ReassessingtheFiscalMonetaryFrameworkofEMUin2018
RamonMarimonADEMUScientificCoordinator
EuropeanUniversityInstituteandUPF– BarcelonaGSE
The consortium
EuropeanUniversityInstituteUniversityofCambridgeUniversityofBonnToulouseSchoolofEconomicsUniversityCollegeLondonCatholicUniversityofPortugalBarcelonaGraduateSchoolofEconomics
http://ademu-project.eu
https://voxeu.org/The-emu-after-the-crisis
In the aftermath of the euro crisis In the aftermath of the euro crisis
In the aftermath of the euro crisis In the aftermath of the euro crisis
The need to strengthen the resilience of the EA
In the aftermath of the euro crisis In the aftermath of the euro crisis
The need to strengthen the resilience of the EA
Two proposals based on ADEMU research
Proposal I
A European Stability Fund
Based “On the Optimal Design of Financial Stability Fund” by
Arpad Abraham, Eva Carceles-Poveda Yan Liu
and Ramon Marimon∗
∗European University Institute; SUNY at Stony Brook, Wuhan University and European University
Institute, UPF - Barcelona GSE & CEPR.
Strengthening the EA: 4 related themes
I. Risk-sharing and stabilization policies in normal times.
II. Dealing with severe crises (“a robust crisis management
mechanism”).
III. Resolving a debt crisis (the euro ‘debt overhang’).
IV. Developing ‘safe assets’.
Strengthening the EA: Current Proposals
I. Risk-sharing and stabilization policies in normal times.
A “Stabilisation Function” (EC) & “Risk-sharing” once we
get more convergence (Presidents’ Reports)
II. Dealing with severe crises.
Transforming the ESM into a European Monetary Fund (EC)
Strengthening the EA: Our approach
Concentrate on
I. Risk-sharing and stabilization policies in normal times.
In itself, not an easy problem.
Strengthening the EA: Our approach
Interesting finding: Solving for a
I. Stability Fund as a ‘constrained efficient risk-sharing
mechanism’ also helps to:
II. deal with severe crises,
III. resolve a debt crisis, and
IV. develop ‘safe assets’.
A basic principle:
The EU is a long-term self-enforcing partnership!
A basic principle:
The EU is a long-term self-enforcing partnership,
but not a Federal State!
A basic principle:
The EU is a long-term self-enforcing partnership,
but not a Federal State!
The solution should not bea European IMF or a Central Fiscal Authority!
Designing a European Stability Fund
• The ECB to address the problem of time-inconsistency
in monetary policy (mainly: ‘competitive devaluations’).
• The ESF to address the problem of time-inconsistency
in fiscal policy (to follow pro-cyclical fiscal policies, i.e.
primary surplus/GDP not sufficiently procyclical).
Designing a Stability Fund – say, the ESF –
• Key element of The ESF long-term contract between the
ESF and an EU country: it is based on a risk-assessment of
the country.
• The ESF long-term contract defines state-contingent
transfers, in contrast to unconditional debt contracts.
• A ESF contract induces countercyclical fiscal (primary
deficit) policies (it is not a crisis resolution debt contract)
Designing a Stability Fund – say, the ESF –
• Contingency is ex-post, in contrast with ex-ante eligibility
conditions (e.g. ‘austerity program’conditions).
• Normal-times-transfers ‘build trust’, in contrast to crisis-
relief-transfers which tend to create ‘stigma & resentment’.
Designing the Fund accounting for 3+2 constraints:
The sovereignty constraint: The country is sovereign and
can always ‘exit’ (although it may be costly)
The redistribution constraint: risk-sharing transfers should
not become ex-post permanent (Hayek’s problem).
The moral hazard constraint: the severity of shocks may
depend on which policies and reforms are implemented.
Designing the Fund accounting for 3+2 constraints:
The asymmetry constraint: there is no ex-ante ‘veil of
ignorance’ and countries may start with large (debt)
liabilities.
The funding constraint: the fund should be (mostly) self-
funded (it can create a safe asset).
The ESF as a ‘constrained efficient
risk-sharing mechanism’ means
its contracts are optimal, subject to the 3+2 constraints!
.
The euro area ‘stressed countries’ with the ESF...
Comparing two alternative borrowing & lending regimes
Incomplete markets with default (IMD) and a risk-free
rate r: 1/(1 + r) ≥ β
• countries smooth shocks, and borrow and lend, with long-
term non-contingent debt;
• there can be default (full, in our case);
• default is costly and the country has no access to
international financial markets, temporarily;
• by exerting costly effort, they can reduce the probability of
adverse (government expenditure) shocks.
