WepresentitherebecauseweusethesamelevelofgenerosityforbothoptionsthoughunderOption2thenationalgovernmentswouldNOTberequiredtospendthemoneyinthisway.

Table6. ComparisonofproposedEUIwithactualnationalunemploymentinsurancesystemsasof2010

Grossreplacementrate*

Grossreplacementrate**

Coverage(%ofLF) Duration(inweeks)

Austria 0.40 0.32 0.68 30

Belgium 0.50 0.37 0.66 -

Bulgaria 0.60 0.52 0.66 40

Cyprus 0.63 0.55 0.79 26

CzechRepublic

0.56 0.43 0.91 26

Denmark 0.52 0.47 0.72 105

Estonia 0.50 0.37 0.74 50

Finland 0.54 0.44 1.00 100


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France 0.57 0.42 0.61 104

Germany 0.42 0.34 0.67 50

Greece 0.58 0.45 1.00 50

Hungary 0.34 0.27 0.87 40

Ireland 0.47 0.44 1.00 50

Italy 0.50 0.37 0.53 34

Latvia 0.55 0.46 0.75 40

Lithuania 0.34 0.26 0.67 21

Luxembourg 0.83 0.71 0.95 50

Malta 0.20 0.18 0.88 26

Netherlands 0.75 0.59 0.83 44

Poland 0.24 0.20 0.54 26

Portugal 0.65 0.50 0.76 78

Romania 0.27 0.22 0.43 26

Slovakia 0.46 0.35 0.57 26

Slovenia 0.70 0.60 0.80 26

Spain 0.63 0.49 0.58 102

Sweden 0.57 0.43 0.96 62

UnitedKingdom

0.13 0.11 0.86 26

EUI NA 0.40 0.75 24

*Ratiowithdenominatorgrosswages(Source:SPIN).**convertedtoratiowithtotalcompensationasdenominator(Source:AMECO).Source:EuropeanCommissionandSPINdatabase.

Aswe can see, the proposed coverage ratio in the EUI system is abovemost non-euro zonemember states with the exception of Sweden, the Czech Republic, Hungary and the UnitedKingdom(beingequal toLatvianratio).Withintheeurozone, thegroup issplitevenlywith8belowand9abovethe75%coverageratio.

Themaximum duration of entitlements has been chosen at the lower threshold for the eurozone,neglectingtheoutlierLithuania.Themostcontroversialitem,thereplacementratio,issetat40%relativetototalcompensation.Thisisclosertothehigherhandthantotheloweroneofthedistribution,whichwithintheEUisveryheterogeneous.

4.1 OPTION1:Harmonised Europeanunemploymentbenefit

What in thesimulation iscalled ‘option1’ is theharmonisedEuropeanunemploymentbenefit(see chapter 1 for a summary of existing proposals). The harmonised system appliesautomatically toeveryeligibleunemployedperson.

Wequantifythefollowingscenario:ThejointEuropeanbenefitssystemwould

- Apply to short-term unemployed workers. Therefore our reference unemployedpopulationdoesnotincludeallunemployedworkers,butthosethathavebeensoforlessthanoneyear.Wesetthemaximumdurationofbenefitto6months.

- Thecoverageratioissetat75%,meaningthatamongthoseunemployedforlessthanayear,threequartersareeligibletoreceivebenefits.


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- Thebenefitisequivalentto40%oftheaveragemonthlynationalnominalcompensation.Itshouldbenotedthat40%ofnominalcompensationisnotaslowasitsoundssinceitiscalculatednot froma grosswage,but fromnominalcompensation,which includesalsoemployersocialsecuritycontributions.

Thememberstatewouldbefreetosetlegibilityrulesandreplacementrate.Ifthecostwouldbelessthantheformula,thememberstatewouldreceivetheactualamount.Ifthecostwouldbehigherthantheformula,thememberstatewouldreceiveamountequivalenttothe75%* 40%formula.Thiswould avoiddifficult-to-achieve formalharmonizationwhile ensuring that therewould be de facto harmonization since member states would be incentivized to set up thesystemina waythatisclosetothe75%*40%formula.Inotherwords,moregeneroussystemswouldbeallowedbutontopoftheharmonisedone.

�� = 0.75�� x0.4��x6��ℎ�

WhereUstandsforunemploymentandMNCEindicatesthemonthlynominalcompensationperemployee.

Howwouldbethesystemfinanced?Wechooseassourceoffundinga dedicatedlabourtaxationequivalentto0.5%ofnominalcompensation.Theratewassetuptoroughlybalancethesystemasshowninthischapter.

�� = (�� − �)x0.5%��x12��ℎ�

Aspreviouslyanticipated,we presenttwoversionsofsuchsystem.Inthefirst(called‘option1a)the system does not require a country-level neutral budgetary position. In other words,countriescanbepermanentlyindeficitorsurplusvies-a-viesthesystemwithoutanycorrectivemechanisms.Thisrepresentsa trulyEuropeansystem,whichessentiallyignoresboundariesinthefiscalsense andabletoredistributeresourcesincaseofshocks.

We correct such system in the so-called simulation1bwhere each country needs to restore aneutralbudgetaryposition.Inwhichway?Fiscalneutralitywouldbeachievedbydoublingthecontributionratefrom0.5%to1%ofthebaseforcountrieswhichhavea cumulativedeficitwiththesystemofatleast1%ofGDP.Thedoublecontributionratewouldstoponcethecumulativedeficitdeclinesbelow1%ofGDP25.

Thechoiceofthemediumtolong-runis duetothefactthataquickeradjustmentwouldhinderthe stabilisation capacity by imposing a fiscal effort to countries that are already facingdifficultiesduetohighunemploymentrates.

4.1.1 Theharmonisedunemploymentsystemwithnofiscalrule(option1a)

Aspreviouslyanticipated,foreachofthefourscenariosweshow:

- systemrevenuesbycountry(whopayshowmuchin)- systemexpenditurebycountry(whogetshowmuchout)- annualbalanceatthecountry-level,i.e.thenetstimulusprovidedbyEUI- cumulativebalance,i.e.long-termbalanceofeachcountrywithEUI- revenues,expenditures,annualandcumulativebalanceforthesystemasa whole

Westartwithrevenuesbycountryas%ofGDPfortheperiod1999-2012,whichresultfrom acontributionof0.5%ofnominal compensationofemployees for eachworker.Given that they

25 Alternatively,thestopcouldbesettobalance– 0%ofGDP.Thiswouldnothavemuchofaneffectonthecurrentsimulation.


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tend to be stable over time,we do not show the annual values, but only theminimum valueachievedovertheentireperiod,themaximumvalueandthemean.

