A Euro Area wide Unemployment Insurance to Improve Macroeconomic Stability

Master's Thesis , 2014 , 88 Pages , Grade: 1

Economics - Finance

The member states of the euro area have delegated the framing of monetary policy to a European Central Bank, while fiscal policy remains in responsibility of the national governments. In a monetary union, counter-cyclical fiscal policy can deliver only limited help to minimize the loss of monetary policy for adjustment to idiosyncratic shocks. As fiscal capacity at EMU level could transfer a significant part of the cyclical aspects of fiscal policy to the su¬pranational level and help the euro area members to focus their fiscal policy on structural balances.
A variety of such risk-sharing mechanisms have been suggested in the academic literature. This Master’s Thesis evaluates the concept of euro area wide unemployment insurance, in comparison with cyclical transfers between the Eurozone members based on their business cycle position. The European unemployment insurance scheme surpasses other concepts with regards to the criteria distributional neutrality and transparency, both of which are essential in order to gain support of European policymakers and voters.

Inhaltsverzeichnis

• Abstract
• Abstract
• Index
• Index for Illustrations and Tables
• List of Abbreviations
• Executive Summary
• 1 Introduction
• 2 Theory of the Optimum Currency Area
  • 1.1 Mundell on factor mobility
  • 1.2 McKinnon on the degree of openness
  • 1.3 Kenen on product diversification
  • 1.4 Limitations, conflicts and contradictions
  • 1.5 Modern views
• 2 Cost and benefits of currency unions
  • 2.1 Monetary efficiency
  • 2.2 Economic growth and trade
  • 2.3 International use
  • 2.4 Credibility of monetary policies
  • 2.5 Loss of monetary independence
  • 2.6 Cost and benefits compared
• 3 The European Economic and Monetary Union as an OCA
  • 3.1 Synchronization of business cycles
  • 3.2 Cross-country insurance mechanisms
    • 3.2.1 Labour mobility
    • 3.2.2 Price and wage flexibility
    • 3.2.3 Integration of financial markets
    • 3.2.4 Fiscal capacity
  • 3.3 Is the EMU an OCA?
• 4 The EMU and the global economic and financial crisis
  • 4.1 Pre-crisis risk factors
  • 4.2 The crisis
  • 4.3 Post-crisis outlook
  • 4.4 Reform of fiscal and economic governance in the EMU
    • 4.4.1 The Stability and Growth Pact
      • 4.4.1.1 The Maastricht convergence criteria and the original SGP
      • 4.4.1.2 Experiences with the pact
      • 4.4.1.3 The first reform of the SGP
    • 4.4.2 The European Semester, the Six-Pack and the Two-Pack
    • 4.4.3 The European Stability Mechanism and the Fiscal Compact
    • 4.4.4 The Euro Plus Pact
  • 4.5 The Banking Union
  • 4.6 The need for a cyclical stabilization tool
• 5 Fiscal capacity with a stabilization function in the EMU
  • 5.1 Risk-sharing mechanisms
  • 5.2 European unemployment insurance
  • 5.3 Cyclical shock insurance for the euro area
• 6 Evaluation of the European unemployment insurance
  • 6.1 Framework of evaluation criteria
  • 6.2 Stabilization properties
    • 6.2.1 Timely response to cyclical developments
    • 6.2.2 Strictly targeted on short-term asymmetries
  • 6.3 Distribution neutrality
  • 6.4 Moral hazard and incentives
    • 6.4.1 Avoid incapacitation of domestic stabilizers
    • 6.4.2 Support structural reforms
    • 6.4.3 Avoid inefficient implementation of transfers
  • 6.5 Political feasibility
    • 6.5.1 Fit with national and European institutions
    • 6.5.2 Transparency
• 7 Summary and conclusion
• Bibliography

Zielsetzung und Themenschwerpunkte

This Master's thesis aims to evaluate the concept of a Euro Area wide unemployment insurance as a potential tool for macroeconomic stabilization within the European Monetary Union (EMU). The thesis analyzes the theoretical framework of optimum currency areas (OCAs) and examines the EMU's suitability as an OCA, considering the challenges posed by the global economic and financial crisis. The work explores various risk-sharing mechanisms and evaluates the European unemployment insurance scheme in comparison to other cyclical transfer mechanisms. The thesis focuses on the criteria of distributional neutrality, transparency, and political feasibility, highlighting the importance of these factors for gaining support from European policymakers and voters.

• Optimum Currency Area (OCA) theory and its relevance to the EMU
• The impact of the global economic and financial crisis on the EMU
• Risk-sharing mechanisms within the EMU
• Evaluation of the European unemployment insurance scheme
• Political feasibility and public support for a Euro Area wide unemployment insurance

Zusammenfassung der Kapitel

The first chapter introduces the topic of the Master's thesis, outlining the need for a cyclical stabilization tool within the EMU. It highlights the limitations of national fiscal policies in a monetary union and the potential benefits of a supranational risk-sharing mechanism. The second chapter delves into the theory of optimum currency areas, exploring the criteria for successful currency unions and analyzing the EMU's compliance with these criteria. The third chapter examines the EMU's performance as an OCA, considering the synchronization of business cycles and the availability of cross-country insurance mechanisms. The fourth chapter analyzes the impact of the global economic and financial crisis on the EMU, highlighting the pre-crisis risk factors, the crisis itself, and the post-crisis outlook. It also discusses the reforms implemented to address the crisis, including the Stability and Growth Pact, the European Semester, the Six-Pack, the Two-Pack, the European Stability Mechanism, the Fiscal Compact, and the Banking Union. The fifth chapter explores various risk-sharing mechanisms within the EMU, focusing on the concept of a European unemployment insurance scheme. The sixth chapter evaluates the European unemployment insurance scheme based on criteria such as stabilization properties, distributional neutrality, moral hazard, and political feasibility. The seventh chapter summarizes the findings of the thesis and concludes with recommendations for future research and policy implications.

Schlüsselwörter

The keywords and focus themes of the text include the European Monetary Union (EMU), optimum currency area (OCA), macroeconomic stabilization, risk-sharing mechanisms, European unemployment insurance, fiscal capacity, distributional neutrality, transparency, political feasibility, and the global economic and financial crisis. The thesis explores the challenges and opportunities of implementing a Euro Area wide unemployment insurance scheme as a tool for improving macroeconomic stability within the EMU.

• College: Donau-Universität Krems (Department for Management and Economics)
• Course: International Financial Environment
• Grade: 1
• Author: Christian Kitzmueller (Author)
• Publication Year: 2014
• Pages: 88
• Catalog Number: V287605
• ISBN (eBook): 9783656878452
• ISBN (Book): 9783656878469
• Language: English
• Tags: EMU, European Monetary Union, Euro, EUI, European Unemployment Insurance, Cyclical Shock Insurance, CSI