Comparing two alternative borrowing & lending regimes
Financial Stability Fund (Fund) as a risk-neutral agent
with discount 1/(1 + r) ≥ β.
• a country could leave the Fund at any time, in which case it
is like a country which defaults in an IMD regime;
• persistent transfers are limited by the amount of
redistribution that is mutually accepted;
• there are incentives for countries to apply policies which
reduce risks.
The ESF contract has the following 5 properties:
Consumption smoothing: consumption is less volatile and
less procyclical.
Countercyclical fiscal policies: primary surpluses are highly
procyclical.
Government bond spreads are very low (& negative): the
real spreads of ESF contracts (debts) are very low (& possibly
negative).
The ESF contract has the following 5 properties:
High capacity to absorb severe shocks (& existing debts):
in a severe shock (a rare event) a country with an ESF
contract disposes of a large line of credit.
An ESF contract for the 5 EA ‘stressed’ countries
(1980 - 2015)
1st Moments Data IMD Fund
Mean
Debt to GDP ratio 77.29% 78.35% 175.2%
Real bond spread 3.88% 3.61% −0.03%
G to GDP ratio 20.18% 19.34% 19.10%
Primary surplus to GDP ratio −0.78% 1.70% 3.79%
Fraction of working hours 36.74% 37.23% 38.10%
Maturity 5.38 5.38 5.38
2ndMoments Data IMD Fund
Volatility
σ(C)/σ(Y ) 1.49 1.46 0.33
σ(N)/σ(Y ) 0.92 0.70 0.62
σ(G)/σ(Y ) 0.91 0.96 0.51
σ(PS/Y )/σ(Y ) 0.65 0.81 0.94
σ(real spread) 1.53% 0.97% 0.01%
Correlation
ρ(C, Y ) 0.88 0.74 0.59
ρ(N, Y ) 0.67 −0.10 0.94
ρ(PS/Y, Y ) −0.29 0.13 0.95
ρ(G, Y ) 0.35 0.08 0.03
ρ(real spread, Y ) −0.35 −0.30 0.24
ρ(e, Y ) n.a. 0.00 -0.20
Comparing the economies in normal times
IMD vs. Fund Business Cycle Paths: shocks and allocations
0 50 100
0.1
0.2
0.3
0.4
Shocks
3
G(#3)
0 50 100
0.1
0.15
0.2
y
0 50 100
0.1
0.12
0.14
0.16
c
0 50 100
0.3
0.35
0.4
n
FSF-MH
IMD-MH
IMD vs. Fund Business Cycle Paths: shocks and assets
0 50 1000.15
0.2
0.25
0.3
0.35
0.4
e
0 50 100
-40
-20
0
20
==y (%)
0 50 100
-200
-150
-100
-50
0
a0=y (%)
0 50 100
0
2
4
6
rf ! r (%)
FSF-MH
IMD-MH
Comparing the economies in times of crisis
IMD vs. Fund: combined shock impulse-responses: allocations
0 50 100
0.1
0.15
0.2
0.25
0.3
Shocks
3
G(#3)
0 50 1000.12
0.13
0.14
0.15
0.16
0.17
y
0 50 100
0.11
0.12
0.13
c
0 50 1000.3
0.32
0.34
0.36
0.38
n
FSF-MH
IMD-MH
IMD vs. Fund: combined shock impulse-responses: assets and effort
0 50 100
0.3
0.32
0.34
0.36
0.38e
0 50 100-40
-30
-20
-10
0
==y (%)
0 50 100
-150
-100
-50
a0=y (%)
0 50 100
0
0.01
0.02
0.03
0.04
rf ! r (%)
FSF-MH
IMD-MH
Welfare gains and absorbing capacity
Welfare gains and absorbing capacity
Shocks (θ,Gc) Welfare Gain (b′/y)max: M (b′/y)max: F
(θl, Gh) = (0.148, 0.038) 7.37 1.71 78.02
(θm, Gh) = (0.299, 0.038) 6.35 107.61 170.05
(θh, Gh) = (0.456, 0.038) 4.32 215.15 318.32
(θl, Gl) = (0.148, 0.025) 6.51 1.84 78.81
(θm, Gl) = (0.299, 0.025) 5.90 111.47 170.23
(θh, Gl) = (0.456, 0.025) 4.12 214.78 316.75
Average 5.84
• Welfare gains are expressed in consumption equivalent terms at b = 0 (%).
• bmax is the maximum level of country indebtedness expressed as the percentage of
GDP in a given financial environment (Markets or Fund).
Strengthening the EA: as we have seen...