Themeanvalueoscillatesbetween0.24and0.36,withLuxembourgastheonlyexception.Thetotalrangeforallcountriesandallyearsoscillatesbetween0.22%and0.39%ofGDP,againwithLuxembourgastheonlyexception.

Given that the contribution mechanism is set up as the same percentage of nominalcompensation,differencesprimarilyreflectdifferentsharesof labourcompensation inGDP. Inthatsense, it ismildlyantcyclicalas it tendstodecline inperiodsofhighunemployment,butonlytoa limitedextent.

ThecountrieswithhighestcontributionoverthewholeperiodareNetherlands(0.36%),Austria(0.33%),Belgium,FranceRomania,SloveniaandUnitedKingdom(all0.31%).OntheotherendareLuxembourg(0.16%),HungaryandLithuania(0.24%),Bulgaria,theCzechRepublic, Ireland,LatviaandPoland(all0.25%).FiguresarepresentedinTable7.

Table7. EUIannualrevenuesbycountry,minimum,maximumandmeanvalue,%ofGDP

Source:Authors’ elaborationbasedonAMECOdata.

min max mean

Belgium 0.3 0.32 0.31

Bulgaria 0.23 0.27 0.25

CzechRepublic 0.23 0.26 0.25

Denmark 0.28 0.31 0.29

Germany 0.28 0.3 0.29

Estonia 0.24 0.29 0.26

Ireland 0.23 0.28 0.25

Greece 0.25 0.29 0.27

Spain 0.29 0.31 0.3

France 0.31 0.32 0.31

Croatia 0.28 0.31 0.29

Italy 0.27 0.31 0.29

Cyprus 0.27 0.3 0.28

Latvia 0.23 0.28 0.25

Lithuania 0.22 0.27 0.24

Luxembourg 0.14 0.18 0.16

Hungary 0.23 0.25 0.24

Malta 0.25 0.26 0.26

Netherlands 0.35 0.38 0.36

Austria 0.32 0.34 0.33

Poland 0.23 0.29 0.25

Portugal 0.28 0.3 0.29

Romania 0.27 0.39 0.31

Slovenia 0.3 0.33 0.31

Slovakia 0.22 0.25 0.23

Finland 0.27 0.3 0.28

Sweden 0.28 0.3 0.29

UnitedKingdom 0.3 0.32 0.31


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Expenditure figures,aspercentageofGDP,arepresentedinTable8.Alreadyaquickglanceatthedatashowsthatexpenditureoscillatesmuchmorethantherevenueandthusprovidesthemainanti-cyclicalelement.Itexceeds0.5%ofGDPintheworstyear forEstonia(0.76%),Ireland(0.57%), Greece (0.73%), Spain (1.3%), Cyprus (0.58%), Latvia (0.89%), Lithuania (0.72%),Poland (0.66%) and Portugal (0.59%). However, only for Spaindoes this translate intomeanexpenditure over the period that is larger than 0.5% of GDP (0.71%). For the rest, increasedexpenditureisa temporaryphenomenon,reflectingprimarilythoughnotexclusivelytheperiodofGreatRecession.

Table8. EUIannualexpenditurebycountry,minimum,maximumandmeanvalue,%ofGDP

min max mean

Belgium 0.18 0.3 0.25

Bulgaria 0.13 0.43 0.28


Denmark 0.15 0.36 0.25

Germany 0.2 0.36 0.29

Estonia 0.13 0.76 0.36

Ireland 0.13 0.57 0.25

Greece 0.24 0.73 0.35

Spain 0.43 1.3 0.71

France 0.3 0.42 0.36

Croatia 0.16 0.44 0.33

Italy 0.18 0.35 0.24

Cyprus 0.16 0.58 0.27

Latvia 0.25 0.89 0.42

Lithuania 0.18 0.72 0.42


Hungary 0.18 0.37 0.25

Malta 0.14 0.19 0.16


Austria 0.2 0.29 0.24

Poland 0.25 0.66 0.45

Portugal 0.16 0.59 0.29

Romania 0.14 0.3 0.22

Slovenia 0.16 0.38 0.26

Slovakia 0.15 0.46 0.3

Finland 0.28 0.46 0.37

Sweden 0.23 0.4 0.3

UnitedKingdom 0.19 0.34 0.24Source:Authors’ elaborationbasedonAMECOdata.


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Table 9 presentsaverageannualandcumulativebalanceof eachcountryvis-à-vis thesystem.Thefirstcolumnshowsaverageannualbalanceforthewholeperiod(1999-2012).ThesecondcolumnshowsaverageannualbalancefortheperiodpriortotheGreatRecession(1999-2008).The third column shows the average annual balance for the Great Recession period and itsaftermath(2009-2012).

Weseethatduringthegoodtimes,onlySpainandPolandhadlargerannualnegativebalance–0.22% and 0.21% of GDP. By the same token, only the Netherlands had significant averageannualsurplus(0.21%).After2009,Estonia,Greece,Spain,LatviaandLithuaniaexceedaverageannual negative balance of more than 0.2% of GDP. During this period, no country has anaveragesurplusofmorethan0.2%ofGDP.

However,evensmallersurplusesordeficitscanaccumulate into larger totals over aperiodofmore than a decade. If we set 1% of GDP as the threshold for triggering the increase in thecontribution, then Greece, Spain, Latvia, Lithuania, Poland and Finland accumulate deficits ofsuchmagnitude thatinoption1bturntriggeranincreaseinthecontribution.

Malta, Netherlands and Austria instead cumulatively contribute more than 1% of 2012 GDPcomparedtowhattheypayin.


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Table9. EUIaverageannualbalanceandcumulativebalancebycountry,%ofGDP

Averageannualbalance1999-2012



Cumulativebalance(%of2012GDP)

Belgium 0.06 0.08 0.03 0.70

Bulgaria -0.03 -0.03 -0.03 -0.13

CzechRepublic 0.03 0.05 -0.01 0.35

Denmark 0.04 0.08 -0.04 0.48

Germany 0.00 -0.02 0.05 0.07

Estonia -0.10 -0.05 -0.25 -0.88

Ireland 0.00 0.07 -0.18 -0.03

Greece -0.08 0.00 -0.28 -1.16

Spain -0.41 -0.22 -0.88 -5.36

France -0.05 -0.03 -0.08 -0.55

Croatia -0.04 -0.04 -0.03 -0.30

Italy 0.05 0.06 0.01 0.59

Cyprus 0.02 0.07 -0.13 0.03

Latvia -0.17 -0.10 -0.36 -1.70

Lithuania -0.18 -0.11 -0.33 -1.57

Luxembourg 0.05 0.06 0.03 0.45

Hungary -0.01 0.04 -0.13 -0.27

Malta 0.10 0.10 0.09 1.05

Netherlands 0.20 0.21 0.15 2.34

Austria 0.10 0.10 0.10 1.12

Poland -0.20 -0.23 -0.11 -1.65

Portugal 0.00 0.07 -0.17 -0.15

Romania 0.09 0.12 0.02 0.73

Slovenia 0.06 0.09 -0.03 0.63

Slovakia -0.07 -0.07 -0.06 -0.37

Finland -0.09 -0.10 -0.08 -1.00

Sweden -0.01 0.01 -0.07 -0.18

UnitedKingdom 0.07 0.09 0.01 0.87Source:Authors’ elaborationbasedonAMECOdata.

