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.
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.