In this CEPS Commentary, Ilaria Maselli and Miroslav Beblavý argue that the European economic governance system needs to be equipped with a supranational automatic stabiliser that would kick-in automatically in the event of an economic downturn, to avoid unduly burdening national public finances. In their view, the option of creating an unemployment benefit system for the euro area should be given serious consideration. The possible variations of such a system and their implications will be the subject of in-depth study at CEPS over the coming year

Beblavý, Miroslav

Maselli , Ilaria

Archive of European Integration

  
Ilaria Maselli is Research Fellow at CEPS and Miroslav Beblavý is Senior Research Fellow at 
CEPS. 
CEPS Commentaries offer concise, policy-oriented insights into topical issues in European 
affairs. The views expressed are attributable only to the authors in a personal capacity and not 
to any institution with which they are associated. 
Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2015 
Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu 
The case for a European 
unemployment benefit scheme 
Ilaria Maselli and Miroslav Beblavý 
19 May 2015 
 
e argue in this brief that the European economic governance system needs to be 
equipped with a supranational automatic stabiliser that would kick-in automatically in 
the event of an economic downturn, to avoid unduly burdening the national public 
finances. One option that should be seriously considered is the creation of an unemployment 
benefit system for the euro area.  
The idea is far from new. The first proposal was put forward by the former Commissioner Robert 
Marjolin in 1975. In a seminal study on the future of the economic and monetary union, he argued:  
Further progress requires the manifestation of a political will. This will is today 
uncertain and needs to show itself and to fortify itself by action. At a time when Europe 
finds itself confronted with redoubtable dangers, under the name of “inflation”, 
“massive balance of payments deficits” and “unemployment”, the only reasonable way 
for the member countries is to face together (…) these perils.1 
There are multiple arguments in favour of such a system. The first rationale derives from the realm 
of spill overs.2 The more integrated national economies become, the less effective are the national 
instruments of economic policy, because a large part of the fiscal stimulus translates into an 
increase in imports. This results in an increasing gap in the balance of payments of the country. 
This argument also arises from the idea of fiscal policy as a common good among integrated 
economies: national governments may be reluctant to implement a fiscal policy of the optimal size 
(in terms of average expenditure as a percentage of GDP) because they will not be able to reap all 
the benefits, part of which will accrue to neighbouring economies. Hence, a common fiscal policy 
is needed to reach the optimal level of resources devoted to fiscal policy.3  
Moreover, it is precisely during financial market dislocations that the spill-over effects are likely to 
be particularly strong. Recent experience has shown that very large shocks can impair the ability 
of a government to offset shocks to demand, exactly at a time when it is needed most. The Banking 
                                                   
1 Marjolin et al. (1975).  
2 See Weyerstrass et al. (2006) and Caporale & Girardi (2013) for a comprehensive review.  
3 Goodhart & Smith (1993); Majocchi & Rey (1993); Enderlein et al. (2013). 
W
2 | MASELLI AND BEBLAVÝ  
 
