As a follow-up event of the conference on automatic stabilizers held in October 2013 in Brussels, the Bertelsmann Stiftung and the European Commission’s DG for Employment, Social Affairs and Inclusion organized jointly a conference entitled “Economic shock absorbers for the Eurozone. Deepening the debate on automatic stabilizers”. The conference took place on Friday 20 June 2014. Here is my report of the event.
The morning session consisted of a long opening speech by László Andor, the European Commissioner for Employment, Social Affairs and Inclusion, and a plenary panel. Somewhat surprisingly, apart from Andor himself, the speakers seemed rather ambiguous about the proposal for European unemployment insurance (which would serve as the main automatic stabiliser), and in some cases turned to out to be hardline defenders of the prevailing orthodoxy and thus very skeptical of any version of the proposal.
Andor himself stated boldly that an epistemic community has been created around the idea. The concept of epistemic community was first introduced by Peter M. Haas back in 1992, defining it as “a network of professionals with recognised expertise and competence in a particular domain and an authoritative claim to policy relevant knowledge within that domain or issue-area”. Epistemic communities play a role in articulating the cause-and-effect relationships of complex problems, helping states and other actors identify their interests, framing the issues for collective debate, proposing specific policies, and identifying salient points for negotiation. As Andor pointed out, the upcoming Italian Presidency of the Council has decided to make automatic fiscal stabilisers one of the topics for discussion at the informal meeting of Employment and Social Ministers which will take place in Milan in July 2014.
There are, however, two rather different models of a European unemployment benefit scheme. The more conservative model – which seems to be favoured by many Germans – aims at constructing a fiscally neutral mechanism through which funds can be transferred each year from countries in a better economic situation to countries with temporary difficulties. However, the system will pay for itself and even out in due course; thus no permanent transfers are implied by this model. The European fund will benefit unemployed only when their own country is in temporary crisis. Otherwise the current national unemployment benefit systems are left intact.
A more ambitious plan starts from the idea of developing a separate European unemployment benefit scheme. It would be a common system of unemployment insurance, creating a bond of solidarity among European citizens. Even this kind of common European unemployment scheme would not eliminate the national unemployment insurance systems. The national systems would in most cases continue to provide additional security for citizens (depending on the current national system).
In his speech, Andor stressed that the new epistemic community has emerged from an agreement that “macroeconomic instability in Europe has stemmed predominantly from the incomplete design of the Economic and Monetary Union”. The beauty of the proposal for a basic European unemployment insurance scheme lies in its capacity to combine macroeconomic considerations (automatic stabilisation, good for growth) with considerations of legitimacy (employment and social justice). As Andor sides with the second, more ambitious model, he clarified that it should have a real effect on aggregate demand and include at least some fiscal transfers among member states. The system should be predictable and reliable and involve macro-economically significant volume, i.e. roughly 1% of the European GDP. Nonetheless, Andor looked somewhat hesitant on the question of fiscal transfers, underlining that “the risk of lasting transfers” can be minimised through various mechanisms.
The former prime minister of Italy (until February 2014) Enrico Letta emphasised that a new political response is needed to the rise of French National Front and other similar parties across Europe. In his opinion the ‘M’ (monetary) part of the EMU is working well, but the ‘E’ (economic) is not working. Letta indicated support for the European unemployment insurance – and yet he concentrated mostly in promoting the currently dominant neoliberal ideas of growth and competitiveness. This provoked a rather long critical intervention from the floor, pointing out that the concept of “structural reforms” is mostly about labour cost -competitiveness only. “Structural reforms” imply dire social and economic consequences for Europe and thus make the legitimation problem worse. A tad of temporary solidarity through a modest insurance scheme does not change anything; it is not a paradigm shift. Letta responded by stating that EU-leaders are divided; the majority of the Council is keen on enhancing competiveness. This is what political realism dictates in today’s EU.
Professor Harold James provided, in his turn, a USAmerican perspective on the problematic. For instance, he emphasised that “we” need to tackle long-term unemployment, but first and foremost in terms of increased cross-European labour mobility (this is what the American economists have always been saying about the problems of EMU, seeing it through the lenses of the optimal currency are theory).