Solving for a
I. Stability Fund as a ‘constrained efficient risk-sharing
mechanism’ also helps to:
II. deal with severe crises,
III. resolve a debt crisis, and
IV. develop ‘safe assets’.
Implementing the ESF
Light version
• ESM implements ESF contingent contract on crisis resolution
contracts (existent and new)
• ESF conditionality becomes ex-post
• ESF is allowed to provide risk-sharing contracts (e.g.
countries that may fail SGP conditions)
• (The Macroeconomic Imbalance Procedure with an
opportunity instead of a non-credible threat!)
Implementing the ESF
Full version
• Full risk-sharing, stabilization capacity integrated to its crisis-
resolution capacity
• ESF contracts become ‘safe assets’ in the ESF balance sheet
• ESF becomes a proper Fund that can accommodate other
EMU needs (Backstop for SRM, EUIS Fund,...?)
• ESF allowed to issue a safe bond backed by its safe assets.
Proposal II
A European Unemployment InsuranceSystem (EUIS)
Arpad Abraham Joao Brogueira de SousaRamon Marimon Lukas Mayr
European University Institute
A European Unemployment Insurance System?
• Several policy proposals then and now:◦ �e Marjolin Report (1975),◦ Dullien (2014), Beblavy et al. (2015), Beblavy and
Lenaerts (2017), Dullien et al. (2018).
• High unemployment + low de�cit requirements: costlydelivery of unemployment insurance during recessions.
• Business cycles are not perfectly correlated across EUcountries: risk sharing.
◦ Social and political cohesion, labour marketintegration, worker mobility and EU identity.
• Large di�erences in unemployment rates and labourmarket �ows: a system of transfers across countries? .
A European Unemployment Insurance System?
• Several policy proposals then and now:◦ �e Marjolin Report (1975),◦ Dullien (2014), Beblavy et al. (2015), Beblavy and
Lenaerts (2017), Dullien et al. (2018).
• High unemployment + low de�cit requirements: costlydelivery of unemployment insurance during recessions.
• Business cycles are not perfectly correlated across EUcountries: risk sharing.
◦ Social and political cohesion, labour marketintegration, worker mobility and EU identity.
• Large di�erences in unemployment rates and labourmarket �ows: a system of transfers across countries? .
A European Unemployment Insurance System?
• Several policy proposals then and now:◦ �e Marjolin Report (1975),◦ Dullien (2014), Beblavy et al. (2015), Beblavy and
Lenaerts (2017), Dullien et al. (2018).
• High unemployment + low de�cit requirements: costlydelivery of unemployment insurance during recessions.
• Business cycles are not perfectly correlated across EUcountries: risk sharing.
◦ Social and political cohesion, labour marketintegration, worker mobility and EU identity.
• Large di�erences in unemployment rates and labourmarket �ows: a system of transfers across countries? .
A European Unemployment Insurance System?
• Several policy proposals then and now:◦ �e Marjolin Report (1975),◦ Dullien (2014), Beblavy et al. (2015), Beblavy and
Lenaerts (2017), Dullien et al. (2018).
• High unemployment + low de�cit requirements: costlydelivery of unemployment insurance during recessions.
• Business cycles are not perfectly correlated across EUcountries: risk sharing.◦ Social and political cohesion, labour market
integration, worker mobility and EU identity.
• Large di�erences in unemployment rates and labourmarket �ows: a system of transfers across countries? .
A European Unemployment Insurance System?
• Several policy proposals then and now:◦ �e Marjolin Report (1975),◦ Dullien (2014), Beblavy et al. (2015), Beblavy and
Lenaerts (2017), Dullien et al. (2018).
• High unemployment + low de�cit requirements: costlydelivery of unemployment insurance during recessions.
• Business cycles are not perfectly correlated across EUcountries: risk sharing.◦ Social and political cohesion, labour market
integration, worker mobility and EU identity.
• Large di�erences in unemployment rates and labourmarket �ows: a system of transfers across countries? .
Unemployment in Europe (2010Q1-2017Q3)
�ree questions
• What could be the (net) bene�ts of a EUIS?
• Can all the EU countries involved bene�t from a commonand simple change to their current UI systems?
• Can unanimous agreement for this change be achievedwhen permanent transfers across countries are avoided?
? �e answers depend on how the EUIS is designed.
�ree questions
• What could be the (net) bene�ts of a EUIS?
• Can all the EU countries involved bene�t from a commonand simple change to their current UI systems?
• Can unanimous agreement for this change be achievedwhen permanent transfers across countries are avoided?
? �e answers depend on how the EUIS is designed.
�ree questions
• What could be the (net) bene�ts of a EUIS?
