Eurozone growth cannot leave weak countries behind
EUROPE’S recovery continues to be undermined by an unprecedented divergence between the eurozone’s ‘core’ and ‘periphery’, which has repeatedly raised questions about the composition of theeurozone.
This polarisation is not only a source of social imbalances but also a danger for the stability of the EU. Economic recovery, social cohesion, and Economic and Monetary Union reform are all linked to each other.
Already in 2012, the Four Presidents’ report concluded that, in order to ensure proper recovery, the architecture of Europe’s EMU must be strengthened. In particular, a fiscal capacity is needed at EMU level, which would enable member states to partially share the risks of cyclical downturns.
In his recent speech in Jackson Hole, European Central Bank president Mario Draghi recognised an important link between macroeconomic policies and the diverging employment situation within the EMU.
Indeed, the ECB’s commitment to preserve the euro area’s integrity and the recently agreed banking union are important achievements on which we need to build. However, they are not sufficient to ensure a resilient EMU in which prosperity would be more evenly shared.
In recent months, political debates on EMU reform have revolved mainly around greater flexibility in fiscal rules. On the other hand, more hardcore issues of the monetary union easily slip out of the political agenda.
Truly systemic questions such as the ECB’s mandate, the absence of a genuine lender of last resort, and the lack of an EMU-level fiscal capacity apparently interest more the world of academia than decision makers. The risk today is that, despite bitter experience, the political discussion would again be settled with a modest investment plan, while postponing systemic reform of the EMU.
Today, and in all coming cycles, the main effort should be about restoring aggregate demand and maintaining economic activity in Europe. To deliver this, macroeconomic adjustment inside the eurozone has to be sufficiently sophisticated.
Restoring competitiveness in the EMU cannot depend entirely on internal devaluation, the overdose of which can do more harm than good. Countries with large surpluses have to see their responsibility and boost investment as well as wages in a meaningful and timely fashion.
The point is not so much to question the existing rules of fiscal co-ordination within the EMU. However, the tighter the constraints on national budgets, the more necessary a well- designed and reliable mechanism of counter-cyclical fiscal transfers between eurozone countries becomes.
Several years of expert debate on this matter point to various possible solutions, whereby EMU countries would partly share the costs of short-term unemployment insurance.
Short-term unemployment is closely linked to developments in the economic cycle. It is an economic and a social problem. It is easy to understand and can be promptly measured.
The first main option is an EMU-level reinsurance of national unemployment benefit schemes, triggered by extraordinary developments only. The second is partial pooling of national schemes through a ‘common core’ of unemployment insurance. Both could and should be accompanied by stronger coordination to improve the functioning of national labour market institutions.
A basic European unemployment insurance scheme could provide limited and predictable short-term stimulus to economies undergoing a cyclical downturn. It would focus solely on cyclical, not structural unemployment. It would avoid moral hazard through clear safeguards against long-lasting net transfers to or from any particular country.
Europe’s national unemployment benefit systems would remain diverse, but the common core would provide an effective fiscal stabiliser against asymmetric shocks. As compared to ex-post crisis management and various discretionary transfer models, a basic European unemployment insurance scheme would be relatively cheap and efficient, precisely because of its automaticity.
Crucially, a fiscal shock absorber at EMU level would help prevent short-term crises from unleashing longer-lasting divergence within the monetary union. It would answer the question of the disillusioned European voter: ‘Where is the EU when we need it most?’ At the same time, a basic unemployment insurance scheme would not represent “more Europe” for its own sake, or any intrusion of “Brussels” into national policy-making.
On the contrary, the mechanism would strengthen the autonomy of each member state precisely by stabilising the EMU, on the basis of transparent rules.
No matter which instrument will eventually be chosen, the stability, the cohesion and through those the growth potential of the Eurozone will have to be strengthened significantly in the coming years. But for that to happen, some serious discussions have to take place in the coming months or perhaps weeks.
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