 
Union and the Capital Markets Union are expected to make these shocks less likely, but the danger 
remains. This is also due to the fact that further financial integration can exacerbate contagion in 
case a crisis breaks out.4   
Not surprisingly, even in the most decentralised federations, like Canada and the United States, 
the federal budget is in the range of 15 to 20% of GDP. In addition to defence and foreign relations, 
this budget is used to finance both welfare redistributive and macroeconomic countercyclical 
policies.5 By comparison, the EU’s budget at 1% of GDP, represents breadcrumbs. As a result, a 1% 
drop in GDP in the US or Canada results in a decrease in household consumption of only 0.2%, 
compared to a 0.6% in the EU/EMU.6 Together with the European Stabilisation Mechanism (ESM), 
EU-level unemployment insurance could provide better stabilisation properties at relatively low 
cost. 
Looking more specifically at European countries, researchers have calculated that the capacity of 
national unemployment benefits to stabilise income in the face of an unemployment shock is 
limited in many member states, including Italy and Greece. It is less than 10% in Greece, Slovenia, 
Estonia and Italy, and up to 25% in continental and Nordic countries.7 This is consistent with the 
above-mentioned risk of sub-optimal stabilisation due to high economic integration. There are two 
possible explanations for the underperformance of national insurance: either the subsidies benefit 
only a limited portion of unemployed workers, or these subsidies are not generous enough to avoid 
an excessive fall in consumption. The share of the labour force covered by some form of 
unemployment insurance can be anywhere in between 50 and 100% in Europe, and replacement 
rates over the previous salary are also very heterogeneous (ranging between 20% and 80% of the 
average gross wage).8  
Another reason to shift some of the unemployment expenditure to the ‘federal’ level lies in market 
failures. Goodhart and Smith observed as early as 1993:  
The case for government intervention usually rests on the existence of some market 
failure, or imperfection. In the case of intervention for the purpose of stabilization, the 
purported failure is that of (labour) markets to clear, whether by means of wage 
flexibility or by migration (though migration would not be an effective response to a 
common shock). 9 
They argue that labour markets in the EU appear relatively sluggish in adjustment: not only is the 
elasticity of wages to unemployment lower than in other advanced economies, but migration also 
occurs in smaller numbers between European countries compared to American states. Therefore, 
given European rigidities, “unless stabilised, adverse shocks are likely to impinge to some 
considerable extent on real variables, output and unemployment (rather than primarily on nominal 
variables)”. 10 
And not much progress has been achieved on this ground since. The ECB argues at the very 
beginning of a working paper that “It has been well established that the wages of individual 
workers react little, especially downwards, to shocks that hit their employer”.11 Such rigidity is 
confirmed in both real and nominal terms. At the same time, the Great Recession proved that 
mobility also cannot be considered as an adjustment mechanism. Despite the prolonged duration 
                                                   
4 Cottarelli & Guerguil (2014).  
5 Ibid. 
6 Ibid.  
7 Dolls et al. (2012).  
8 Strauss et al. (2013).   
9 Goodhart & Smith (1993, p. 421). 
10 Ibid. 
11 Babecký et al. (2009)  
THE CASE FOR A EUROPEAN UNEMPLOYMENT BENEFIT SCHEME? | 3 
 
of the crisis, the percentage of EU citizens willing to move to another country remains severely 
limited: 0.3% per year, or one and a half million people, which is equivalent to about one-tenth of 
the percentage observed in the United States.12 
Apart from the purely economic arguments related to market failures and the spill-over effects of 
economic policies, the creation of a European unemployment benefit scheme also responds to the 
current political considerations. The support for the Eurosceptics has never been as high as 
reflected in last year’s European Parliament elections. Moreover, when asked what they think are 
the two most important issues facing the EU, Europeans consistently rank the economic situation 
and unemployment in the top two places.13 
The devil is more than ever before in the details. The creation of a supranational unemployment 
benefit scheme faces many challenges. A principal one, for example, is related to moral hazard: can 
the system minimise the temptation of member states to postpone reforms as a consequence of the 
knowledge that they will receive financial help from the EU level? Or where should the line be 
drawn on the stabilisation–redistribution axis? Would a supranational system require the 
harmonisation of the national systems? And finally: can this be done at all within the current legal 
framework?  
Eighteen variants of such a scheme are currently under study by a team of researchers led by CEPS. 
These 18 variants can be grouped around two main typologies: genuine systems and equivalent 
systems. In the first group, the systems considered are those in which financial transfers from the 
supranational fund directly target unemployed individuals. Equivalent European unemployment 
benefit schemes are those in which financial transfers from the supranational fund occur only from 
and towards member states as a reinsurance mechanism between national insurance schemes. The 
difference between the two typologies is substantial. The idea behind a ‘genuine’ scheme is that it 
would cover a small portion of every shock, whereas in ‘equivalent’ schemes, the supranational 
fund could insure sovereigns more extensively but only in the event of major labour market 
turmoil.14 We are currently engaged in computing a micro and macroeconomic estimation of the 
stabilisation capacity of each scheme and will publish our findings in the course of the coming 
year. 
 