• Can all the EU countries involved bene�t from a commonand simple change to their current UI systems?
• Can unanimous agreement for this change be achievedwhen permanent transfers across countries are avoided?
? �e answers depend on how the EUIS is designed.
�ree questions
• What could be the (net) bene�ts of a EUIS?
• Can all the EU countries involved bene�t from a commonand simple change to their current UI systems?
• Can unanimous agreement for this change be achievedwhen permanent transfers across countries are avoided?
? �e answers depend on how the EUIS is designed.
A step back
We �rst develop a �exible quantitative dynamic modelto
? Describe the observed heterogeneity of labour markets inthe EU (job creation and destruction, search costs, and av.wage di�erentials).
? Evaluate the impact of di�erent types of EUIS’s.
? European UI systems are de�ned by replacement rateand duration of unemployment bene�ts and, usually, are�nanced by payroll taxes
A step back
We �rst develop a �exible quantitative dynamic modelto
? Describe the observed heterogeneity of labour markets inthe EU (job creation and destruction, search costs, and av.wage di�erentials).
? Evaluate the impact of di�erent types of EUIS’s.
? European UI systems are de�ned by replacement rateand duration of unemployment bene�ts and, usually, are�nanced by payroll taxes
A step back
We �rst develop a �exible quantitative dynamic modelto
? Describe the observed heterogeneity of labour markets inthe EU (job creation and destruction, search costs, and av.wage di�erentials).
? Evaluate the impact of di�erent types of EUIS’s.
? European UI systems are de�ned by replacement rateand duration of unemployment bene�ts and, usually, are�nanced by payroll taxes
A step back
We �rst develop a �exible quantitative dynamic modelto
? Describe the observed heterogeneity of labour markets inthe EU (job creation and destruction, search costs, and av.wage di�erentials).
? Evaluate the impact of di�erent types of EUIS’s.
? European UI systems are de�ned by replacement rateand duration of unemployment bene�ts and, usually, are�nanced by payroll taxes
Map of EU Labour Markets
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18
Job finding rate: Non-Active
0
0.05
0.1
0.15
0.2
0.25
Jo
b f
ind
ing
ra
te:
Un
em
plo
ye
d
Labour Market Institutions (model)Austria
Belgium Germany
EstoniaSpain
Finland
FranceGreece
IrelandItaly
LuxemburgLatvia
Netherlands
Portugal
SloveniaSlovakia
Map of EU Labor Markets
0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
Average Job finding rate: Non-Employed
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
Jo
b S
ep
ara
tio
n r
ate
: E
mp
loye
d
Labour Market Institutions (model)
Austria
Belgium
Germany
Estonia
Spain
Finland
France
Greece
IrelandItaly
Luxemburg
Latvia
Netherlands
Portugal
Slovenia
Slovakia
Map of EU national UB policies
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Replacement rate
0
1
2
3
4
5
6
7
8
9
10
Ma
xim
um
du
ratio
n,
qu
art
ers
Unemployment benefit policy (data)
Germany
Austria
Estonia
SpainFinland
France
GreeceIreland
Italy
Luxemburg
Latvia
Netherlands
Portugal
SloveniaSlovakia
How can there be a unique recipe?
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.
• EUIS provides support when large negative shockincreases unemployment.• A Member State enters unemployment recession alone
(the rest of the Union not a�ected).• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;◦ Under the EUIS: government receives a transfer
equivalent to the increase in national UB expendituresduring the recession.
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.• EUIS provides support when large negative shock
increases unemployment.
• A Member State enters unemployment recession alone(the rest of the Union not a�ected).• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;◦ Under the EUIS: government receives a transfer
equivalent to the increase in national UB expendituresduring the recession.
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.• EUIS provides support when large negative shock
increases unemployment.• A Member State enters unemployment recession alone
(the rest of the Union not a�ected).
• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;◦ Under the EUIS: government receives a transfer
equivalent to the increase in national UB expendituresduring the recession.
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.• EUIS provides support when large negative shock
increases unemployment.• A Member State enters unemployment recession alone
(the rest of the Union not a�ected).• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;◦ Under the EUIS: government receives a transfer
equivalent to the increase in national UB expendituresduring the recession.
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.• EUIS provides support when large negative shock
increases unemployment.• A Member State enters unemployment recession alone
(the rest of the Union not a�ected).• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;
◦ Under the EUIS: government receives a transferequivalent to the increase in national UB expendituresduring the recession.
A ‘rainy day’ EUIS for large asymmetricnegative shocks?
