Banque de France Bulletin no. 240: Article 3 European unemployment insurance and macroeconomic stabilisation: are permanent fiscal transfers between States needed?

A common unemployment insurance mechanism would be a concrete expression of solidarity between EU Member States as it would help to smooth the impact of economic shocks. As early as 1975, the Marjolin report underlined the importance of this type of mechanisms for reducing intra regional imbalances. In response to the strong asymmetric shocks observed since the early 2000s, the Five Presidents’ Report (2015) also stressed the importance of setting up a “common macroeconomic stabilisation function […] to better deal with shocks that cannot be managed at the national level alone”.

From a theoretical point of view, the presence of market failures justifies the creation of such a mechanism. In a fixed exchange rate regime, the presence of nominal rigidities and frictions to free factor mobility prevents the absorption of asymmetric shocks by market mechanisms. Beyond measures aimed at modifying the incentives of private economic agents, public policy has a role to play. However, public risk sharing mechanisms at the Economic and Monetary Union (EMU) level raise several questions regarding their implementation and political feasibility. In particular, the lack of consensus on possible fiscal transfers between countries has so far prevented further steps forward.

A European unemployment insurance fund would be a first step towards risk sharing within EMU (Bilbiie et al., 2021), presenting clear features of subsidiarity between levels of government. A widely influential report by fourteen French and German economists (Bénassy Quéré et al., 2018) on the completion of the euro area proposed setting up a European unemployment insurance scheme
with no permanent fiscal transfers within EMU. The Franco German Meseberg Declaration (2018) called for further examining “the issue of a European Unemployment Stabilisation Fund, for the case of severe economic crises, without transfers”.

This Bulletin estimates the gains in terms of intra European business cycle smoothing and harmonisation that would be obtained from a European unemployment insurance system. The analysis focuses on an insurance system without permanent transfers, but with a common borrowing capacity. The supranational scheme would be designed as an addition to national unemployment insurance transfers, partly based on the US federal unemployment insurance model. The simulation is calibrated to involve an additional expenditure of EUR 10 billion per year on average, i.e. the equivalent of a SURE plan per decade.

We find that such a scheme could play an important role as a countercyclical stabiliser, with no permanent redistributive effects between Member States. In particular, our simulations show that…