SOCIAL DIMENSION OF THE ECONOMIC AND MONETARY UNION MINIMUM UNEMPLOYMENT ALLOWANCE

MANUEL CALDEIRA CABRAL | UNIVERSITY OF MINHO

EUROPEAN PARLIAMENT, BRUSSELS, 9 JULY 2013

OUTLINE:

- why is there a need for an automatic stabilizer? 

- possible modalities for its introduction

MANUEL CALDEIRA CABRAL

SINGLE CURRENCY AREA

Countries that integrate a single currency area loose their ability to use the monetary and exchange rate instruments to react to crisis and external shocks. In the Euro Zone several other conditionalities – Fiscal rules, competition policy, etc.

Asymmetric shocks: Shocks that affect different countries of the same currency area in different (or even opposite ways).

Problem: the optimal monetary policy should be different for the different countries that are in the same currency area (and thus have to pursue the same monetary policy).

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OPTIMAL CURRENCY AREA

Minimizing the risks: • Homogeneous set of countries – decreases the probability of

assimetric schocks – Not the case of the EZ.

• Reducing the consequences of the Asymmetric shocks:

• Flexibility – for fast adjustment • Mobility of factors within the Currency Area (*)• Central transfers (Stabilizers | avoiding the risk of divergence)

(*) With factor movements the drag of adjustment may result in movements from decaying regions of the more mobile factors (Problems: Structural unemployment; Debt, divergence…)

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COUNTRY WITH NA ADVERSE SHOCKBudget: State level Stabilizers – crisis:Þ Decrease in tax revenuesÞ Increase in unemployment – increase in social expenses

=> Increase in the budget deficit | Constraints may => prociclical macro policies.

Monetary policy: • Devaluation and decrease in interest rate to increase

exports and investment and reduce imports.NOT POSSIBLE IN COMMON CURRENCY.

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ASYMMETRIC SHOCKS – EU NORTH AND SOUTH

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SHOCKS EFFECTS

Asia uprising China in WTO

Affected more low wage labour intensive industries.

more important in SOUTH EUROPE

Enlargement NEGATIVE for countries that compete with the new entrants - SOUTH EUROPE POSITIVE for countries with complementar industrial structure.

Increase in Food prices

NEGATIVE for importer countries - SOUTH EUROPE

POSITIVE for food exporters – FR,GER,NE…

2007-2012 crisis Affected more countries: * high public debt and deficit (GR, IT, BEL, PT…) * with competitiveness problems (GR, PT, SP) * housing market bublles (IRL, SP, NE…) * Problems in the banks (IRL, SP, CYP, …)

ASYMMETRIC - DIFFERENCES IN INTEREST RATES

EUROPEAN UNION POLICY

TRADE: • Decreased barriers on entry of labour intensive products• Decreased less the barriers for agriculture goods

Monetary policy needed:

SOUTH EUROPE• Current Account Deficit• High Debt• Unemployment DEVALUATION

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0,82

1,60

EUR/$ - STRONG APPRECIATION

CENTRAL AUTOMATIC STABILIZERS NEEDED BECAUSE:- Asymmetric shocks exist and can be brutal- Member states lost several instruments to deal

with crisis (monetary policy, exchange rate, limits in fiscal policy, competition policy rules)

- Factor movements within the EZ may amplify the effects of shocks (on GDP, indebtment, Unemployment…)

MANUEL CALDEIRA CABRAL

CENTRAL AUTOMATIC STABILIZERS NEEDED:- To allow some space for stabilizers within the

constrains of having a single currency, and the stability pact;

- To avoid that economic crisis result in budget, debt and financial crisis.  

- To avoid that asymmetric shocks result in long periods of divergence between member states.

MANUEL CALDEIRA CABRAL

Euro Zone: 2001-2007Level of GDP and convergence - Eurostat

MANUEL CALDEIRA CABRAL

-15

-10

-5

0

5

10

15

20

25

0 20 40 60 80 100 120 140

Euro Zone: 2001-2007Convergence in the Euro Area

MANUEL CALDEIRA CABRAL

-15

-10

-5

0

5

10

15

20

25

0 20 40 60 80 100 120 140

Euro Zone: 2007-2012Countries with lower income: 7/10 in divergence

MANUEL CALDEIRA CABRAL

-15

-10

-5

0

5

10

0 20 40 60 80 100 120 140

ALTERNATIVES FOR THE INTRODUCTION OF EUROPEAN STABILIZERS

MANUEL CALDEIRA CABRAL

NATIONAL AND REGIONAL MEASURES

Creation of an Euro Zone Employment Insurance Fund to pay for measures at National and Regional level in countries and regions with high levels of unemployment.

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NATIONAL LEVEL

• Support when national unemployment level is above a threshold (e.g. 2 percentual points above Euro Zone average, or above 12%). The Euro Zone Fund should transfer the correspondent to 50% of the unemployment benefit of the workers that are in this situation to the national government.

This measure should be subjected to conditionality • Revision of Labour laws• Unemployment benefit design • Other employment promoting policies

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REGIONAL LEVEL

When regional unemployment level is above a threshold (e.g. 2 percentual points above Euro Zone average, or above 12%). The Euro Zone Fund should support:

• Active employment policies (e.g. training, internships…);• Investment support (fund for high unemployment regions); • Higher levels of support for less developed regions;• Coordination with othe EU funds

These measures should not be subjected to conditionality

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