Consider the following scenario:• Member states keep the existing national UB systems.• EUIS provides support when large negative shock
increases unemployment.• A Member State enters unemployment recession alone
(the rest of the Union not a�ected).• Two scenarios:
◦ Without a EUIS: the country facing theunemployment crisis must balance the budget;◦ Under the EUIS: government receives a transfer
equivalent to the increase in national UB expendituresduring the recession.
Labor market states in France during recession
0 5 10 15 20 25 30 35 4080
85
90E
mplo
yed in %
0 5 10 15 20 25 30 35 405
10
15
Unem
plo
yed in %
0 5 10 15 20 25 30 35 40
quarters
0
5
10
Inactive in %
France’s taxes during a recession, without andwith an EUIS
0 5 10 15 20 25 30 35 40
quarters
1
1.5
2
2.5
3
3.5
4
in %
Autarky
Union
�e bene�ts of sharing risk through an EUIS?
Employed Un. Eligible. Un. Non-Elig. Non-Active TotalAustria 0.05 0.04 0.04 0.03 0.04Belgium 0.18 0.14 0.17 0.10 0.15Germany 0.02 0.01 0.01 0.00 0.02
Spain 0.26 0.18 0.20 0.09 0.21Finland 0.27 0.20 0.27 0.16 0.24France 0.10 0.06 0.06 0.02 0.09Ireland 0.11 0.06 0.08 0.04 0.09
Italy 0.01 0.01 0.01 0.01 0.01Luxembourg 0.02 0.02 0.02 0.01 0.02Netherlands 0.04 0.02 0.02 0.01 0.04
Table: EUIS for large shocks: welfare gains in CEV% (Cons. Equiv. Value)
�e bene�ts of sharing risk through an EUIS?
Employed Un. Eligible. Un. Non-Elig. Non-Active TotalAustria 0.05 0.04 0.04 0.03 0.04Belgium 0.18 0.14 0.17 0.10 0.15Germany 0.02 0.01 0.01 0.00 0.02
Spain 0.26 0.18 0.20 0.09 0.21Finland 0.27 0.20 0.27 0.16 0.24France 0.10 0.06 0.06 0.02 0.09Ireland 0.11 0.06 0.08 0.04 0.09
Italy 0.01 0.01 0.01 0.01 0.01Luxembourg 0.02 0.02 0.02 0.01 0.02Netherlands 0.04 0.02 0.02 0.01 0.04
Table: EUIS for large shocks: welfare gains in CEV% (Cons. Equiv. Value)
10 EA countries’ taxes during a recession
0 20 40 60 80 100
quarters
0
1
2
3
4
5
6
7
8
in %
Austria
Belgium
Germany
Spain
Finland
0 20 40 60 80 100
quarters
0
1
2
3
4
5
6
7
8
in %
France
Ireland
Italy
Luxemburg
Netherlands
10 EA countries’ taxes during a recessionwith EUIS insurance
What could be the bene�ts of sharing riskthrough an EUIS?
Employed Un. Eligible. Un. Non-Elig. Non-Active TotalAustria 0.05 0.04 0.04 0.03 0.04Belgium 0.18 0.14 0.17 0.10 0.15Germany 0.02 0.01 0.01 0.00 0.02
Spain 0.26 0.18 0.20 0.09 0.21Finland 0.27 0.20 0.27 0.16 0.24France 0.10 0.06 0.06 0.02 0.09Ireland 0.11 0.06 0.08 0.04 0.09
Italy 0.01 0.01 0.01 0.01 0.01Luxembourg 0.02 0.02 0.02 0.01 0.02Netherlands 0.04 0.02 0.02 0.01 0.04
Table: EUIS for large shocks: welfare gains in CEV% (Cons. Equiv. Value)
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:
◦ All EA UB systems de�ned by: the replacement rateand the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?
◦ Assumption: small open economies⇒ constantprices
• Remarkably similar across countries:
◦ UB Replacement rate 20%-45% and very long durationof eligibility.
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:
◦ All EA UB systems de�ned by: the replacement rateand the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?
◦ Assumption: small open economies⇒ constantprices
• Remarkably similar across countries:
◦ UB Replacement rate 20%-45% and very long durationof eligibility.
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:◦ All EA UB systems de�ned by: the replacement rate
and the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?
◦ Assumption: small open economies⇒ constantprices
• Remarkably similar across countries:
◦ UB Replacement rate 20%-45% and very long durationof eligibility.
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:◦ All EA UB systems de�ned by: the replacement rate
and the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?◦ Assumption: small open economies⇒ constant
prices
• Remarkably similar across countries:
◦ UB Replacement rate 20%-45% and very long durationof eligibility.