Weaggregatefigurestopresenttheoverallbalanceat theEUlevel.Figure7 showsrevenuesandexpenditures for the whole system as % of GDP. We can see that while the revenues areessentially flat around 0.3% of GDP, expendituresoscillatemuchmore – between 0.25% justpriortotheGreatRecessionand0.4%duringmostofit. Expenditureisthereforesensitivetothebusinesscycle, inananti-cyclical fashionas it is supposedtobe,whereas revenues areratherconstant.


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Figure7. RevenueandexpenditureattheEUlevel,%ofGDP


Figure 8 shows annual and cumulative balance at the EU level. The annual balance line isunsurprising as it is essentially the difference between revenue and expenditure in the firstchart.It ismildlypositivemostoftheyearsbeforetheGreatRecessionandthenitsaysinthenegativeterritory,showingannualdeficitsbetween0.05%and0.1%ofGDP.

A moreinterestingpieceofinformationisthecumulativebalanceofthewholesystemexpressedasa percentageofa givenyear’sGDP.Hadthesystembeeninplacesince1999,the EUIwouldnothave required additionalfinancialinjectionafteritsstart.Indeed,itwouldhaveaccumulatedreservesallthewayupto2008.However,thereserveswouldthen allbespentin2009andthecumulativedeficitwouldcontinueincreasingduringthe2010-2012period.Thisraisestheissueofadditional financingneedsofEUIundersuchcircumstances.Given thesystemperformancepriorto2009,therecouldbea reasonableexpectationthatthemoneywouldberecoveredoverthelongrun,buttheinterimperiodcouldbeanextendedone.

Figure8. Annualandcumulative balanceattheEUlevel,%ofGDP


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4.1.2 Theharmonisedunemploymentsystemwithlong-termcountry-levelneutralbudgetaryposition (option1b)

Wenowmove fromoption1a tooption1b.The twodifferbyasinglebutcrucialelement:wenowa systemthataims to bebalancedinthemedium- tolong-runforeachmemberstate. Thisentailsthatastatecanrunyearlydeficitvis-à-visthesystemincaseofrecessions,butneeds torepay the loan in themedium-long-run.Asaconsequence, redistributionbetweencountriesisallowedbutonlytemporarily.

Therebalancingis achievedbydoublingthecontributionratefrom0.5%to1%ofthebaseforcountries, whichhave a cumulative deficitwith the systemof at least 1%ofGDP.Thedoublecontributionratewouldstoponcethecumulative deficitreturnsagainbelow1%ofGDP.26

Forthisoption,wedonotprovideexpendituredataonthecountrybasissincetheexpenditureisidenticaltoOption1a– thedifferencelays ontherevenueside.

Table10 showsrevenuesbycountryaspercentage ofGDPfortheperiod1999-2012.Aswiththepreviousoption, we showtheminimumvalue achievedannually, themaximum value and themean.Thebottomvalues remain the sameas inOption1a - ifwe takeoutLuxembourg, then0.22%ofGDP is the lowestanycountrypays inanyyear(Slovakia),and0.23%ofGDPas thelowestaveragecontributionbya country(alsoSlovakia).

Torepeatfrom1a– giventhatthecontributionmechanismissetupasthesamepercentageofnominalcompensation,differencesprimarilyreflectdifferentsharesoflabourcompensationinGDP. In that sense, it is mildly anti-cyclical as it tends to decline in periods of highunemployment,butonlytoa limitedextent.

Table10. EUIannualrevenuesbycountry,minimum,maximumandmeanvalue,%ofGDP

min max mean

Belgium 0.3 0.32 0.31

Bulgaria 0.23 0.27 0.25


Denmark 0.28 0.31 0.29

Germany 0.28 0.3 0.29

Estonia 0.24 0.29 0.26

Ireland 0.23 0.28 0.25

Greece 0.25 0.29 0.27

Spain 0.29 0.62 0.43

France 0.31 0.32 0.31

Croatia 0.28 0.31 0.29

Italy 0.27 0.31 0.29

Cyprus 0.27 0.3 0.28

Latvia 0.23 0.49 0.3

Lithuania 0.23 0.44 0.28


Hungary 0.23 0.25 0.24

Malta 0.25 0.26 0.26


26 Alternatively,thestopcouldbesettobalance– 0%ofGDP.Thiswouldnothavemuchofaneffectonthecurrentsimulation.


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Austria 0.32 0.34 0.33

Poland 0.23 0.53 0.32

Portugal 0.28 0.3 0.29

Romania 0.27 0.39 0.31

Slovenia 0.3 0.33 0.31

Slovakia 0.22 0.25 0.23

Finland 0.27 0.3 0.28

Sweden 0.28 0.3 0.29

UnitedKingdom 0.3 0.32 0.31Source:Authors’ elaborationbasedonAMECOdata.

Whereitgetsdifferentandinterestingofcourseiswithregardtomaximumvalues.Giventheiraccumulateddeficitofmorethan1%ofGDPatsomepoint,Spain,Latvia,LithuaniaandPolandhavetocontributemorefora periodoftime.ForSpain,thisappliestoyear2005andtheperiodfrom2008on.Latviahastodoubleitscontributionsin2010andafterwards,Lithuaniain2011and 2012. For Poland, the relevant period is 2003-2006. In 2013, they would be joined byGreece, which hit a cumulative deficit of 1.16% of GDP in that year. This also shows thedisadvantage of the balancing system. The 1% benchmark provides breathing space whena country pays regular contributions but receives much higher benefits, but if there isa sustained spell of high unemployment, the doubled contributions can erase the anti-cyclicalimpactinthoselateryears.

