European-wide unemployment insurance proposals – more bunk!

The Europhiles have been tweeting their heads off in the last week or so thinking that the corner has been turned – by which they mean that Germany is about to get all cuddly with France and agree to fundamental shifts in thinking which will make the dysfunctional Economic and Monetary Union (EMU) finally workable, without the need for the ECB to break Treaty law by propping up the private bond markets. The most recent incarnation of the ‘saviour’ is a few words that the new German Finance Minister, Olaf ‘Wolfgang Schäuble'” Scholz said during an interview with Der Spiegel (June 8, 2018) – ‘Germany Has a Special Responsibility’ – about his support for a new unemployment insurance scheme for the Eurozone. It seems even the smallest things excite those who remain in denial about the long-term viability of the common currency. The proposal that Scholz was advancing has been out in the public debate for some years and is nothing like an effective solution to the terminal design flaws in the EMU. It is just an application of the same thinking that led to the creation of that flawed architecture in the first place and reinforces the conclusion that the main players in Eurozone policy setting have no intention of creating an effective federated monetary system. Just more of the same. Tomorrow, the tweets will be extolling the virtues of some other erroneous plan that some Europhile has come up with to save the system. And so it goes.

In his interview with Der Spiegel, Scholz claimed that Germany should hold Europe as its “most important national interest”. He claimed that “Germany should push forward projects to continue strengthening solidarity in Europe”.

Der Spiegel then asked the obvious question:

SPIEGEL: That sounds like additional cash flow from north to south.

Scholz: No, that’s too simplistic. In social policy, the principle of self-responsibility applies first and foremost. Every eurozone member state should have functioning unemployment protection, a social safety net and appropriate minimum wages.

So, inching away from a ‘federal’ concept.

Then, when asked to be more specific, Scholz replied:

I’m in favor of supplementing national systems for unemployment insurance with a reinsurance for the overall eurozone. A country in the midst of an economic crisis that is resulting in significant job losses and placing a heavy burden on its social-security system could borrow from this joint reinsurance fund. Once the recession is over, the country would pay back the funds it borrowed. At the same time, all countries should make efforts that their safety nets are as prepared for crisis as possible.

Which then prompted this exchange:

SPIEGEL: And Germany bears the risk.

Scholz: No, Germany profits. The German Federal Employment Agency’s reserves would remain untouched, and no debts will be communitized.

And, Der Spiegel asked, isn’t this just “a further step into a ‘liability union'”, which would be politically difficult to gain support for in Germany.

Scholz failed to answer that question directly, instead claiming that the Eurozone unemployment insurance scheme would just be like the “reduced-hours compensation program” introduced by the German government in 2008 which saved “many jobs”.

While not particularly important to this discussion, the German stimulus applied in 2008 to subsidise wages and allow workers to retain jobs with less hours of work as activity fell was not similar to the various configurations of proposed European-wide unemployment insurance schemes.

Scholz also went on during the interview to say he supported the introduction of a “European financial transaction tax” and repeated his call for the “transformation of the European Stability Mechanism into a monetary fund based on the IMF model”.

I dealt with the ‘IMF-style’ proposals in these blog posts (among others):

1. Forget European reform – the Germans have anyway (April 23, 2018).

2. Die schwarze Null continues to haunt Europe (May 21, 2018).

Today, I will consider the specific proposal to introduce an unemployment insurance scheme at the European level, which has been floated for some years now.

In my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – I referred to these type of proposals as hybrid proposals, which acknowledge that there are deficiencies in the design of the EMU but fail to advocate the transition towards a full fiscal union.

The hybrid reform proposals are broadly organised in terms of those that seek to add cyclical responsiveness (increasing the ‘automatic stabilisers’) and hence, provide European level support to regions in crisis, and, proposals that seek to reorganise and reclassify government debt to reduce the vulnerability of the EMU to private bond markets.

They are all what might be called ‘austerity’ proposals in that they offer palliative care solutions (‘band aids’) to stop the breach.

In that sense, they fail to address the cause of the breach itself – the lack of a fully functioning fiscal authority and the bias towards pro-cyclical fiscal policy as a result of the SGP rules.

The proposal to introduce a European-wide unemployment insurance scheme is of the former variety – increasing the automatic stabilisers.

But with a catch.