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:◦ All EA UB systems de�ned by: the replacement rate
and the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?◦ Assumption: small open economies⇒ constant
prices
• Remarkably similar across countries:
◦ UB Replacement rate 20%-45% and very long durationof eligibility.
What role for an EUIS?
• Welfare gains of insuring large shocks are small, butpositive for all Members.
• An interesting �nding:◦ All EA UB systems de�ned by: the replacement rate
and the duration of eligibility.
• What would be the optimal UB policy for each Memberstate, given its existing labour market institutions?◦ Assumption: small open economies⇒ constant
prices
• Remarkably similar across countries:◦ UB Replacement rate 20%-45% and very long duration
of eligibility.
Why a common UB recipe?
• National governments do not internalize generalequilibrium e�ects of their reforms on citizens in othercountries.
• Finding: “Optimal” reforms are welfare worsening inseveral countries once General Equilibrium e�ects aretaken into account.
• Mechanism: Too generous bene�t policies⇒ Privatesavings ↓ ⇒ European capital stock ↓ ⇒ wages ↓
⇒ Lack of coordination across countries may result indetrimental reforms.
Why a common UB recipe?
• National governments do not internalize generalequilibrium e�ects of their reforms on citizens in othercountries.
• Finding: “Optimal” reforms are welfare worsening inseveral countries once General Equilibrium e�ects aretaken into account.
• Mechanism: Too generous bene�t policies⇒ Privatesavings ↓ ⇒ European capital stock ↓ ⇒ wages ↓
⇒ Lack of coordination across countries may result indetrimental reforms.
Why a common UB recipe?
• National governments do not internalize generalequilibrium e�ects of their reforms on citizens in othercountries.
• Finding: “Optimal” reforms are welfare worsening inseveral countries once General Equilibrium e�ects aretaken into account.
• Mechanism: Too generous bene�t policies⇒ Privatesavings ↓ ⇒ European capital stock ↓ ⇒ wages ↓
⇒ Lack of coordination across countries may result indetrimental reforms.
Why a common UB recipe?
• National governments do not internalize generalequilibrium e�ects of their reforms on citizens in othercountries.
• Finding: “Optimal” reforms are welfare worsening inseveral countries once General Equilibrium e�ects aretaken into account.
• Mechanism: Too generous bene�t policies⇒ Privatesavings ↓ ⇒ European capital stock ↓ ⇒ wages ↓
⇒ Lack of coordination across countries may result indetrimental reforms.
A fully harmonized EUIS?
• Replacement rate (15%) and unlimited duration of bene�ts.
• Financed with a common EUIS wage tax.
Employed Unemp. Inactive Total Tax rate TransferAustria -0.31 -0.05 -0.28 -0.29 1.47 -0.51Belgium 0.36 -1.01 0.18 0.25 1.47 -0.71Germany 0.16 0.79 0.14 0.20 1.47 -0.14Spain 1.51 1.42 1.31 1.45 1.47 0.74Finland 1.11 0.63 0.92 1.04 1.47 -0.87France -0.06 -0.02 -0.08 -0.06 1.47 -0.16Ireland 0.66 1.07 0.63 0.68 1.47 -0.09Italy 0.75 2.13 0.76 0.87 1.47 0.29Luxemb. -0.43 -0.20 -0.34 -0.40 1.47 -0.64Netherlds. 0.14 0.55 0.12 0.17 1.47 0.07
Table: Welfare gains (in % CEV), tax rate (in %) and transfers (in % of GDP)
A fully harmonized EUIS?
• Replacement rate (15%) and unlimited duration of bene�ts.
• Financed with a common EUIS wage tax.
Employed Unemp. Inactive Total Tax rate TransferAustria -0.31 -0.05 -0.28 -0.29 1.47 -0.51Belgium 0.36 -1.01 0.18 0.25 1.47 -0.71Germany 0.16 0.79 0.14 0.20 1.47 -0.14Spain 1.51 1.42 1.31 1.45 1.47 0.74Finland 1.11 0.63 0.92 1.04 1.47 -0.87France -0.06 -0.02 -0.08 -0.06 1.47 -0.16Ireland 0.66 1.07 0.63 0.68 1.47 -0.09Italy 0.75 2.13 0.76 0.87 1.47 0.29Luxemb. -0.43 -0.20 -0.34 -0.40 1.47 -0.64Netherlds. 0.14 0.55 0.12 0.17 1.47 0.07
Table: Welfare gains (in % CEV), tax rate (in %) and transfers (in % of GDP)
A fully harmonized EUIS?
• Replacement rate (15%) and unlimited duration of bene�ts.
• Financed with a common EUIS wage tax.
