Options for a Euro-area fiscal capacity. Bruegel Policy Brief 2013/01, January 2013

Europe has responded to the crisis with strengthened budgetary and macroeconomic surveillance, the creation of the European Stability Mechanism, liquidity provisioning by resilient economies and the European Central Bank and a process towards a banking union. However, a monetary union requires some form of budget for fiscal stabilisation in case of shocks, and as a backstop to the banking union. This paper compares four quantitatively different schemes of fiscal stabilisation and proposes a new scheme based on GDP-indexed bonds. The options considered are: (i) A federal budget with unemployment and corporate taxes shifted to euro-area level; (ii) a support scheme based on deviations from potential output;(iii) an insurance scheme via which governments would issue bonds indexed to GDP, and (iv) a scheme in which access to jointly guaranteed borrowing is combined with gradual withdrawal of fiscal sovereignty. Our comparison is based on strong assumptions. We carry out a preliminary, limited simulation of how the debt-to-GDP ratio would have developed between 2008-14 under the four schemes for Greece, Ireland, Portugal, Spain and an ‘average’ country.The schemes have varying implications in each case for debt sustainability

Economic Policy Coordination in the Euro Area under the European Semester. CEPS Special Report No. 123, December 2015

The implementation record of the Country Specific Recommendations (CSRs) has declined over time, as financial turbulence lessened and the economic outlook started to improve. Urgency for reforms seemingly receded to leave room to request member states to move towards more accommodative stances. It is mainly the small countries that implement, at least partially, the recommendations addressed to them. Unfortunately, there is little that the EU can do to change the status quo. Yet, the President of the Eurogroup could be held accountable for the implementation of the recommendations addressed to the euro area. The creation of National Competitiveness Boards risks making the European Semester even more complex and likely to have little impact in the countries that need them most, namely large countries and those with poor governance. To make it effective, a procedure would be needed to make national wage norms consistent at the euro-area level, which may be a very difficult objective to achieve.

The euro crisis: ten roots, but fewer solutions. Bruegel Policy Contribution 2012/17, October 2012

Many factors have contributed to the euro crisis. Some have been addressed by policymakers, even if belatedly, and European Union member states have been willing to improve the functioning of the euro area by agreeing to relinquish national sovereignty in some important areas. However, the most pressing issue threatening the integrity, even the existence, of the euro, has not been addressed: the deepening economic contraction in southern euro-area member states. The common interest lies in preserving the integrity of the euro area and in offering these countries improved prospects. Domestic structural reform and appropriate fiscal consolidation, wage increases and slower fiscal consolidation in economically stronger euro-area countries, a weaker euro exchange rate, debt restructuring and an investment programme should be part of the arsenal. In the medium term, more institutional change will be necessary to complement the planned overhaul of the euro area institutional framework. This will include the deployment of a euro-area economic stabilising tool, managing the overall fiscal stance of the euro area, some form of Eurobonds and measures to make euro-area level decision making bodies more effective and democratically legitimate.

A budget for Europe's Monetary Union. Bruegel Policy Contribution 2012/22, December 2012

In a monetary union, national fiscal deficits are of limited help to counteract deep recessions; union-wide support is needed. A common euro-area budget (1) should provide a temporary but significant transfer of resources in case of large regional shocks, (2) would be an instrument to counteract severe recessions in the area as a whole, and (3) would ensure financial stability. The four main options for stabilisation of regional shocks to the euro area are: unemployment insurance, payments related to deviations of output from potential, the narrowing of large spreads, and discretionary spending. The common resource would need to be well-designed to be distributionally neutral, avoid free-riding behaviour and foster structural change while be of sufficient size to have an impact. Linking budget support to large deviations of output from potential appears to be the best option. A borrowing capacity equipped with a structural balanced budget rule could address area-wide shocks. It could serve as the fiscal backstop to the bank resolution authority. Resources amounting to 2 percent of euro-area GDP would be needed for stabilisation policy and financial stability.