The annual and cumulativebalancenumbersdonot change formost countries,meaning thattheydonotcrossthe1%soil.BoththeirrevenuesandexpendituresstaythesamecomparedtoOption1a.However,forthe4countriesmentionedabove,theneedtocontributemoreimprovestheirbalancevis-à-visthesystem.






OPTION1acumulativebalance(%of2012GDP)

Spain -0.28 -0.16 -0.58 -3.54 -5.36

Latvia -0.12 -0.10 -0.19 -1.06 -1.70

Lithuania -0.14 -0.11 -0.22 -1.14 -1.57

Poland -0.13 -0.13 -0.11 -1.06 -1.65Source:Authors’ elaborationbasedonAMECOdata.

Theincreasedrevenueensuresthat,duringgoodtimes,nocountryhasanaverageannualdeficitof0.2%ofGDPormore(inOption1a,PolandandSpainfulfilledthis).Italsoensuresthatthecumulativebalanceiscutfrom5.36%ofGDPto3.54%ofGDPforSpainandfromthe1.5-1.7%rangetothe1-1.2%forthe3others.Ofcourse,thedecreasewouldfurthercontinueintheyears2013andlater.

The increased revenue for certain countries also increases system-wide revenues in certainyearsaswecanseeinthefollowingchart.ComparedtoOption1a,theexpenditureprofilestaysthesame,butweseea slightincreaseinrevenueinearlytomid-2000duetohigherSpanishandPolishcontributionsandthenmuchhighercontributionstartingfrom2009on.


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ThisleadstohigherannualsurplusesinthegoodtimesandsmallerannualdeficitsduringtheGreatRecessionasFigure10 shows.Italsomakesthesystemmuchmoresolvent– despitetheGreatRecession,itwouldbeonlyin2012whenitwouldrequireadditionalinjection.

Figure10. AnnualandcumulativebalanceattheEUlevel,%ofGDP


4.2 Thecatastrophicunemploymentinsurancesystem

We call Option 2 the catastrophic unemployment insurance. The insured identity is not thesingleworker at riskof unemployment, as inOption1, but states, or,more preciselynationalinsurancefunds.Thebasicideaistotransferfundstofinanceunemploymentbenefitsfromthecentretotheperipherywhenunemploymentismeasurablyhigherthannormal.

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In our simulation, the assistance is triggered when the unemployment rate is higher thanNAWRUby2percentagepoints inacertaincountry.Thechoiceof the triggerisarbitrary andsmaller values could be chosen27. However, such value is consistent with the idea of thecatastrophic system intervening only in exceptional circumstances – in other words majorincreaseintheunemploymentrates.

Thepay-outisasubsidytonationalbudgetequivalenttosumofallunemploymentbenefitsfora 6-month benefit period calculated on the same basis as Option 1 (40% of nominalcompensation, 75% of unemployed of less than 1 year covered). The pay-out would not beconditional– gross transfers fromEUIcanbeusedasnationalgovernmentssee fit (thoughofcourseifconditionalitywereimposed,thiswouldhavenoimpactonthefiscalcalculationsthatfollow).

Theinsurancewouldbefundedbymemberstates’ contributions.Thesewouldamountto0.1%ofGDPannuallyuntil0.5%ofEUGDPisaccumulated.Thencontributionswouldstopandwouldberestartedifthefundfellagain under0.5%oftheUnion’soutput.

On the expenditure side, we model the following rule: if difference between the annualunemploymentrateandNAWRUineachcountryishigherthan2%,thenthecountryinquestionreceivesapay-outequalto75%ofunemployedworkers(below12months)multipliedby40%oftheiraverage nominalcompensation.

��,� − �� > 2 => �� − ��,� = 0.4��x.75�

Aswith Option 1, we present results for the two versions of this second option. In the first(Option2a),nofiscalruleisapplied.Inotherwords,countriescanbepermanentlyindeficitorsurplus vis-à-vis the system without any corrective mechanisms. This represents a trulyEuropean system, which essentially ignores boundaries in the fiscal sense, and also a realinsurance basedontheideathatsuchshockisrandomlydistributed.

In the second version (Option 2b) countries are required to maintain a neutral budgetaryposition.The systemwould aim tobebalanced in themedium- to long-run for eachmemberstate. This would be achieved by setting an additional contribution of 0.2% of GDP payableannuallyforcountrieswhichhavea cumulative deficitwiththesystemofatleast1%ofGDP.Theadditionalcontributionisdueeveryyearregardlessofwhethertheregularcontributionisbeingpaidandwouldstoponcethecumulative deficitdeclinesbelow1%ofGDP.28

4.2.1 Thecatastrophicinsurancescheme withnofiscalrule(option2a)

AswithOptions1aand1b,weshow detailedresultsofoursimulation.Thisincludes:

- systemrevenuesbycountry(whopayshowmuchin)- systemexpenditurebycountry(whogetshowmuchout)- annualbalanceatthecountry-level,i.e.thenetstimulusprovidedbyEUI- cumulativebalance,i.e.long-termbalanceofeachcountrywithEUI- revenues,expenditures,annualandcumulative balanceforthesystemasa whole

Revenuesareeasilycountedinthiscasesince everycountrypaysthesame– 0or0.1%ofGDPdependingonthe aggregatebalance of the fund.Between1999and2004,all countriespay togradually buildupthefund.Then between2005and2009,weseethestop-and-startmechanism

27 Values bigger thanNAWRU + 2would insteadmakeno sense as theywould apply to an extremelylimitednumberofcases.28 Alternatively,thestopcouldbesettobalance– 0%ofGDP.Thiswouldnothavemuchofaneffectonthecurrentsimulation.


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ofcontributionsandatthesametimeonlyminor ornopay-outs.Thesituationchangesin2010,contributionsrestartona sustainedbasistoreplenishthefund.

Figure11. EUIannualrevenuesforeachcountry,%ofGDP


The clear difference between the two scenarios is that the contribution demanded for thecatastrophic insurance ismuch smaller compared to theharmonised system.We see that themechanism is indeed much smaller – on average 0.07% of GDP annually and that includedbuildingupthefund.Inyearssincethe0.5%GDPwasreached(2006),itwouldhavebeenonly0.05%ofGDPonaverage.

The pay-outs are much more varied and many member states would not have received anyduringtheperiod sincetheirunemploymentratestayedbelowthetrigger.However,countriesthatreceiveapay-outreceivesupportthatis comparableinsizetotheharmonisedscheme.Asaconsequence:

- thestabilisingeffectofthecatastrophicinsuranceisbiggerduetothefactthatasimilarpremiumisreceivedforasmallerannualcontribution

- thesamegoalisachievedforasmallercostwiththecatastrophicinsurancescheme

Weprovide inTable12 detailed informationon the annual expenditure, dividing thepre andpost-crisisperiods.

