Policy paper 166
 

Automatic stabilisers for the euro area: what is on the table?

This Policy paper by Nathalie Spath contributes to the debate on how to equip the euro area with a mechanism for asymmetric shocks absorption. It considers 3 proposals: a cyclical shock insurance, a European Unemployment Insurance and a Reinsurance.

|   19/07/2016             |   Nathalie Spath             |   Economics and finance
Policy paper
This Policy paper by Nathalie Spath, affiliate fellow at the Jacques Delors Institut – Berlin, our office in Germay, contributes to the debate on how to equip the euro area with a mechanism for asymmetric shocks absorption. It responds to the challenge of automatic stabilisation and adds to potential solutions by analysing the promises and problems of automatic stabilisation mechanisms for the euro area. It considers three of the most influential proposals for an automatic stabilisation mechanism: a cyclical shock insurance (CSI) put forward by Enderlein, Guttenberg & Spiess (2013); a European Unemployment Insurance (EUI) proposed by Dullien (2014a); and a Reinsurance proposed by Beblavy´, Gros & Maselli (2015). The analysis reveals the underlying assumptions of each proposal, identifies main requirements and compares net payments as well as stabilisation properties.

The analysis finds that all three proposals offer sophisticated mechanisms that could be implemented at the European level to ensure automatic stabilisation. All three offer different promises and problems and a preference for one or the other is a question of priorities. The CSI is based on an indicator with limited precision but offers lean requirements. The proposal offers a technical solution by smoothing cyclical deviation; it is based on a narrow economic approach. The EUI is based on a more holistic approach. Payments at the individual level make the mechanism tangible to citizens but, at the same time, add complexity to the design. The major challenges lie in the harmonization of labour markets and a consequentially complex legal procedure, including treaty changes. The Reinsurance provides insurance for severe crisis, and is thus only semi-automatic. Although it can be understood intuitively, the discretionary element adds an administrative burden that is difficult to realize at the European level.

The introduction and part 1 lay out the problem of macroeconomic stabilisation, part 2 reviews existing proposals and assesses their specificities. Part 3 analyses the findings and discusses potential remedies to mitigate the proposals’ identified challenges. The Policy paper concludes providing policy makers with a sound basis to evaluate the promises and problems of the three automatic stabiliser proposals.