Firmer foundations for a stronger European Banking Union. Bruegel Working Paper 2015/13, November 2015

The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking.The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries.While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out.To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.

An Unemployment Insurance Scheme for the Euro Area: A simulation exercise of two options. CEPS Special Report No. 98/December 2014

This study offers an in-depth economic analysis of the two main proposals for the creation of a European unemployment insurance scheme. One proposes the creation of a harmonised European unemployment benefit scheme that would apply automatically to every eligible unemployed person. The alternative, termed ‘reinsurance’ here, would transfer funds to national unemployment insurance schemes to finance benefits from the centre to the periphery when unemployment is measurably higher than normal. The rationale behind these proposals is to set up an EU-level shock absorber to overcome coordination failures and the crisis-budget constraints of individual countries. The authors consider the possible trade-offs and challenges of, for example, the definition of the trigger, the fiscal rule and the harmonisation of national benefits. They conclude that while both options are viable, ‘reinsurance’ offers a stronger stabilisation effect for the same amount of European distribution.

Unemployment is the scourge, not youth unemployment per se. The misguided policy preoccupation with youth. CEPS Policy Brief No. 294, 26 June 2013

This Policy Brief argues that too much effort and political capital is being spent by the Commission and member states on being seen to be doing something quickly about youth unemployment when, in fact, the structural measures proposed will only have long-term effects. Expectations of immediate relief are running well above what can be delivered, especially at the EU level. Given the macroeconomic situation, no policy option will deliver a significant dent in either youth unemployment or unemployment in general. The EU policies on the table that are supposed to have an immediate effect, such as increased lending from the European Investment Bank to SMEs for the hiring of young people, will only have a very marginal impact on youth unemployment. Moreover, this impact will come mostly to the detriment of older unemployed persons excluded from such a scheme. Given the perceived need to ‘be seen to be doing something’, we fear that policies subsidising young workers de facto at the expense of older workers or, even worse, policies that subsidise older workers for not taking young people’s jobs, will proliferate. In fact, it is not at all clear that young people suffer more from being unemployed than older people, or even disproportionately more than older unemployed individuals. In particular, it is not clear that the much-publicised notion of a ‘lost generation’ with permanent ‘scars’ is relevant only to the young generation. The paper ends by highlighting the much-neglected policy option of encouraging labour mobility within the internal market. Although the Commission is ‘upgrading and modernising’ its tools, much more could be done in this area – to the benefit of the individuals concerned, the member states, and European integration in general.

Reinsurance of National Unemployment Benefit Schemes. CEPS Working Document No. 401, 6 January 2015

This study is a contribution to the debate around the creation of an unemployment insurance scheme for the EU/euro area by proposing an alternative mechanism to the Europeanisation of national insurance schemes. The authors make the case for a reinsurance mechanism and show that such a system delivers, for a small average contribution, large shock-absorption capacities. At the same time, due to a threshold issue, it is not suitable for EU-level absorption of small national shocks. It is rather meant to deliver a large punch once activated, which should occur only in case of MAJOR events for the labour market. Had such a scheme been in place in the EU during the period 2000-2012, it would have been triggered 40 times.

Which fiscal union for the euro area? Bruegel Policy Contribution ISSUE 2016/05, February 2016

At the current level of political and societal integration, a large federal budget is unrealistic in the euro area. The authors make three recommendations that would lead national fiscal policies to be more stabilising with respect to the economic cycle, while achieving long-term sustainability. They also recommend a move towards a European unemployment insurance scheme targeted at ‘large’ shocks, and a minimum set of labour-market harmonisation criteria.