References 
Barslund, M., M. Busse and J. Schwarzwälder (2015), “Labour Mobility in Europe: An untapped 
resource?”, CEPS Policy Brief No. 327, CEPS, Brussels.  
Beblavý, M., D. Gros and I. Maselli (2015), “Reinsurance of National Unemployment Benefit 
Schemes”, CEPS Working Document No. 401, CEPS, Brussels. 
Babecký, J., P. Babecký, J. Messina and T. Rõõm (2009), “Downward nominal and real wage 
rigidity: Survey evidence from European firms”, ECB Working Paper No. 1105, European 
Central Bank, Frankfurt, November. 
Beblavý, M. and I. Maselli (2014), “An Unemployment Insurance Scheme for the Euro Area: A 
simulation exercise of two options”, CEPS Special Report No. 98, CEPS, Brussels, December.  
Caporale, G.M. and A. Girardi  (2013) “Fiscal spillovers in the euro area”, Working Paper No. 109, 
Luiss Lab of European Economics, June, Rome. 
                                                   
12 See Barslund et al. (2015). 
13 Eurobarometer. Question asked since 2011.  
14 For further details please read: Beblavý, Gros, and Maselli (2015) and Beblavý and Maselli (2014). 
4 | MASELLI AND BEBLAVÝ  
 
 
Cottarelli, C. and M. Guerguil (2014), “Designing a European Fiscal Union: Lessons from the 
Experience of Fiscal Federations”, Routledge Studies in the European Economy. 
Dolls, M., C. Fuest and A. Peichl (2012): “Automatic Stabilizers and Economic Crisis: US versus 
Europe”, Journal of Public Economics, 96, 279-294.  
Enderlein H., L. Guttenberg and J. Spiess (2013), “Blueprint for a Cyclical Shock Insurance in the 
Euro Area”, Notre Europe, Paris.  
Goodhart, C. and S. Smith (1993), “Stabilization”, European Economy, Vol. 5, pp. 417-456. 
Majocchi, A. and M. Rey (1993), “A special financial support scheme in EMU: Need and nature”, 
Rivista di diritto finanziario e scienza delle finanze, Vol. 52, No. 2, pp. 161-204. 
Marjolin, R., F. Bobba, H. Bosman, G. Brouwers, L. Camu, B. Clappier, I. Foighel, F. Forte, H. 
Giersch, P. Lynch, D. MacDougall, H. Markmann, F. Peeters, A. Shonfield and N. Thygesen 
(1975), “Report of the Study Group ‘Economic and Monetary Union 1980”, European 
Commission, Brussels. 
Strauss, R., O. Bontout, G. Lejeune, M. Ciesielska and R. Di Girolamo (2013), “Paper on automatic 
stabilisers”, European Commission, Brussels. 
Weyerstrass, K., J. Jaenicke, R. Neck, G. Haber, B. van Aarle, K. Schoors, N. Gobbin and P. Claeys 
(2006), “Economic spillover and policy coordination in the Euro Area”, European Economy, 
Economic Papers, No. 246, March.  
 


The case for a European unemployment benefit scheme. CEPS Commentary, 19 May 2015