Table12. EUIannualexpenditurebycountry,overall,since2009andthemaximum value,%ofGDP

Totalpay-out1999-2012 Totalpay-out2009-2012 Highestannualpay-oyt

Belgium 0.00 0.00 0.00

Bulgaria 0.80 0.00 0.43


Denmark 0.36 0.36 0.36

Germany 0.00 0.00 0.00

Estonia 1.46 1.46 0.76

Ireland 1.76 1.76 0.57

Greece 1.94 1.37 0.73

Spain 4.75 4.75 1.30

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France 0.00 0.00 0.00

Croatia 0.00 0.00 0.00

Italy 0.00 0.00 0.00

Cyprus 0.00 0.00 0.00

Latvia 2.43 2.43 0.89

Lithuania 3.66 2.26 0.72


Hungary 0.00 0.00 0.00

Malta 0.00 0.00 0.00


Austria 0.00 0.00 0.00

Poland 2.27 0.00 0.66

Portugal 0.00 0.00 0.00

Romania 0.00 0.00 0.00

Slovenia 0.00 0.00 0.00

Slovakia 0.89 0.00 0.46

Finland 0.00 0.00 0.00

Sweden 0.00 0.00 0.00

UnitedKingdom 0.00 0.00 0.00Source:OwnelaborationbasedonAMECOdata.

The countries receivingmore than 1% of GDP overall are: Estonia (1.46%), Ireland (1.76%),Greece(1.94%),Spain(4.75%),Latvia(2.43%),Lithuania(3.66%)andPoland(2.27%).Thevastmajority of pay-outs for these countries occurred since 2009, but there are exceptions(Lithuania2000-2002,Poland2002-2005,Greece1999-2000).

Ifwelookattotalbalance,wegeta similarthoughmoresophisticatedpicture.OnlyforSpainisthe total annual average balance more than 0.2% of GDP (0.27%) and only for Latvia andLithuaniaisitmorethan0.1%(0.1%and0.19%respectively).ThisillustrateshowthesystemislesslikelythanOption1toproducesignificantlong-termbeneficiariesevenwithoutadditionalcontributions(whichwillbeaddedinOption2b).Bydesign,itisimpossibleforanycountrytobea netpayeroftheorderofmagnitudeof0.2%ofGDPandmoreforanysustainedperiodoftime.

However, during theGreatRecessionand its aftermath,Estonia, Ireland,Greece, Spain, Latviaand Lithuania all received on averagemore than 0.2%GDP annuallymore than they paid in.Spain(4%),Latvia(1.52%)andLithuania(1.95%)alsoaccumulateda totalnegativecumulativebalance ofmore than 1% of GDP by 2012. No country accumulatesmore than 1% of GDP ofcumulativesurplusthoughPortugalandsomeothercountriescomeclose.ThePortuguesecasealso demonstrates one disadvantage of this option – a country with consistently poorperformancecanbeina situationwhereitsdeviationfromits„normal“isnever largeenoughtowarrantassistanceanditendsupasa netpayerdespiteitssignificant suffering.


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Table13. Annualbalanceoverview





Belgium 0.07 0.07 0.08 0.80

Bulgaria 0.01 -0.01 0.08 0.28

CzechRepublic 0.07 0.07 0.08 0.67

Denmark 0.05 0.07 -0.01 0.48

Germany 0.07 0.07 0.08 0.85

Estonia -0.03 0.07 -0.29 -0.58

Ireland -0.05 0.07 -0.36 -0.88

Greece -0.07 0.01 -0.27 -0.91

Spain -0.27 0.07 -1.11 -4.00

France 0.07 0.07 0.08 0.83

Croatia 0.07 0.07 0.08 0.76

Italy 0.07 0.07 0.08 0.88

Cyprus 0.07 0.07 0.08 0.75

Latvia -0.10 0.07 -0.53 -1.52

Lithuania -0.19 -0.07 -0.49 -1.95

Luxembourg 0.07 0.07 0.08 0.70

Hungary 0.07 0.07 0.08 0.79

Malta 0.07 0.07 0.08 0.76

Netherlands 0.07 0.07 0.08 0.84

Austria 0.07 0.07 0.08 0.80

Poland -0.09 -0.16 0.08 -0.59

Portugal 0.07 0.07 0.08 0.90

Romania 0.07 0.07 0.08 0.58

Slovenia 0.07 0.07 0.08 0.80

Slovakia 0.01 -0.02 0.08 0.29

Finland 0.07 0.07 0.08 0.81

Sweden 0.07 0.07 0.08 0.75

UnitedKingdom 0.07 0.07 0.08 0.90Source:OwnelaborationbasedonAMECOdata.

AttheEUlevel,thesystemismuchmorevolatileonboththerevenueandtheexpendituresidethan Option 1 as befits a catastrophic insurance system. The following chart shows thatrevenues for the whole system are identical to national-level revenues shown above.Expendituresarequitelowduringthe‘goodtimes’,withsmallpay-outsoflessthan0.02%ofEUGDPbetween1999and2008anda fewyearsofnopay-outs.Since2009,thesystemwouldbepayingoutbetween0.11and0.12%ofEUGDPannually.


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Source:OwnelaborationbasedonAMECOdata.

The annual balance of the system is determined by interaction between the start-and-stoprevenuesystemandcatastrophicevent-basedpayouts.Inearlyyears, it ismostlyinsurplusofcloseto0.1%ofGDPasmemberstatespaytobuildupthefundanddonotgetmuchinreturn.Sincethen,withtheexceptionof2009,thebalanceiszeroorclosetozeroassignificantpay-outsisbalancedornearlybalances byrestartof thecontributions.Asa result, thecumulative fundbalanceshowstheinitialbuildupto0.5%ofGDP,thenstagnation,thena sharpcutin2009andsince then a gradual mild erosion as pay-outs are somewhat larger than the restartedcontributions.

Figure13. AnnualandcumulativebalanceattheEUlevel,%ofGDP


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4.2.2 Thecatastrophicinsuranceschemewithlong-termcountry-levelneutralbudgetaryposition (option2b)

Option2bis identicaltoOption2abutwiththeaddedneedforcountry-levelneutralbudgetaryposition.The systemwould aim tobebalanced in themedium- to long-run for eachmemberstate. This would be achieved by setting an additional contribution of 0.2% of GDP payableannuallyforcountrieswhichhavea cumulative deficitwiththesystemofatleast1%ofGDP.Theadditionalcontributionisdueeveryyearregardlessofwhethertheregularcontributionisbeingpaidandwouldstoponcethecumulative deficitdeclinesbelow1%ofGDP.