Adjusting to a credit cycle bust: The role of fiscal policy. CEPS Commentary, 27 July 2012

In response to the often-heard accusation that “austerity is killing growth in Europe”, Daniel Gros asks in this new Commentary: “What austerity?” Looking at the entire budget cycle, he finds that the picture of austerity killing growth simply does not hold up. Since the bursting of the bubble in 2007, Gros reports that the economic performance of the US has been very similar to that of the euro area: GDP per capita is today about 2% below the 2007 level on both sides of the Atlantic; and the unemployment rate has increased by about the same amount as well: it increased by 3% both in the US and the euro area. Thus, he concludes that over a five-year period, the US has not done any better than the euro area although it has used a much larger dose of fiscal expansion.

The Revision of the Insurance Mediation Rules at EU Level and its Impact on Consumer Protection

The European Commission has put forward a new proposal for a directive on insurance mediation which should provide for significant changes in practices of selling insurance products and guarantee enhanced level of consumer protection. This proposal accompanies other regulatory initiatives in the insurance sector, all of them pursuing three main objectives: firstly, a strengthened insurance supervision with convergent supervisory standards at EU level; secondly, a better risk management of insurance companies; and thirdly a greater protection of policyholders. All these initiatives contribute to the EU programme on consumer protection and herald a new approach to EU insurance regulation and supervision. However, while the new supervisory rules are a direct response to the financial crisis and shortcomings of crossborder cooperation between national supervisors, the plans for the revision of insurance mediation rules were conceived much earlier due to scandals with mis-selling of insurance products in the United States and some EU Member States. This article will focus entirely on the Commission’s initiative in the consumer mediation area and the aspects of insurance supervision and risk management will be dealt with in separate articles.

Cross-country insurance mechanisms in currency unions. Bruegel Working Paper 2014/04, 27 March 2014

Countries in a monetary union can adjust to shocks either through internal or external mechanisms. We quantitatively assess for the European Union a number of relevant mechanisms suggested by Mundell’s optimal currency area theory, and compare them to the United States. For this purpose, we update a number of empirical analyses in the economic literature that identify (1) the size of asymmetries across countries and (2) the magnitude of insurance mechanisms relative to similar mechanisms and compare results for the European Monetary Union (EMU) with those obtained for the US. To study the level of synchronization between EMU countries we follow Alesina et al. (2002) and Barro and Tenreyro (2007). To measure the effect of an employment shock on employment levels, unemployment rates and participation rates we perform an analysis based on Blanchard and Katz (1992) and Decressin and Fatas (1995). We measure consumption smoothing through capital markets, fiscal transfers and savings, using the approach by Asdrubali et al. (1996) and Afonso and Furceri (2007). To analyze risk sharing through a common safety net for banks we perform a rudimentary simulation analysis. |

Benefits and drawbacks of European Unemployment Insurance. Bruegel Policy Brief 2014/06, September 2014

The issue: Unemployment in Europe has increased to high levels and economic growth has remained subdued. A debate on additional policy instruments to address the situation is therefore warranted. Fiscal stabilisation mechanisms have not provided adequate fiscal stabilisation during the crisis in some countries nor in the euro area as a whole. Different preferences and historical developments mean that national labour markets are differently organised, which sometimes hinders the efficient working of the monetary union. European Unemployment Insurance (EUI) has been proposed as a measure to contribute to fiscal policy management and improve labour markets. | Read more at Bruegel http://www.bruegel.org/publications/publication-detail/publication/847-benefits-and-drawbacks-of-european-unemployment-insurance/

Time for some shock (absorption): Reinsurance of national unemployment insurance should be a Commission priority. CEPS Commentary, 1 October 2014

In presenting their priorities for the new European Commission, Miroslav Beblavý and Ilaria Maselli assert in this CEPS Commentary that the time has come to devise an EU-level shock absorption mechanism. In their view, the instrument that best aligns varying political and economic objectives is a form of reinsurance of national systems of unemployment insurance. The primary motivation for the reinsurance proposal is that it can have a substantial stabilising effect, especially in case of large shocks, and, at the same time, be politically realistic in terms of contributions, costs and administrative burdens.