An Unemployment Re-Insurance Scheme for the Eurozone? Stabilizing and Redistributive Effects: Summary of the study

The study summarized here is the first analysis to evaluate an unemployment re-insurance scheme for the euro area as regards potential stabilizing and redistributive effects. The results show that such a scheme can stabi- lize economies in the euro area and could thus contribute to cushioning large labor market shocks. More specifically, this study runs a series of simulations to show that an unemployment re-insurance scheme would have had a counter-cyclical effect in all euro area countries during the simulation period and would not have led to permanent transfer payments. The novel feature of the study is that it separates the stabilization effects of the unemployment re-insurance scheme into two channels relevant to the current political debate: First, it indicates the potential for stabilization through payments between countries (so-called interregional stabilization). Stabili- zation through this channel arises because labor market fluctuations differ across countries, i.e., shocks are not completely "symmetric". Second, the study estimates the so-called intertemporal stabilization potential. This channel describes the stabilization that member states can achieve when taking out loans in times of crisis and repaying them in good times. Thus, this channel is indicative of the stabilization potential of loan-based re-insur- ance models as set out in the BMF proposal. The distinction between the two stabilization channels is crucial for assessing the possible value added of different reform options. Intertemporal stabilization can be achieved through national debt or through financial assistance programs of the European Stability Mechanism (ESM) in the case of loss of market access. By contrast, interregional stabilization only arises by pooling contribution pay- ments within a common fund and disbursing transfers from it if a member state is hit by a large labor market shock

Chances and risks of a European unemployment benefit scheme

The Eurozone debt crisis has revived the debate about deeper fiscal integration in the European Economic and Monetary Union (EMU). Some observers argue that fiscal risk sharing is necessary to make the Eurozone more resilient to macroeconomic shocks and to avoid its break-up. However, the main concerns relate to the issues of permanent transfers across Member States and moral hazard. The 2012 Four Presidents’ Report suggested that fiscal integration could include a common unemployment insurance system. A White Paper outlining further steps necessary to complete EMU is to be released by the European Commission in the spring of 2017. This ZEW policy brief presents new research findings on the stabilizing and redistributive effects of a common unemployment insurance scheme for the euro area (henceforth EMU-UI).1 It provides insights regarding its potential added value and discusses moral hazard issues

Automatic Stabilization and Redistribution in Europe and the US

The aim of this book is to evaluate the stabilizing and redistributive role of tax and transfer systems in Europe and the US. In the �first chapter, we briefly introduce the method of counterfactual simulations which is applied throughout this book. Chapter 2 compares the effectiveness of automatic stabilizers in Europe and the US to protect households against income losses and to stabilize aggregate demand. Chapter 3 extends this analysis and asks how much weight European tax and transfer systems put on different income groups to insure them against income shocks. Chapter 4 shifts the focus to the redistributive role of the income tax system in the US during the last three decades and analyzes the direct effects of tax policy reforms on the income distribution. In chapter 5, we �first document how the strength of automatic stabilizers has changed over time in the US. We then estimate in a set of panel regressions for the US states partisan effects on the stabilizing and redistributive capacity of the income tax system

Automatic Stabilizers and Economic Crisis: US vs. Europe

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 percent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view.

Automatic Stabilizers, Economic Crisis and Income Distribution in Europe

This paper investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi country micro simulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low income groups in Eastern and Southern European countries.automatic stabilization, crisis, inequality, redistribution

Automatic Stabilizers and Economic Crisis: US vs. Europe

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of 26 to 35 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view. However, we find that active fiscal policy is lower in more open economies.automatic stabilization, crisis, liquidity constraints, fiscal stimulus

Automatic Stabilizers and Economic Crisis: US vs. Europe

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of 23 to 32 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view.automatic stabilization, economic crisis, liquidity constraints, fiscal stimulus

Automatic Stabilizers and Economic Crisis: US vs. Europe

This paper analyzes the effectiveness of social protection systems in Europe and the US to provide (income) insurance against macro level shocks in terms of automatic stabilizers. We find that automatic stabilizers absorb 38% of a proportional income shock and 47% of an idiosyncratic unemployment shock in Europe, compared to 32% and 34% in the US. There is large heterogeneity within Europe with stabilization being much lower in Eastern and Southern than in Central and Northern Europe. Our results suggest that social transfers, in particular the rather generous systems of unemployment insurance in Europe, play a key role for the stabilization of disposable incomes and explain a large part of the difference in automatic stabilizers between Europe and the US.Automatic Stabilization, Crisis, Liquidity Constraints, Fiscal Stimulus

A Challenge for the G20: Globally Stipulated Debt Brakes and Transnational Independent Fiscal Supervisory Councils

Debt-to-GDP ratios have grown to unprecedented levels in many industrialized economies. This requires disciplined consolidation efforts which are, however, supposed to come now at the wrong time with the economic recovery being fragile. Against this background, we call for a global debt brake following the German example and discuss the political progress achieved at the most recent Euro and G20 summits. The agreement on the debt brake should be binding and hence be fixed in national constitutions and monitored by independent transnational fiscal councils. The fiscal councils could be located at the ESM and the IMF and should conduct a regular evaluation of national budget plans. In an economic and political environment which is characterized by large uncertainties concerning economic prospects and the fear of a potential spreading of the sovereign debt crisis, a global debt brake in combination with an independent transnational supervisory council would send a credible signal that a reduction of sovereign debt to sustainable levels is not further delayed into the future. The new fiscal policy framework thus leaves enough room for discretionary fiscal policy and the workings of automatic stabilizers in an economic downturn.debt brake, fiscal council, G20

A Challenge for the G20: Globally Stipulated Debt Brakes and Transnational Independent Fiscal Supervisory Councils

Debt-to-GDP ratios have grown to unprecedented levels in many industrialized economies. This requires disciplined consolidation efforts which are, however, supposed to come now at the wrong time with the economic recovery being fragile. The countries forming the G20 need to make sure the long-term sustainability of public finances. Not least, this is indispensable in order to avoid a further spreading of the sovereign debt crisis. Against this background, we call for a global debt brake following the Swiss or German example which should be agreed upon in Cannes in early November 2011. The agreement on the debt brake should be binding – in contrast to previous expressions made at the G20-level to reduce government debt, as, for example, the Seoul Action Plan is lacking any binding character. Therefore, the debt brakes should be fixed in national constitutions and monitored by independent transnational fiscal councils. The fiscal councils could be located at the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) and should conduct a regular evaluation of national budget plans in order to ensure that they meet the requirements stipulated by the debt brake. Through this global monitoring process, an early warning system could be developed with the aim to avoid sovereign debt crises and the resulting contagion risks among highly indebted countries in the future. In an economic and political environment which is characterized by large uncertainties concerning economic prospects and the fear of a potential spreading of the sovereign debt crisis, a global debt brake in combination with an independent transnational supervisory council would send a credible signal that a reduction of sovereign debt to sustainable levels is not further delayed into the future. Moreover, a well-designed debt brake ensures that the general government budget is balanced over the business cycle. Consequently, it is a more efficient instrument than the former Stability and Growth Pact for the Eurozone which in fact stipulated a ceiling for the budget deficit, but whose requirements regarding budget surpluses in good times were insufficient. This asymmetry is eliminated by those debt brakes which are in force in Switzerland and Germany. The new fiscal policy framework thus leaves enough room for discretionary fiscal policy and the workings of automatic stabilizers in an economic downturn.debt brake, fiscal council, G20