  Ilaria Maselli is Research Fellow at CEPS and Miroslav Beblavý is Senior Research Fellow at CEPS. CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated. Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2015 Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu The case for a European unemployment benefit scheme Ilaria Maselli and Miroslav Beblavý 19 May 2015  e argue in this brief that the European economic governance system needs to be equipped with a supranational automatic stabiliser that would kick-in automatically in the event of an economic downturn, to avoid unduly burdening the national public finances. One option that should be seriously considered is the creation of an unemployment benefit system for the euro area.  The idea is far from new. The first proposal was put forward by the former Commissioner Robert Marjolin in 1975. In a seminal study on the future of the economic and monetary union, he argued:  Further progress requires the manifestation of a political will. This will is today uncertain and needs to show itself and to fortify itself by action. At a time when Europe finds itself confronted with redoubtable dangers, under the name of “inflation”, “massive balance of payments deficits” and “unemployment”, the only reasonable way for the member countries is to face together (…) these perils.1 There are multiple arguments in favour of such a system. The first rationale derives from the realm of spill overs.2 The more integrated national economies become, the less effective are the national instruments of economic policy, because a large part of the fiscal stimulus translates into an increase in imports. This results in an increasing gap in the balance of payments of the country. This argument also arises from the idea of fiscal policy as a common good among integrated economies: national governments may be reluctant to implement a fiscal policy of the optimal size (in terms of average expenditure as a percentage of GDP) because they will not be able to reap all the benefits, part of which will accrue to neighbouring economies. Hence, a common fiscal policy is needed to reach the optimal level of resources devoted to fiscal policy.3  Moreover, it is precisely during financial market dislocations that the spill-over effects are likely to be particularly strong. Recent experience has shown that very large shocks can impair the ability of a government to offset shocks to demand, exactly at a time when it is needed most. The Banking                                                    1 Marjolin et al. (1975).  2 See Weyerstrass et al. (2006) and Caporale & Girardi (2013) for a comprehensive review.  3 Goodhart & Smith (1993); Majocchi & Rey (1993); Enderlein et al. (2013). W2 | MASELLI AND BEBLAVÝ    Union and the Capital Markets Union are expected to make these shocks less likely, but the danger remains. This is also due to the fact that further financial integration can exacerbate contagion in case a crisis breaks out.4   Not surprisingly, even in the most decentralised federations, like Canada and the United States, the federal budget is in the range of 15 to 20% of GDP. In addition to defence and foreign relations, this budget is used to finance both welfare redistributive and macroeconomic countercyclical policies.5 By comparison, the EU’s budget at 1% of GDP, represents breadcrumbs. As a result, a 1% drop in GDP in the US or Canada results in a decrease in household consumption of only 0.2%, compared to a 0.6% in the EU/EMU.6 Together with the European Stabilisation Mechanism (ESM), EU-level unemployment insurance could provide better stabilisation properties at relatively low cost. Looking more specifically at European countries, researchers have calculated that the capacity of national unemployment benefits to stabilise income in the face of an unemployment shock is limited in many member states, including Italy and Greece. It is less than 10% in Greece, Slovenia, Estonia and Italy, and up to 25% in continental and Nordic countries.7 This is consistent with the above-mentioned risk of sub-optimal stabilisation due to high economic integration. There are two possible explanations for the underperformance of national insurance: either the subsidies benefit only a limited portion of unemployed workers, or these subsidies are not generous enough to avoid an excessive fall in consumption. The share of the labour force covered by some form of unemployment insurance can be anywhere in between 50 and 100% in Europe, and replacement rates over the previous salary are also very heterogeneous (ranging between 20% and 80% of the average gross wage).8  Another reason to shift some of the unemployment expenditure to the ‘federal’ level lies in market failures. Goodhart and Smith observed as early as 1993:  The case for government intervention usually rests on the existence of some market failure, or imperfection. In the case of intervention for the purpose of stabilization, the purported failure is that of (labour) markets to clear, whether by means of wage flexibility or by migration (though migration would not be an effective response to a common shock). 9 They argue that labour markets in the EU appear relatively sluggish in adjustment: not only is the elasticity of wages to unemployment lower than in other advanced economies, but migration also occurs in smaller numbers between European countries compared to American states. Therefore, given European rigidities, “unless stabilised, adverse shocks are likely to impinge to some considerable extent on real variables, output and unemployment (rather than primarily on nominal variables)”. 