Yves Mersch, Member of the Executive Board of the European Central Bank, started by saying that as an unelected representative of the ECB, he should avoid making any sort of political statement – and then for the next 20 minutes he did precisely that. Mersch turned out a real hardliner, defending the orthodoxy in every detail, even against some of the recent ECB definitions of policy. We should “implement structural reforms in a rigorous way” and we can create competitiveness “only through an external or internal evaluation”. Since the former has been excluded by the ECB, only the latter is possible. But it seems to me that this is also an ideological choice for Mersch. “Do we want to live in market economy or not?”
As I pointed out in my own intervention from the floor, when we look at things from the standpoint of all actors and countries at once (from a holistic perspective), attempts to increase cost competitiveness through internal devaluation prove contradictory. Imagine a world of only two countries. Both try to enhance their competitiveness by putting down wage-level or taxes and social benefits. As a result neither country emerges as more cost-competitive than before. Both countries face smaller export markets and there will be less efficient demand in the system as a whole, thus a weaker basis also for economic growth (or worse, there will be a recession in both countries). The dire social consequences of this kind of policy turn out to be counterproductive from the viewpoint of its own rationale.
After the lunch, I attended two workshops, WS 2 Design: (Social) stabilisation in an EMU-wide unemployment insurance scheme and WS 4 Implementing: Coping with political realities and assessing a realistic timeframe for an EMU fiscal capacity. The first concerned technical calculations of the possible and likely effects of different insurance schemes. Researchers hired to explore these and present their conclusions in WS2 included Matthias Dolls (Mannheim), Holly Sutherland (Essex) and Anne Epaulard (Paris). The emphasis was on the less ambitious proposals. Overall, it seems that while the likely effects are as intended (some stabilisation etc), they also appear to be rather limited, if not minimal, under most scenarios. Depending on the scheme, so far there might have been some permanent (or long-term) transfers to some countries such as Spain, but also countries like Austria or Finland could have been net beneficiaries under some schemes. Especially the difference that the European system would make in terms of within country income stabilisation coefficient seems small, and in countries such as Finland wholly negligible.
In WS4, speakers included Ferdinand Fichtner from Berlin and Shahin Vallée from Brussels. There were also two discussants, Maria João Rodrigues, a well-known Portuguese researcher and politician who was elected to the European parliament in May (and previously behind some of the key ideas of the Lisbon Treaty), and Boris Vujčić, Governor from the Croatian National Bank. As I pointed out in the general discussion, there seemed to be a conservative bias in the room. For instance, any redistributional effects that the insurance scheme might have were considered as politically unrealistic and thus undesirable. What is more, the will of the Angela Merkel government and other key government and actors, as well as the current institutional design of the EU, were taken as given and unchangeable. By the time of the general discussion, Ferdinand Fichtner had already left for the airport, but Shahin Vallée concurred with this criticism, defending his (and others’) cautious and one-sided approach on the grounds of political realism. In the packed room, many seemed to agree, though after the session I heard also contrary opinions and even praise.
By the end of WS4, we were somewhat behind the schedule, and as the concluding session did not start on time, I had to leave for the airport to catch my flight. I could not help feeling disappointed, even though I am fully aware of the political situation within the EU and in the world more widely. The EU is not particularly open to changes, or to phrase this slightly differently, it lacks capacity to learn and transform itself. Some sort of European unemployment insurance system would be a step in the right direction, but at the moment it seems that only rather conservative and non-transformative versions of that proposal are taken seriously within the epistemic community created by the Bertelsmann Stiftung and the European Commission.
Given how the EU has been constructed, and given the hegemonic situation in European in the global political economy more widely, the Euro crisis has not been deep enough to induce real changes. The EU continues along its pre-set path. As I have stressed before, rational democratic society learns and transforms itself easily. However, a non-learning society becomes, with no trouble at all, blind, and “is driven, like bullet or torpedo, wholly by its past”, to quote Karl Deutsch, a favourite political theorist of mine. This may indeed be the fate of the EU.
Heikki Patomäki