First, the concept of an automatic stabiliser is sometimes difficult for people to grasp.

There are two sources of stimulus that fiscal policy can provide:

(a) discretionary changes to the spending and/or taxation settings; and

(b) the operation of the in-built automatic stabilisers, which refer to the inherent sensitivity of taxation revenue and spending to changes in economic activity.

In the case of (b), when economic activity falls and employment declines, the government automatically receives less taxation revenue and increases spending by way of welfare benefits.

No discretionary changes to the policy settings are needed for this second effect to work.

The upshot is that the automatic stabilisers will push the fiscal deficit up (or surpluse down) and provide a modicum of spending support to the local economy.

In recessions, both sources of stimulus will typically be needed to ensure unemployment doesn’t escalate.

Reliance on the automatic stabilisers alone only moderates the contraction, but will usually not provide sufficient stimulus to prevent the recession from occurring.

The advantage of having strong automatic stabilisers though is that they are active with any further political decisions being necessary, which bypasses the delays that are inherent in the political process.

The problem for the EMU is that its inherent design deliberately reduces the potency of these automatic stabilisers.

1. The overall EU fiscal involvement (‘the Budget’) is not large enough to have sufficient impact when there are significant asymmetric negative shocks across the regional space.

2. The existing transfer mechanisms – like the structural and regional funding schemes – are not flexible enough to serve a counter-cyclical adjustment role.

Enter the various proposals for a European-wide unemployment insurance scheme.

While there are several different proposals that have been put forward in this regard, they all share similar characteristics and weaknesses.

One of the prominent Tweeters in the week following Scholz’s interview with Der Spiegel was entrenched Europhile Henk Enderlein, who seems to hold various positions in universities and think tanks in Europe and has been a long-time go-to person by the European Commission for supportive research.

On November 25, 2014, Enderlein was described in the French newspaper Le Monde as “le disciple allemand de Jacques Delors” (Source), an association that makes his views clear.

I considered why Jacques Delors should not be considered a progressive visionary in this blog post – Jacques Delors – a failed leader not a champion of a prosperous Europe (August 14, 2017).

Rather the vision and plan that Delors pushed through in the late 1980s as President of the European Commission has failed dramatically and reflected the dominance of neoliberal economic thinking combined with the dysfunctional Franco-German rivalry.

Enderlein told Le Monde in 2014 that “Dans le monde post-wesphalien actuel, L’Etat nation est un anachronisme.”

Which is the central claim by neoliberals and deluded progressives that we critiqued in out 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).

Just the assertion that we are in a post-Westphalien world is now accepted uncritically by many progressives along the TINA lines.

Sort of, ‘oh well, the nation state is dead, we have to have a post-national world’ – as if that is a valid description of reality.

As we argued in the 2017 book, the state is very much alive and all major policy decisions are still made via the legislative capacities of the nation states.

There is no post-Westphalian world.

That is just a clever construct that the neoliberals have advanced to justify the capture of the state’s legislative and regulative capacities to further there own ends rather than to advance the general welfare of the people.

Progressives were duped into believing the idea that the nation state is powerless in the face of globalisation.

In part, the EMU as a post national construction is the embodiment of that deception. The founders knew that the nation states would not concede crucial fiscal capacities but they also knew they could neuter those capacities with the Stability and Growth Pact framework and better serve the elites.

The evidence is obvious. The EMU fails to deliver prosperity for all.

But the ‘post-Westphalian world’ narrative is powerful and conditions the way the public debate unfolds on matters relating to the Eurozone.

Wolfgang Münchau’s column in the Financial Times last week (June 10, 2018) – Political tale-telling is splitting the eurozone apart – in interesting in this respect.

He begins by noting that “Narratives matter”.

Narratives can encapsulate crafted framing and language which can support myths that become ‘verities’ in the public consciousness. They allow cognitive dissonance to be pervasive and knowledge to be suppressed by ideology.

The ‘post-Westphalian world’ myth is of this ilk.

It allows German politicians to claim they are all for Europe but then deny the very changes that would be required to make Europe ‘work’.

As Wolfgang Münchau notes:

… I shuddered when I heard political commentators gushing that Angela Merkel was to be congratulated when she finally gave her response to Emmanuel Macron on eurozone reform.

