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). | MANUEL CALDEIRA CABRAL

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…) | MANUEL CALDEIRA CABRAL

COUNTRY WITH NA ADVERSE SHOCK Budget: State level Stabilizers – crisis:  Decrease in tax revenues  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. | MANUEL CALDEIRA CABRAL

ASYMMETRIC SHOCKS – EU NORTH AND SOUTH | MANUEL CALDEIRA CABRAL SHOCKSEFFECTS 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… 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 | MANUEL CALDEIRA CABRAL

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: Level of GDP and convergence - Eurostat MANUEL CALDEIRA CABRAL

Euro Zone: Convergence in the Euro Area MANUEL CALDEIRA CABRAL

Euro Zone: Countries with lower income: 7/10 in divergence MANUEL CALDEIRA CABRAL

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. | MANUEL CALDEIRA CABRAL

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 | MANUEL CALDEIRA CABRAL

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 | MANUEL CALDEIRA CABRAL