This would mean that, unlike in Option 2a, countries would not all have equal averagecontributionsover a longerperiod.Asshown in thenext table,mostwould still pay0.07%ofGDPonaverage (due to the fact that the contributionof0.1%wouldnotbepayable in everyyear),butSpain,Latvia,LithuaniaandPolandwouldpaymore– 0.1%.

Table14. EUIannualrevenuesbycountry,meanvalue,%ofGDP

Country Averagecontribution

Belgium 0.07

Bulgaria 0.07

CzechRepublic 0.07

Denmark 0.07

Germany 0.07

Estonia 0.07

Ireland 0.07

Greece 0.07

Spain 0.1

France 0.07

Croatia 0.07

Italy 0.07

Cyprus 0.07

Latvia 0.1

Lithuania 0.11

Luxembourg 0.07

Hungary 0.07

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Netherlands 0.07

Austria 0.07

Poland 0.1

Portugal 0.07

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Slovakia 0.07

Finland 0.07

Sweden 0.07

UnitedKingdom 0.07Source:OwnelaborationbasedonAMECOdata.

Wedonotprovideexpendituredataon thecountrybasissince theexpenditure is identical toOption2a– thedifferenceisontherevenueside.


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What changes is thebalance, of course, for the 4 countries thatwouldhave topay additionalrevenue.By2012,LatviaandLithuaniawouldbeclosetorebalancingtheirrelationshipwiththesystem and Poland would have already rebalanced it. On the other hand, the ongoingunemploymentcrisisinSpainanditsseveritywouldmeanthatevenhighercontributionswouldnothavechangedmuchitsfiscalrelationshipwiththesystemb2012.


BALANCE1999-2012

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Cumulativebalance

OPTION 2ACumulativebalance(%of2012GDP)

Belgium 1.0 0.3 0.7 0.80 0.80

Bulgaria 0.2 0.3 -0.1 0.28 0.28CzechRepublic 1.0 0.3 0.7 0.67 0.67

Denmark 0.6 -0.1 0.7 0.48 0.48

Germany 1.0 0.3 0.7 0.85 0.85

Estonia -0.5 -1.2 0.7 -0.58 -0.58

Ireland -0.8 -1.5 0.7 -0.88 -0.88

Greece -0.9 -1.1 0.1 -0.91 -0.91

Spain -3.4 -4.1 0.7 -3.60 -4.00

France 1.0 0.3 0.7 0.83 0.83

Croatia 1.0 0.3 0.7 0.76 0.76

Italy 1.0 0.3 0.7 0.88 0.88

Cyprus 1.0 0.3 0.7 0.75 0.75

Latvia -1.0 -1.7 0.7 -1.14 -1.52

Lithuania -2.1 -1.4 -0.7 -1.39 -1.95

Luxembourg 1.0 0.3 0.7 0.70 0.70

Hungary 1.0 0.3 0.7 0.79 0.79

Malta 1.0 0.3 0.7 0.76 0.76

Netherlands 1.0 0.3 0.7 0.84 0.84

Austria 1.0 0.3 0.7 0.80 0.80

Poland -0.9 0.3 -1.2 -0.32 -0.59

Portugal 1.0 0.3 0.7 0.90 0.90

Romania 1.0 0.3 0.7 0.58 0.58

Slovenia 1.0 0.3 0.7 0.80 0.80

Slovakia 0.1 0.3 -0.2 0.29 0.29

Finland 1.0 0.3 0.7 0.81 0.81

Sweden 1.0 0.3 0.7 0.75 0.75UnitedKingdom 1.0 0.3 0.7 0.90 0.90Source:OwnelaborationbasedonAMECOdata.

Lookingattherevenuesandexpendituresatthesystemlevel,theresultsaresimilartoOption2a:highlyvolatilerevenuesandexpendituresasbefitsacatastrophicinsurance.Thedifferencesare on the revenue side and they relatively small – we can see that, after 2010, the overall


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revenuegraduallyrisesfromstandard0.1%ofGDPto0.12%assomecountriespayadditionalcontributions.



Lookingatthefundbalance,theadditionalrevenueissufficienttostabilizethefundat0.4%ofGDPduringtheGreatRecessionanditsaftermath,butthedifferenceisfairlysmall.

Figure15.Annual andcumulative balanceattheEUlevel,%ofGDP


Overall,atthesystemlevelweseethattheadditionalrulespaidbycountrieswithdeepdeficitscanbeimportantforthecountryfiscalrelationshipvis-a-visthesystem,butdonotmakemuchdifferenceforthesystemasa whole.Ontheotherhand,suchstatementsarebasedonrerunninga historical situation where none of the truly largest economies (France, Germany, Italy, UK)wereeligibleforthepay-outona sustainedbasis.

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4.3 Comparisonsofoptions

Inthissection,wecomparethefouroptionstobetterpresenttheirsimilaritiesanddifferencestothereader.WestartwiththeEUlevelandthenproceedtopresentthesimulationforseveralofthe memberstatesasanillustration.

4.3.1 ComparisonoftheoptionsattheEUlevel

Westartwithrevenues.ThefollowingchartshowsstarkdifferencesbetweenOptions1and2.Option2– despiteinitial5-yearperiodtobuildupthefund- ismuchlesscostlythanOption1sinceitisa formofcatastrophicinsuranceforthememberstateswhereasOption1isa formofpermanentredistribution.Ofcourse,Option1unlikeOption2canreplacethenationalschemestosomeextentsothisdoesnotimplythattheoverallpublicrevenueandexpenditureinmemberstates + EU would be increased. It could simply be transferred from member states to thesupranationallevel.

Inthe14-yearperiodwesimulate,differencesbetweena/andb/optionappeartoberelativelysmall for Option 2, butmore significant for Option 1,where the need to rebalance a countryrelationship with the system if the accumulated deficit exceeds 1% of GDP leads to a moresustainedincreaseinrevenues.

Figure16. EUIrevenuesandexpenditurepaidbyandtoSpainundervariousoptions,as%ofGDP.

Revenues Expenditure


Expenditure does not differ between a/ and b/ as the difference is on the revenue side.Therefore,wecanonlycompareexpenditureoverallunderOptions1and2.Whatwecanseeinthechartisthesameasintherevenuechart,onlymorepronounce.Thecatastrophicinsuranceoption lies essentiallydormant (helping an individualmember statehere and there)until theGreatRecessionwhenitkicksintoaction.ExpenditureforOption1isalsoeffectivelyanticyclicalattheEUlevel– expenditurerangesfrom 0.25%ofGDPto0.4%,butithasa baselinecomponentwhichdistributessignificantamountseveninthebestoftimes.

