Scholz’s choice

Olaf Scholz, Germany's finance minister. Photo: Shutterstock

 

Another round of debate on Eurozone unemployment insurance must lead to reform

It is counterintuitive for a German finance minister to launch a campaign for Eurozone unemployment insurance, but this is what has been happening since Olaf Scholz gave an interview to Der Spiegel in June this year. The significance of this should not be underestimated. If successful, Scholz can not only achieve a necessary next step in the slow-motion reform of Economic and Monetary Union (EMU), but also make the European Pillar of Social Rights (EPSR) more meaningful. At the same time he would help to reposition European Social Democracy, which is badly needed after the electoral debacles of recent years and in view of the forthcoming European Parliament (EP) elections.

A Community unemployment fund is not entirely a new idea. It was first outlined by the 1975 Marjolin Report and supported by the 1977 MacDougall Report as well. These documents explored the fiscal and financial requirements for a sustainable European economic integration which also stretches to establishing a monetary union. While distant in time from the actual introduction of the single currency, the MacDougall Report highlighted the important link between monetary union and unemployment insurance with the following argument:

"Apart from the political attractions of bringing the individual citizen into direct contact with the Community, it would have significant redistributive effects and help to cushion temporary setbacks in particular member countries, thereby going a small part of the way towards creating a situation in which monetary union could be sustained.“

In other words, the question has always been how the Community can help member states tackling cyclical unemployment which is linked to, and aggravated by, the lack of adjustment tools at an advanced stage of monetary integration.

Those early documents of public finance analysis held it as no-brainer that monetary integration requires unemployment insurance as a form of de facto solidarity. Unfortunately, the Delors Report (1989) and the subsequent Maastricht process introduced an incomplete form of monetary union which in techniques but not in essence went beyond currency board arrangements. While some young economists like Jean Pisani-Ferry and Alexander Italianer argued for robust automatic stabilisers, political leaders decided to take higher risk with an untested model: a single currency with neither common financial sector regulation nor fiscal stabilisation capacity.

When EU leaders looked into the abyss in 2012 and faced the risk of Eurozone disintegration, the moment of truth came and far reaching reforms were announced (Banking Union, Fiscal Union, Political Union). The Four Presidents’ report, the Commission Blueprint for Deep and Genuine EMU and the Thyssen Report of the EP pointed to the same direction. The words of the Blueprint on automatic stabilisers were repeated in the 2013 October Commission Communication about the Social Dimension of the EMU. Subsequently, the European Parliament report by Pervenche Beres (French Socialist) and Reimer Böge (German CDU) confirmed the need for fiscal capacity.

Documents produced by the Juncker Commission, including the 2017 Reflection Paper on the future of the EMU, highlighted the danger of economic and social divergence in the Eurozone but in the absence of a great political momentum (even taking into account the election of Emmanuel Macron as President of the French Republic) only very modest reform proposals were put forward, especially concerning risk sharing. In May 2018, Juncker proposed a new Multiannual Financial Framework (MFF) which would embed facilities serving the EMU stabilisation function into the seven-year EU budget but with tools that may not be convincing due to either size or profile.

Should there be a consensus about the need for an EMU fiscal capacity and embedding it into the MFF with a stabilisation function, it is important to ensure that such an instrument allows for demand side intervention, without major delays, and reaching a large number of citizens affected by adverse macroeconomic developments. Unemployment insurance, or reinsurance, satisfies these criteria, and should be considered either linked to the MFF or as a stand-alone mechanism. Decision makers today can rely on a wide pool of research, analysis and simulations.

Since the Eurozone crisis of 2011-3, a great deal of analysis, including by the Commission itself as well as a host of think tanks and independent experts, has explored the issue and run simulations, all pointing to overwhelming economic and social benefits of automatic fiscal stabilisers. The European Commission, in cooperation with the Bertelsmann Foundation, held two public conferences about the possibility of EU level unemployment insurance in 2013-4. Important inputs were provided by Prof. Sebastian Dullien, whose book on the subject was published by Bertelsmann too.

Subsequently, a Centre for European Policy Studies-led consortium of researchers delivered multiple simulations and analysis pointing towards the feasibility of a re-insurance mechanism. Some researchers continued to favour fiscal stabilisation unrelated to unemployment. One such study was presented in the European Parliament by Prof. Heikki Oksanen, similar to the input to the 2013 Commission—Bertelsmann conference by Prof. Henrik Enderlein. Another model was designed by MEPs Jakob von Weizsacker and Jonas Fernandez and presented in the European Parliament, combining modest tranfers with loans, effectively forcing member states to save in good times to be able to secure long enough and generous unemployment coverage in bad times.

A partial pooling of unemployment benefit schemes as proposed by Dullien was understood to represent a more perfect form of integration: a US inspired reinsurance model was seen as one matching better the European way that respects subsidiarity but adds further layers if justified by clear added value. However, the point is that had either of these insurance mechanisms existed in the EMU from the start of the single currency, all member states would have been beneficiaries for a shorter or longer period. Countries experiencing a severe recession would have received fiscal transfers, helping them towards a faster recovery and avoiding a perception that for the EU arbitrary fiscal targets are more important than democracy and social cohesion.

Eurozone unemployment insurance or reinsurance can deliver stabilization in three ways. First, it would contribute to economic stabilization by shifting demand and purchasing power to countries and regions which otherwise would need to implement fiscal ‘adjustment’ and internal devaluation. Second, social stabilization would be enacted as well, by directing the flow of funds towards more vulnerable groups, and helping to tame the rise of poverty among the working age population (which has been a major trend in recent years in Europe). The third type is institutional stabilization. The EMU is based on rules but the application of these rules has been the subject of academic as well as political debates. Member states agreed on tightening them but pragmatic considerations often point towards more flexibility, the cases of Spain and Portugal being the most significant controversy before the current one vis-à-vis Italy.

While some experts simply recommend ignoring the rules and giving up on them entirely, it is more likely that a modus vivendi could be found through the creation of stabilization tools that would allow the reconciliation of uniform fiscal rules with the need to maintain national welfare safety nets and social investment capacities. Those in Eurozone surplus countries who fear that this would be an anti-German idea should note the long list of German economists who have been promoting research and public debate on this issue, like Dullien and von Weizsacker, but also Daniel Gros, Matthias Dolls and Guntram Wolff. Besides, Nobel Prize laureate Joseph Stiglitz also endorsed the idea in his book (The Euro: How a Common Currency Threatens the Future of Europe, 2016) but also in a public debate with Eurozone President Jeroen Dijsselbloem.

It is of course a question how quickly the political process can follow the progress among experts. The good news is that Olaf Scholz is not the first among finance ministers to advocate this critical reform. Italian finance minister Pier Carlo Padoan (2014-8) was patiently campaigning for an unemployment insurance fund embedded in the MFF. At the time of the Italian presidency, a debate was organised in both ECOFIN and EPSCO councils. The latter generated a lot of interest and support, while in ECOFIN the mood in 2014 remained lookwarm and Italy practically remained alone. Two years later the Slovakia presidency relaunched the ECOFIN discussion and the picture among finance ministers was much more balanced.

Shortly after Padoan stepped down and Scholz took over the finance portfolio in Berlin but also the coordination of the centre-left in ECOFIN, he came out with his own version. It is based on loans rather than actual transfers, with risks presenting a more symbolic rather than substantial version of solidarity. Such aspects, together with interregional and intertemporal stabilisation effects, governance structures and the necessary degree of labour market harmonisation still need to be discussed. But at least from now on it is no longer a Germany against the rest type of EU political debate but an internal one in Germany, which is a major step towards practical reform.