EU Unemployment Reinsurance: Olaf Scholz`s Trial Balloon

At long last, the new German government is finally setting out its proposals for EU-level reforms.

Olaf Scholz (SPD), the Vice-Chancellor and German Finance Minister, has informally put forth a proposal for an EU-wide unemployment reinsurance scheme.

This is far from a technical matter. If there is to be any hope for economic convergence, an initiative is very much necessary.

The European Commission has been pushing for a long time to introduce a European unemployment insurance system in order to improve employment conditions in EU member states. The problem it faces is that the 2007 Treaty of Lisbon does not allow financial and social transfers.

Scholz’s preconditions

The Scholz plan for a European Unemployment Reinsurance Fund tries to overcome that hurdle by requiring the existence of dependable national unemployment insurance systems as a precondition. Alas, it is doubtful whether this alone is sufficient.

Scholz’s core argument is that such an EU unemployment reinsurance would not create a new European transfer system – and just serve as a backstop for national plans.

According to the Scholz plan, each member state is obliged to guarantee its own insurance coverage or minimum income for unemployment. Only in the event of a “labor market shock” could member states obtain loans from a common reinsurance scheme, which must be repaid after the crisis.

As it happens, the blueprint for such a two-tier approach of unemployment insurance in the individual states and a common reinsurance fund for labor market crises can be found in the United States.

The advantage of this two-tier approach is that it can help stabilize the economy and reduce social dumping between states, but at a very low level of unemployment benefits.

However, looking at the disastrous experience of financial transfers among EU member states so far, it is in serious doubt whether the obligation for repayment would ever be fulfilled.

EU minimum standards for unemployment insurance

While some EU member states have unemployment insurance systems that are particularly well-funded, in other countries such funding is highly inadequate.

And while public unemployment benefits and social assistance schemes are in place in all EU countries, this assistance is sometimes only paid out in case of need.

With regard to the level of unemployment insurance benefits, Luxembourg, the Netherlands, Portugal and Slovenia are at the top, while Great Britain, Poland and Malta rank at the bottom.

Similarly, there are often significant differences in the duration of benefits, previous contributions and the number of persons included.

In Germany, unemployment has fallen considerably due to the strong economic recovery of recent years. The legal framework linking unemployment insurance and labor market policy has been a supporting factor.

Moreover, the huge German Federal Employment Agency, with hundreds of local offices that often work in cooperation with communities on the long-term unemployed and support for dependent persons, is an important institutional factor to combat unemployment. However, most EU member states do not have such an agency providing active labor market support.

Collective bargaining partners

In addition, the most important factor for the effective conduct of labor market policy in Germany is the traditional involvement and responsibility of the so-called collective bargaining partners, employers and trade unions, in all major labor market decisions.

Despite all these positive institutional factors, the level of benefits that is paid out in Germany, whether from unemployment insurance (ALGI) and minimum income support (ALGII) for the unemployed, is in the lower or middle range compared to EU member countries as a whole.

In an EU-wide context, one must also properly consider the fact that, following Germany’s welfare reforms in the 2002-2005 period, only about one third of unemployed receive unemployment insurance benefits at all. Many are referred to the “Hartz IV” regime, with its harsh needs-based tests that often involve financial support of relatives, as well as sanctions for reduction of benefits.

Given the extreme rigor with which such benefits are provided in supposedly very rich and very successful Germany, it is more than understandable that Germans are leery about creating any EU-wide unemployment scheme.

For that reason, an essential precondition of the Scholz plan for an EU unemployment reinsurance scheme would be European minimum standards for national unemployment insurance and minimum income systems in terms of amount, duration and persons included.

A time-consuming undertaking

This would be a difficult and time-consuming undertaking, given past experience with the introduction of minimum social standards in the EU.

This applies all the more so as, far beyond Germany, other EU member states are now experiencing similar social controversies and bitter divisions in their domestic societies regarding their labor market reforms.

That is one more reason why the controversies between the EU Commission and Member States’ governments or national parliaments regarding both the legal basis as well as the financial and organizational framework for the possible introduction of such an EU unemployment reinsurance scheme will be enormous.

The same would apply to any decisions on what constitutes labor market shocks, the granting of reinsurance benefits or their distribution.

A clear risk of establishing a European Unemployment Reinsurance Fund is that it might well be used to circumvent unpopular national-level decisions on necessary structural reforms in economic and fiscal politics.

The continuing serious shortcomings in the vocational training systems of various Member States, which have still not been overcome, is not an encouraging sign for efforts to “Europeanize” labor-market reforms.

There are also still considerable deficits with regard to the institutional capacities of employment services and the role of social partners.

Moreover, inside the EU, the differences in wage and pension levels, working hours and other labor and social regulations remain big. These factors also have a decisive influence on employment and unemployment.

Conclusion

If the introduction of European Unemployment Reinsurance Scheme is not to be yet another inefficient bandaid, then these issues must be solved beforehand.