Employed Unemp. Inactive Total Tax rate TransferAustria -0.31 -0.05 -0.28 -0.29 1.47 -0.51Belgium 0.36 -1.01 0.18 0.25 1.47 -0.71Germany 0.16 0.79 0.14 0.20 1.47 -0.14Spain 1.51 1.42 1.31 1.45 1.47 0.74Finland 1.11 0.63 0.92 1.04 1.47 -0.87France -0.06 -0.02 -0.08 -0.06 1.47 -0.16Ireland 0.66 1.07 0.63 0.68 1.47 -0.09Italy 0.75 2.13 0.76 0.87 1.47 0.29Luxemb. -0.43 -0.20 -0.34 -0.40 1.47 -0.64Netherlds. 0.14 0.55 0.12 0.17 1.47 0.07
Table: Welfare gains (in % CEV), tax rate (in %) and transfers (in % of GDP)
A fully harmonized EUIS?
• Replacement rate (15%) and unlimited duration of bene�ts.
• Financed with a common EUIS wage tax.
Employed Unemp. Inactive Total Tax rate TransferAustria -0.31 -0.05 -0.28 -0.29 1.47 -0.51Belgium 0.36 -1.01 0.18 0.25 1.47 -0.71Germany 0.16 0.79 0.14 0.20 1.47 -0.14Spain 1.51 1.42 1.31 1.45 1.47 0.74Finland 1.11 0.63 0.92 1.04 1.47 -0.87France -0.06 -0.02 -0.08 -0.06 1.47 -0.16Ireland 0.66 1.07 0.63 0.68 1.47 -0.09Italy 0.75 2.13 0.76 0.87 1.47 0.29Luxemb. -0.43 -0.20 -0.34 -0.40 1.47 -0.64Netherlds. 0.14 0.55 0.12 0.17 1.47 0.07
Table: Welfare gains (in % CEV), tax rate (in %) and transfers (in % of GDP)
Can all countries bene�t from an EUIS whencross-country transfers are neutralized?
• Common replacement rate (15%) and unlimited duration of bene�ts.
• Country-speci�c tax rates
Employed Unemp. Inactive Total Tax Rate Cur. TaxAustria 0.21 0.51 0.24 0.23 0.73 0.99Belgium 1.05 -0.24 0.81 0.92 0.45 2.14Germany 0.34 0.44 0.28 0.38 1.27 0.45Spain 0.65 0.65 0.58 0.62 2.53 4.33Finland 2.09 1.83 1.90 2.03 0.22 3.75France 0.11 0.18 0.09 0.11 1.23 1.90Ireland 0.77 1.31 0.73 0.79 1.34 1.97Italy 0.48 1.58 0.51 0.60 1.90 0.25Luxembourg 0.30 0.51 0.33 0.32 0.55 0.53Netherlands 0.06 0.13 0.03 0.08 1.57 1.01
Table: Welfare gains (in % CEV) and tax rates (in %)
Can all countries bene�t from an EUIS whencross-country transfers are neutralized?
• Common replacement rate (15%) and unlimited duration of bene�ts.
• Country-speci�c tax rates
Employed Unemp. Inactive Total Tax Rate Cur. TaxAustria 0.21 0.51 0.24 0.23 0.73 0.99Belgium 1.05 -0.24 0.81 0.92 0.45 2.14Germany 0.34 0.44 0.28 0.38 1.27 0.45Spain 0.65 0.65 0.58 0.62 2.53 4.33Finland 2.09 1.83 1.90 2.03 0.22 3.75France 0.11 0.18 0.09 0.11 1.23 1.90Ireland 0.77 1.31 0.73 0.79 1.34 1.97Italy 0.48 1.58 0.51 0.60 1.90 0.25Luxembourg 0.30 0.51 0.33 0.32 0.55 0.53Netherlands 0.06 0.13 0.03 0.08 1.57 1.01
Table: Welfare gains (in % CEV) and tax rates (in %)
Can all countries bene�t from an EUIS whencross-country transfers are neutralized?
• Common replacement rate (15%) and unlimited duration of bene�ts.• Country-speci�c tax rates
Employed Unemp. Inactive Total Tax Rate Cur. TaxAustria 0.21 0.51 0.24 0.23 0.73 0.99Belgium 1.05 -0.24 0.81 0.92 0.45 2.14Germany 0.34 0.44 0.28 0.38 1.27 0.45Spain 0.65 0.65 0.58 0.62 2.53 4.33Finland 2.09 1.83 1.90 2.03 0.22 3.75France 0.11 0.18 0.09 0.11 1.23 1.90Ireland 0.77 1.31 0.73 0.79 1.34 1.97Italy 0.48 1.58 0.51 0.60 1.90 0.25Luxembourg 0.30 0.51 0.33 0.32 0.55 0.53Netherlands 0.06 0.13 0.03 0.08 1.57 1.01
Table: Welfare gains (in % CEV) and tax rates (in %)
Can all countries bene�t from an EUIS whencross-country transfers are neutralized?