Themostcomplicatedchartsofaristhecomparisonofannualbalances.Ingoodtimes,Options1and 2 are both neutral as assistance to individual countries is not sufficiently large tosignificantly influence theoverall systembalance.Theonly exception is the initial build-upoffundingunderOption2.However,indifficulttimesafter2009,bothoptionsinitiallygodeeplyinto deficit in 2009. Afterwards, their reactions differs. At one end of the range, Option 2bquicklyregainsbalanceattheEUIlevel,whileattheotherend,Option1acontinueswithdeficitof0.05%to0.1%ofGDPuntil2012.Therefore,preferabilityofvariousoptionsattheEUleveldependsalsoonwhatpolicy-makersviewasa preferableapproach.

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Figure17. EUIannualandcumulativebalanceoftheEUundervariousoptions,%ofGDP.

Annualbalance Cumulativebalance


Different annual balances translate also into different cumulative balance. For Option 2, thedifferences between a/ and b/ lead to a small cumulative difference. The real difference isbetweenOption1and2,whereOption1goesintocumulativedeficit,whichbecomesa system-widedeficitunderbotha/andb/by2012(thoughtheb/option,byincreasingrevenue,makesthedeficitmuchsmaller).Thecalibrationofvariousoptionsis,ofcourse,onlyanillustration,butitshowsthat,forOption1,policy-makerswouldneedtohavea financialbackstoppingfacilityofsomekind(e.g.extraordinarycontributionorloans).

4.3.2 Comparisonoftheoptionsforselectedcountries

In this part of the report,we present comparison of the four options for individual memberstates.Tofacilitatethereader,wereproduceinthissectionthetablethatsummarisesthefourscenarios we analyse: the harmonised European unemployment benefit system and thecatastrophicunemploymentinsurance,eachwithtwodifferentfiscalrules.

Wefocusontwogroups,wheretheresultsarelikelytobeofinterest- countriesmostsufferingfromtheGreatRecessionandcountries thatare likely tobe long-termnetpayers.Specifically,welookatSpain,Greece,Latvia,Ireland,theNetherlands,AustriaandGermany.Wepresentthefouroptionsforeachofthesecountriestogetherwiththeannualandcumulativebalance.

Table16. Matrixofscenariosexplored

Nolong-termcountry-levelbudgetaryneutrality

Long-termcountry-levelbudgetaryneutrality

Harmonised Europeanunemploymentbenefit

Option1a Option1b

Catastrophicunemploymentinsurance

Option2a Option2b

Source:Ownelaboration.

Spain

SpainistheheaviestuserofEUIunderalloptions. It isthereforenotsurprising that,withthebalancingrequirementofoptionb/,this leadsalso tohigherpayments intothesystem.Under

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Option1b,itreachesapproximately0.6%after2008.WithOption2b,itismilder,butstillSpainwouldbepaying0.3%ofGDP,3timeshigherthanmostothermemberstatessince2011.

Figure18. EUIrevenuesandexpenditurepaidbyandtoSpainundervariousoptions,as%ofGDP.



WhatSpainwouldgetfromEUIdiffersdramaticallyduringthegoodtimes,butlesssoduringthebad times. Until 2008, the catastrophic insurance would not pay Spain anything since itssituationisnotdramaticenough.Undertheharmonised systeminstead,Spainwouldget0.4to0.6% ofGDP, significantlymore thanothermember states evenprior to theGreatRecession.However,duringtherecessionanditsaftermath,theEUIexpenditureofbothsystemsconvergesuptoa veryhighlevel,approximately1.3%ofGDPreflectingthedramaticdeteriorationintheSpanishunemployment.

TheheavySpanishrelianceonEUIisalsodemonstratedbyitsannualbalance,whichisnegativeevenduringthegoodtimesunderharmonised systemthoughnotforcatastrophicinsurance.ItbecomesverynegativeduringtheGreatRecessionthoughthebalancedependsheavilyon theOption chosen. It ranges from approximately 0.6% of GDP annually under the catastrophicinsurancewith a tighter fiscal rule to1-1.2% annuallyunder the harmonised systemwithnobudgetaryneutrality.

Figure19. EUIannualandcumulativebalanceofSpainundervariousoptions,%ofGDP.



Consequently, thecumulativebalanceofSpainwith thesystemworsens throughout theentireperiod (if one discounts the initial fund-building period in Option 2). By the end of 2012, it

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wouldhavebeenbetween3.5%and4%ofGDPintheredinalloptionsexceptfor1a,whereitwouldbeevenhigher(around5%ofGDP).

Greece

Greecepaysstandardrevenuesintothesystemdespiteitsrepeatedusesinceitdidnotcrossthe1%accumulateddeficit thresholdby2012 (but itwould in the followingyears)We can see agradualdeclineinrevenuesasitsemploymentdecreasesduringthecrisis.

Figure20. EUIrevenuesandexpenditurepaidbyandtoGreeceundervariousoptions,as%ofGDP.



Greece’spay-outfromEUIwouldreachhighlevelsof0.6-0.7%ofGDPannuallyduringtheGreatRecessionunderbothoptions,butitwouldarrivelaterunderOption2.

Greece’s annual balance turnsdramaticallynegativeduring theGreatRecessionasonewouldexpect,reaching0.5%to0.6%ofGDPannually.Themaindifferencebetweenthetwooptionsintermsofannualbalanceiswhenandhowmuch.Thecatastrophicinsurancewouldkickinlaterbutwithastrongerstimulativeeffect,duetolowerrevenuespaidintotheEUI.

Figure21. EUIannualandcumulativebalanceofGreeceundervariousoptions,%ofGDP.



Cumulative balance of Greece vis-à-vis the system turns sharply negative during the GreatRecession anditsaftermath.Thereisnodifferencebetweena/andb/options(withorwithoutrebalancing) and even the difference between the two systems proposed is not dramatic -approximately0.2%ofGDPonacumulativebasis.

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Latvia

Latvia isanexampleof thecountrywhere thebalancingrequirementsmightmakeadramaticdifference.Asaheavyuser,itwouldhaveto,underbothoptions,payinmuchmoresince2010,but thedifference isbetweenroughly0.25%ofGDPunder1aand0.5%ofGDPunder1b.ForOption2,itissimilar:0.1%for2aand0.3%for2b.