10 And not much progress has been achieved on this ground since. The ECB argues at the very beginning of a working paper that “It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer”.11 Such rigidity is confirmed in both real and nominal terms. At the same time, the Great Recession proved that mobility also cannot be considered as an adjustment mechanism. Despite the prolonged duration                                                    4 Cottarelli & Guerguil (2014).  5 Ibid. 6 Ibid.  7 Dolls et al. (2012).  8 Strauss et al. (2013).   9 Goodhart & Smith (1993, p. 421). 10 Ibid. 11 Babecký et al. (2009)  THE CASE FOR A EUROPEAN UNEMPLOYMENT BENEFIT SCHEME? | 3  of the crisis, the percentage of EU citizens willing to move to another country remains severely limited: 0.3% per year, or one and a half million people, which is equivalent to about one-tenth of the percentage observed in the United States.12 Apart from the purely economic arguments related to market failures and the spill-over effects of economic policies, the creation of a European unemployment benefit scheme also responds to the current political considerations. The support for the Eurosceptics has never been as high as reflected in last year’s European Parliament elections. Moreover, when asked what they think are the two most important issues facing the EU, Europeans consistently rank the economic situation and unemployment in the top two places.13 The devil is more than ever before in the details. The creation of a supranational unemployment benefit scheme faces many challenges. A principal one, for example, is related to moral hazard: can the system minimise the temptation of member states to postpone reforms as a consequence of the knowledge that they will receive financial help from the EU level? Or where should the line be drawn on the stabilisation–redistribution axis? Would a supranational system require the harmonisation of the national systems? And finally: can this be done at all within the current legal framework?  Eighteen variants of such a scheme are currently under study by a team of researchers led by CEPS. These 18 variants can be grouped around two main typologies: genuine systems and equivalent systems. In the first group, the systems considered are those in which financial transfers from the supranational fund directly target unemployed individuals. Equivalent European unemployment benefit schemes are those in which financial transfers from the supranational fund occur only from and towards member states as a reinsurance mechanism between national insurance schemes. The difference between the two typologies is substantial. The idea behind a ‘genuine’ scheme is that it would cover a small portion of every shock, whereas in ‘equivalent’ schemes, the supranational fund could insure sovereigns more extensively but only in the event of major labour market turmoil.14 We are currently engaged in computing a micro and macroeconomic estimation of the stabilisation capacity of each scheme and will publish our findings in the course of the coming year.  References Barslund, M., M. Busse and J. Schwarzwälder (2015), “Labour Mobility in Europe: An untapped resource?”, CEPS Policy Brief No. 327, CEPS, Brussels.  Beblavý, M., D. Gros and I. Maselli (2015), “Reinsurance of National Unemployment Benefit Schemes”, CEPS Working Document No. 401, CEPS, Brussels. Babecký, J., P. Babecký, J. Messina and T. Rõõm (2009), “Downward nominal and real wage rigidity: Survey evidence from European firms”, ECB Working Paper No. 1105, European Central Bank, Frankfurt, November. Beblavý, M. and I. Maselli (2014), “An Unemployment Insurance Scheme for the Euro Area: A simulation exercise of two options”, CEPS Special Report No. 98, CEPS, Brussels, December.  Caporale, G.M. and A. Girardi  (2013) “Fiscal spillovers in the euro area”, Working Paper No. 109, Luiss Lab of European Economics, June, Rome.                                                    12 See Barslund et al. (2015). 13 Eurobarometer. Question asked since 2011.  14 For further details please read: Beblavý, Gros, and Maselli (2015) and Beblavý and Maselli (2014). 4 | MASELLI AND BEBLAVÝ    Cottarelli, C. and M. Guerguil (2014), “Designing a European Fiscal Union: Lessons from the Experience of Fiscal Federations”, Routledge Studies in the European Economy. Dolls, M., C. Fuest and A. Peichl (2012): “Automatic Stabilizers and Economic Crisis: US versus Europe”, Journal of Public Economics, 96, 279-294.  Enderlein H., L. Guttenberg and J. Spiess (2013), “Blueprint for a Cyclical Shock Insurance in the Euro Area”, Notre Europe, Paris.  Goodhart, C. and S. Smith (1993), “Stabilization”, European Economy, Vol. 5, pp. 417-456. Majocchi, A. and M. Rey (1993), “A special financial support scheme in EMU: Need and nature”, Rivista di diritto finanziario e scienza delle finanze, Vol. 52, No. 2, pp. 161-204. Marjolin, R., F. Bobba, H. Bosman, G. Brouwers, L. Camu, B. Clappier, I. Foighel, F. Forte, H. Giersch, P. Lynch, D. MacDougall, H. Markmann, F. Peeters, A. Shonfield and N. Thygesen (1975), “Report of the Study Group ‘Economic and Monetary Union 1980”, European Commission, Brussels. Strauss, R., O. Bontout, G. Lejeune, M. Ciesielska and R. Di Girolamo (2013), “Paper on automatic stabilisers”, European Commission, Brussels. Weyerstrass, K., J. Jaenicke, R. Neck, G. Haber, B. van Aarle, K. Schoors, N. Gobbin and P. Claeys (2006), “Economic spillover and policy coordination in the Euro Area”, European Economy, Economic Papers, No. 246, March.   

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The case for a European unemployment benefit scheme. CEPS Commentary, 19 May 2015

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