• Common replacement rate (15%) and unlimited duration of bene�ts.• Country-speci�c tax rates
Employed Unemp. Inactive Total Tax Rate Cur. TaxAustria 0.21 0.51 0.24 0.23 0.73 0.99Belgium 1.05 -0.24 0.81 0.92 0.45 2.14Germany 0.34 0.44 0.28 0.38 1.27 0.45Spain 0.65 0.65 0.58 0.62 2.53 4.33Finland 2.09 1.83 1.90 2.03 0.22 3.75France 0.11 0.18 0.09 0.11 1.23 1.90Ireland 0.77 1.31 0.73 0.79 1.34 1.97Italy 0.48 1.58 0.51 0.60 1.90 0.25Luxembourg 0.30 0.51 0.33 0.32 0.55 0.53Netherlands 0.06 0.13 0.03 0.08 1.57 1.01
Table: Welfare gains (in % CEV) and tax rates (in %)
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks
◦ Risk Sharing bene�ts are small and bene�t the employed more ifthere are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?
◦ With national systems, if National EUIS Funds have enoughborrowing capacity�
◦ With a centralized EUIS Fund absorbing deviations fromsteady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small and bene�t the employed more if
there are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?
◦ With national systems, if National EUIS Funds have enoughborrowing capacity�
◦ With a centralized EUIS Fund absorbing deviations fromsteady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small and bene�t the employed more if
there are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?
◦ With national systems, if National EUIS Funds have enoughborrowing capacity�
◦ With a centralized EUIS Fund absorbing deviations fromsteady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small and bene�t the employed more if
there are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?◦ With national systems, if National EUIS Funds have enough
borrowing capacity�
◦ With a centralized EUIS Fund absorbing deviations fromsteady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small and bene�t the employed more if
there are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?◦ With national systems, if National EUIS Funds have enough
borrowing capacity�◦ With a centralized EUIS Fund absorbing deviations from
steady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small and bene�t the employed more if
there are no UB cuts without EUIS
• Substantial gains to be made withan EUIS with a common coverage. How?◦ With national systems, if National EUIS Funds have enough
borrowing capacity�◦ With a centralized EUIS Fund absorbing deviations from
steady-state beyond certain threshold (|Ui − Ui| ≥ tr; Ui =steady-state unem. rate of country i; tr = 0→ full centralization)
◦ With central funding there is a need for monitoring, periodic riskassessments, and a proper contract between each participatingcountry and the EUIS Fund.
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks
◦ Risk Sharing bene�ts are small, although in times of crisis evensmall gains count!
• Substantial gains with common EUIS◦ 15 % replacement rate◦ unlimited duration
• “Experience rating taxes” provide incentives for higher taxcountries to improve their labour markets.
• An EUIS can also enhance labour cohesion and mobility acrossEU participating countries, and social identity with the EU!
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small, although in times of crisis even
small gains count!
• Substantial gains with common EUIS◦ 15 % replacement rate◦ unlimited duration
• “Experience rating taxes” provide incentives for higher taxcountries to improve their labour markets.
• An EUIS can also enhance labour cohesion and mobility acrossEU participating countries, and social identity with the EU!
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small, although in times of crisis even
small gains count!
• Substantial gains with common EUIS◦ 15 % replacement rate◦ unlimited duration
• “Experience rating taxes” provide incentives for higher taxcountries to improve their labour markets.
• An EUIS can also enhance labour cohesion and mobility acrossEU participating countries, and social identity with the EU!
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small, although in times of crisis even
small gains count!
• Substantial gains with common EUIS◦ 15 % replacement rate◦ unlimited duration
• “Experience rating taxes” provide incentives for higher taxcountries to improve their labour markets.
• An EUIS can also enhance labour cohesion and mobility acrossEU participating countries, and social identity with the EU!
Wrapping up on EUIS
• With an EUIS for large asymmetric negative shocks◦ Risk Sharing bene�ts are small, although in times of crisis even
small gains count!
• Substantial gains with common EUIS◦ 15 % replacement rate◦ unlimited duration
• “Experience rating taxes” provide incentives for higher taxcountries to improve their labour markets.
• An EUIS can also enhance labour cohesion and mobility acrossEU participating countries, and social identity with the EU!
Thanks