Figure22. EUIrevenuesandexpenditurepaidbyandtoLatviaundervariousoptions,as%ofGDP.



Ontheexpenditureside,Latviaillustrateswellthatthecatastrophicinsurance(Option2)comeswith limitations since it is essentially a binarymechanism - activated or not. In early 2000s,whenLatviasufferedfromhighunemployment,Option2wouldnothelpbecausethedifferencewasnotdramaticenoughandthebenchmarkvaluestartedfromahighhistoricallevel.Option1provides amore calibrated assistance andexpenditurebyEUI graduallydeclines forma highlevel.Ontheotherhand,intheGreatRecession,bothoptionsperformverysimilarlyintermsofpay-outsbecausetheshockwassevere.

The annual balanceof Latvia-EUI financial relationshiphassimilarpatternunder all options -worseningdramaticallyin2009andthenrecovering.Whatdistinguishedthevariousoptionsishowquicklyandtowhatextentdotheybringtherelationshipbacktoannualbalance.Option1bisthequickestwhile2aisthemostgradualreturn,withdeficitofmorethan0.3%ofGDPevenin2012.

Figure23. EUIannualandcumulativebalanceofLatviaundervariousoptions,%ofGDP.



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Thedifferenceinannualbalancedevelopmentunderstandablyshowsinthecumulativebalance,where the Latvians accumulate significant deficit, but its size differs. The differences aresignificant – between1%and1.5%ofGDPby 2012.Options1b and2bbring the cumulativebalancealmostbackto1%,while2ahasthehighestcumulativedeficit.

Ireland

Irish employees produce under the harmonised scheme an annual revenue with minorfluctuations around0.25%ofGDP.Under the catastrophic insurance instead, the contributionremains fixed at 0.1%anddrops to0once thebalance reaches0.5%ofGDP.Expenditure co-movesinthetwosystems:it isessentially0forthecatastrophicinsuranceandlessthan0.2%for the harmonised scheme up to 2008. Afterwards, with the start of the Great Recession itsuddenlypeaksto0.6%andthenstartsdecreasingagaintoreach0.35%in2012.Suchincreaseisanaturalconsequenceoftheabruptdeteriorationinunemployment figuresthatincreasefour-foldinlessthanonedecade.

Figure24. EUIrevenuesandexpenditurepaidbyandtoIrelandundervariousoptions,as%ofGDP.



Theannualbalanceremainspositiveuntil2008andthenturnssuddenlynegative,upto-0.3%ofGDPfortheharmonisedcaseand-0.6%forthecatastrophicinsurance,withthelatterthereforeproviding a stronger relief to public finance in the case of the extreme need. All in all, thecumulativebalance remains close to zero in theharmonisedEUI,whereas it reaches -0.9%ofGDP for the catastrophic insurance. Had the latter system been in place right not, therefore,Irelandwouldhavebeenveryclosetotheneedofreadjustmentforthenextyearstorestorethebalanceinthemedium-term.

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Figure25. EUIannualandcumulativebalanceofIrelandundervariousoptions,%ofGDP.



All in all, the Irish case illustrates well the conceptual difference between the two systemssimulated:theharmonisedschemeprotectsagainstalldownturnsuptoacertainlevel,whereasthecatastrophicinsuranceonlyintervenesinextremecases,butwithamorethanproportionalsupport.

TheNetherlands

On the revenue side,Dutchworkers generate annually a stable incomeof0.35-0.38%ofGDPduring the period 1999-2012 for the harmonised scheme and 0.1% for the catastrophicinsurance.Thelatterisneverusedduringtheperiodanalysedduetothefactthatshocksfallinthe‘businessasusual’category.Theharmonisedscheme,instead,followsanupwardtrendduetothefactthatthenumberofunemployedworkersdoublesafterreachingaminimumin2001(from205,700to469,000)anddespitethepositiveperformanceobservedjustbeforethestartoftheGreatRecession.

Figure26. EUIrevenuesandexpenditurepaidbyandtotheNetherlandsundervariousoptions,as%ofGDP.



TheannualbalancestronglyreflectstheunemploymentcycleintheharmonisedsystembutincumulativetermsasaresultofthewellperformingDutchlabourmarket,theNetherlandswouldcumulateabalanceof1.2%.

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Figure27. EUIannualandcumulativebalanceoftheNetherlandsundervariousoptions,%ofGDP.



Austria

TheAustriancaseissimpleandstraightforward.Intermsofrevenue,itproduces0.33-0.34%ofGDPeveryyear in theharmonised systemand0.1% for the catastrophic insurance, exceptionmade foryearswhere thecontributionstops.Expenditureunder the latter is0 between1999and2012:unemploymentremainsrigorouslybelowthetrigger ofNAWRU+2%.

Figure28. EUIrevenuesandexpenditurepaidbyandtoAustriaundervariousoptions,as%ofGDP.



As a consequence of the well-performing labour market, every single year, Austria keeps apositivebalancevis-à-visthesystem,whichtranslates inacumulativebalanceofatleast0.8%ofGDPin2012.

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Figure29. EUIannualandcumulativebalanceofAustriaundervariousoptions,%ofGDP.



Germany

InbothoptionsGermanygeneratesstable annual revenues. It amounts to0.3%ofGDP in theharmonisedsystemand0.1% inthecatastrophic insurance– exceptionmade foryearswherethecontributionstops.

Ontheexpenditureside,theGermanperformanceisstronglypositive:nouseofthecatastrophicinsurance is made between 1999 and 2012, while in the harmonised unemployment benefitsystem itshowsanoveralldeclining trenddue tothegoodperformanceof the labourmarket,after a peak in 2003-2005. During the analysed period in fact, the unemployment rate dropsfrom8.6 to5.5%andsowouldhavedone theexpenditureon theharmonisedunemploymentbenefits,from0.32in1999to0.2%ofGDPin2012.

Figure30. EUIrevenuesandexpenditurepaidbyandtoGermanyundervariousoptions,as%ofGDP.



The overall balance remains positive at the end of the simulated period, yet with largedifferencesbetweenthetwosystems.TheharmonisedEuropeanunemploymentbenefitschemeends up very close to zero after an alternation of positive (2000-2001 and 2007-2012) andnegative contributions (1999 and 2002-2006). Whereas, with the catastrophic insuranceGermanyremainsanetcontributorovertheentireperiodduetothefactthatupsanddownsoftheunemploymentratesexistbutareintherangeofanormalbusinesscycle.

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Figure31. EUIannualandcumulativebalanceofGermanyundervariousoptions,%ofGDP.



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