Brussels, 13/09/2013 (Agence Europe) - The European Commission has prepared plans to set up a European unemployment insurance system. The plans have been ready for a few months now, but have not yet been unveiled and it is not yet clear whether they will be included in the Commission's 2 October 2013 report on the social dimension of Economic and Monetary Union. This is a very ambitious idea, given the reluctance of some member states to make any changes in the divide between national and EU powers. It is described as a stage in the deepening of Economic and Monetary Union. EU Employment and Social Affairs Commissioner Laszlo Andor says the following stages would be to give EMU its own budget capacity and then to introduce binding common welfare and employment standards.
In a column published by the European Policy Centre on Friday 13 September, Andor gives a detailed overview of the European Commission's thinking on EMU. He presents the problems with the single currency idea in a very clear manner, before outlining the objectives that remain to be achieved. The title of the article, Developing the social dimension of a deep and genuine Economic and Monetary Union, suggests that the contents are restricted to the social affairs aspect of the commissioner's portfolio, but in fact the document includes basic doctrine on the European Commission's economic policies, or at least the ideas promoted by one arm of the European Commission. Andor carefully reveals some of the disagreements within the College of Commissioners on aspects like internal devaluation (defined as growth stimulus by lowering production costs, particularly pay and conditions, and greater flexibility on the labour market).
The beginning of the article does not provide any revelations about the theoretical framework for the Commission's reflections. Andor explains that by its very nature, there are at present “systemic flaws”, meaning that “EMU is ill-equipped to deal with asymmetric shocks (such as excessive capital inflows or the bursting of construction or finance bubbles in some member economies”. As a result of the various shocks to the system since 2008, “the euro area is experiencing an unprecedented socioeconomic polarisation”. He expands on the polarisation at length, explaining that a gap has opened up between the heart of the EU (the North) and the periphery (the South). The gap has become even wider within the eurozone itself, as shown by higher unemployment, declining household incomes and rising poverty. He says that this makes it vital to consider modifications to the concept of EMU.
In his analysis, Andor (an economist by training) makes use of a word little known outside the circles of initiates in new classical macroeconomic theories - hysteresis. This is a mathematical term used to describe the impact of an external shock on a system that leads to changes or sustainable disturbance of the system, even when the sources of the shock dissipate. Within the current economic context, such a shock could be “cyclical downturn” leading to asymmetrical, economic or financial disturbances. In such a scenario, the shock waves lead to higher unemployment, lower household income and growing poverty and do not only affect the weaker member states around the periphery, but also those initially spared the shock itself. Shocks send out waves that alter the whole of the system (referring here to the eurozone) through their impact on trade. Andor does not mention it explicitly, but his example applies to the continued crisis in countries like Greece, Spain and Cyprus, which have rocked the eurozone as a whole, and weakened even countries like Germany. Even a country with a strong economy cannot survive alone because the system is constituted in such a manner that “excludes unilateral adjustment of its member economies through the exchange rate or interest rate (by definition), as well as by inflation or fiscal expansion (by design)”.
Through this theoretical development, Andor arrives at the core of his contention. He says that the system, in other words EMU, has to be strengthened by means of “rules, procedures and capacities”. The intensity of the shockwaves can be reduced in a number of ways and this is where the disagreements arise at the European Commission. Before discussing the potential options, Andor looks at the pros and cons of internal devaluation. Its praises were sung recently by Economic and Monetary Affairs Commissioner Olli Rehn, who in an article on Spain, talked about Ireland and Latvia: “A strong sense of political responsibility has been key for the success stories of Ireland and Latvia in terms of economic reform and internal devaluation”, suggesting that it would be an option for other countries too, such as Spain. Andor argues that while such an approach can have a positive outcome “in small open economies enjoying sustained demand from trading partners”, it can also “destroy the social compact in a given country, often have a disproportionate impact on lower income groups and negatively affect aggregate demand”. Therefore “internal devaluation can produce results under certain specific circumstances, i.e. in small open economies enjoying sustained demand from trading partners, but it certainly cannot represent a general model for a large union whose overall exports and imports are balanced”. Another economic pipedream is the idea of inter-European mobility, often praised by the Commission and the European Parliament for its positive impact on employment levels. Andor explains that “transnationally-mobile labour represents only 3-4% of the eurozone's population, meaning that labour mobility cannot be expected to significantly alleviate high unemployment in 'peripheral' countries”.
What, then, are the prospects for EMU? A roadmap with social and employment indicators will no doubt be one of the Commission's key proposals in its report on the social dimension of EMU. The roadmap would be linked with the European semester system and would have the benefit of clearly demonstrating changes in the imbalances among the member states and encouraging greater coordination of employment policies. But this would only be the first stage. In the event of a shock, a common response capacity is required and Andor says it “could help synchronise economic cycles by channelling disposable income from momentarily stronger to momentarily weaker countries (where they could fuel the economy faster).” One option would be to introduce a European unemployment insurance system that would act as an automatic stabilisation mechanism. Few tangible details (like budget, size of the benefit and who would be eligible) seem available at the moment. These plans, drawn up by a group of experts working with the Social Affairs and Employment and the Economic Affairs departments at the European Commission, are already complete, but the European Commission seems to be reluctant to unveil them for the moment. The European Parliament is also looking at the same question and a draft opinion by Hungarian MEP Csaba Ory (EPP) calls for the launch of a pilot project on feasibility and the value-added of European unemployment benefit, which could become a key element of the social dimension of EMU.'
Following this stage, there would need to be discussion about giving EMU its own budget capacity, capacity “that would be flexible enough to support recovery from cyclical downturns, without setting up permanent transfers”. The final stage would be carried out concurrently: “It would also be useful to develop a focused debate on ways to define possibly binding employment and social standards in EMU, helping to prevent a social race-to-the-bottom during adjustment processes”, he said. The final two stages seem so closely linked with the idea of unemployment benefit within EMU that it is difficult to see how they could be separated off, but seems to believe that they must be hived off if they are to have any chance of seeing the light. This will be particularly tricky because they would require changes to the EU treaty. (JK/transl.fl)