The German chancellor said no to almost everything the French president has proposed. The only meaningful concession is a short-term lending facility for countries in trouble – but on conditions likely to be unacceptable to Italy in particular. I have not heard anyone even trying to explain how this could help reduce instability …

The only known antidote to misleading narratives such as these is truth-telling. The biggest threat to the eurozone now is the toxic combination of the preachers of hatred and those who dare not speak truth to power.

The proposal for a European-wide unemployment insurance scheme is similar to the “short-term lending facility” that is mentioned above and is used by the Europhiles as a synonym for ‘reform’ by which they mean progress.

My assessment is that these proposals are all regressions to the mean – they just perpetuate the folly.

The proposal for a European-wide unemployment insurance scheme is symptomatic of the Groupthink among European economists that led to the problem in the first place.

A notable intervention from the Jacques Delors Institute in 2012 from a cast of authors including Henrik Enderlein, Peter Bofinger, Jean Pisani-Ferry, and André Sapir – Completing the Euro. A road map towards fiscal union in Europe – was representative of this type of ‘narrative’.

Many of the authors of this report were involved in various studies that gave rise to the design of the EMU in the first place.

Then, in 2012, as the system they lauded back in the 1990s was clearly failing, their approach was to patch it up with various ad hoc measures, all of which are ring-fenced by the austerity mentality.

They refused to “even consider the option to abandon the euro” (p.3) and are, instead, guided by the principle: “As much political and economic union as necessary, but as little as possible” (p.3).

They advocate what they call a “sui generis form of fiscal federalism”, which is driven by an implicit assumption that the national economies to be involved in this union are not remotely interested in surrendering their fiscal autonomy to the centre.

So much for the ‘post-Westphalian world’ that Enderlein claimed drove post-national developments like the EMU.

But the fiscal autonomy of the EMU Member States has been severely compromised by the SGP and the austerity packages forced onto many of the Eurozone economies during the crisis.

It seems that democracy and autonomy can be violated when the Troika is imposing the terms, but then in other cases, it is upheld as a sacrosanct principle that cannot be compromised.

That sort of hypocrisy has woven its way through the entire debate about economic and monetary integration in Europe and will continue to deliver sub-par outcomes.

Enderlein and his cast of authors proposed a simple rule for the limits of democracy – “sovereignty ends when solvency ends” (p.7), which is astounding if you think about it.

The application of this rule inevitably leads to a violation of democracy because the risk of insolvency is intrinsic to the flawed design of the monetary system.

Member States are forced to issue debt in a currency they have no control over and the ECB is formally precluded from giving any guarantees (although of-course it has violated that prohibition via its huge bond-buying programs).

Default risk and insolvency are always lurking, waiting for the next major economic downturn to arrive.

Thus, according to the likes of Enderlein, as soon as a nation falls into crisis, its citizens lose the capacity to influence their own destiny and are, instead, at the behest of unelected officials in the European Commission, the ECB and the IMF.

That vision has never appeared to me to represent a road map for a sustainable and prosperous Europe.

While Enderlein and Co. proposed the introduction of a European-wide unemployment insurance plan, and hence they are now lauding Olaf ‘Wolfgang Schäuble'” Scholz’s recent support for the idea, their underlying approach to so-called “cyclical divergences” was to “enhance the real exchange rate channel” (p.28), which is code for making internal devaluation more responsive through increased labour mobility and wage cuts in declining regions.

At the height of the crisis, Enderlein and Co. invoked the standard neo-liberal approach – that workers from recessed regions should move to growing regions and those who stay should worker harder for less pay.

The virtue of stable social communities built on family structures and community spirit is ignored by this mainstream approach.

The economy rules and workers are considered meagre pawns in the decisions by management on where to locate industry.

One would think a primary aim for any durable solution to the European crisis is to keep regions viable, especially as Enderlein and Co. recognised that “Linguistic and cultural barriers are certainly important” (p.8).

The belief (assertion) that labour mobility would be of sufficient magnitude to provide a semblance of equalisation in unemployment rates within the Eurozone is denied by the overwhelming evidence that between 2009 and 2011 there was no discernible movement among citizens who were already resident within the Eurozone (Source).

Enderlein and Co. propose the European-wide unemployment insurance plan – “a cyclical adjustment insurance fund” (p.30) – because they acknowledge that a reliance on so-called ‘structural’ adjustments would be “unlikely to solve the inherent difficulties” facing the Eurozone during a major economic downturn.

The characteristics of such an ‘insurance’ scheme would be:

1. The fund would be managed by Eurozone finance ministers and build its kitty from contributions from nations experiencing above the Eurozone growth rates and pay out to nations in crisis.

2. The scheme would thus force nations to reduce their domestic spending in times of buoyant economic growth and provide some relief in bad times.

3. Significantly, Enderlein and Co. stress the “the system cannot become a hidden instrument for permanent transfers” (p.31) and nations might only be permitted to “take out what they once paid in” (p.32).

4. Once again the presumption is that the ‘federal’ redistribution would be neutral across the economic cycle and across space, a proposition for which there is no rationale other than fiscal conservatism.

A later proposal from Jean Pisani-Ferry and Co. released on January 10, 2013 – Options for a Euro-Area Fiscal Capacity – rehearsed the same narrative of fiscal neutrality and no permanent transfers.

In a recent Op Ed in Der Spiegel (June 6, 2018) – Fixing the Euro: The Time to Act Is Now – Enderlein reinforced the austerity narrative.

He considers the current instability in Italy and its poor economic performance since joining the euro.

Among the options for Italy he rejects exit, bailouts, the abandonment of austerity, debt restructuring and more, because:

Every single one of these measures would likely initially lead to an additional crisis – either political or financial, either in Italy or in the rest of Europe …

Most options, viewed soberly, aren’t really options at all.

You get the picture.

With high levels of entrenched unemployment, unsustainable inequalities across its regions, youth that are being denied any chance of a productive working life, zombie banks on the edge of insolvency, stagnant per capita income and decaying social institutions, Enderlein rejects fiscal stimulus as an ‘option’ because it would destabilise Europe.

Words and phrases are used by Enderlein in relation to the options, such as:

“plunge Europe into an even deeper crisis” (exit)

“uncontrollable consequences for the European banking and insurance system” (if any debt relief)

“unrealistic” (any state support for the crumbling banking sector)

“unable to afford” (almost any progressive policy).

He also rejects any further ECB bond-buying as “dangerous … It is not the central bank’s job to solve political crises”.

One might ask who has the job when the currency-issuer is the central bank and the fiscal agents (the Member States) have no direct relationship with the central bank nor any currency-issuing capacity.

And so we get what Enderlein calls “new forms of assistance” which must not be based on any concept of a “transfer union”, the very characteristic that makes working federations effective.

He cited the “group of 14 French and German economists” of which he was one, which issued a statement on January 17, 2018 – Reconciling risk sharing with market discipline: A constructive approach to euro area reform.

They include the European-wide unemployment insurance scheme among their ‘reforms’ and note that:

Member countries would pay into a fund, with countries particularly prone to major economic disturbances paying disproportionate contributions.

So the weaker EMU nations would be even more screwed during times of growth and not be able to spend on domestic initiatives as much as the growth might permit.

And then when recession hits, they would still have to pursue fiscal austerity (obey the SGP rules) but be able to get some of their own funds back as long as the funds were repaid again later.

This is just another inadequate credit provision along the lines of the proposal to create the European Monetary Fund.

What nations need in times of crisis is the capacity to allow their fiscal positions to go into whatever deficit is consistent with the non-government saving desire (collapse in spending).

In short, the proposal suggests it is like an automatic stabiliser but it lacks the essential characteristics.

It would retard public spending when there was growth, even if that public spending was driving growth and it would not allow the deficit to grow to necessary levels in times of downturn.

It is just a credit facility within the existing austerity framework. It would unlikely be sufficient in that regard to prevent elevated levels of unemployment.

A far better way to strengthen the automatic stabilisers is to introduce a European-wide Job Guarantee funded by an enhanced Euro-level fiscal capacity tied in with the currency-issuance power of the ECB.

But then pigs might fly!

Conclusion

Scholz made it clear – his support for a European-wide unemployment insurance scheme was conditional on it being fiscally-neutral and without any transfers between Member States being consolidated.

The economists pushing for this sort of scheme also want to punish the poorer nations more than those that are less prone to crisis by further restricting their capacity to stimulate public service delivery in good times.

For the Europhile cheer squad to think this sort of scheme will represent fundamental reform shows you how far removed they are from any reality.

Groupthink and denial on a very large scale.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.