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Speech: Social dimension of the Economic and Monetary Union: what lessons to draw from the European elections?

Commission Européenne - SPEECH/14/455   13/06/2014

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European Commission

[Check Against Delivery]

László Andor

European Commissioner for Employment, Social Affairs and Inclusion

Social dimension of the Economic and Monetary Union: what lessons to draw from the European elections?

Lecture at Hertie School of Governance

Berlin, 13 June 2014

Professor Offe,

Ladies and Gentlemen,

It is an honour and a pleasure to be here. I would like to thank Mr Weise for his kind invitation and the opportunity to discuss with you the on-going reform of Europe’s Economic and Monetary Union at a time when a new European Parliament and Commission are being formed and key priorities for the next five years are being discussed.

Just over a month ago, President Barroso delivered a remarkable lecture on Europe here in Berlin, entitled “Considerations on the present and the future of the European Union”. On his list of necessary improvements and reforms over the coming years, the deepening of Economic and Monetary Union is the first item.

Today I will build on the President’s reflections in some ways, focusing on the reform of the EMU and on the social dimension of the European integration project.

My main argument today, and one of my main messages to those negotiating the mandate of the next European Commission, is that Europe’s Economic and Monetary Union needs to be strengthened with a well-designed mechanism of fiscal transfers between Member States using the euro.

I will outline how such a transfer mechanism should look like, namely a scheme where EMU Member States share part of the costs of short-term unemployment insurance.

Through such a scheme, it would be possible to create a European safety net for the welfare safety nets of individual Member States.

The earlier such a mechanism is agreed and launched, the better for everybody, including those countries which today enjoy higher levels of employment and may consider themselves to be safe from the impact of financial crises.

A basic European unemployment insurance scheme would have a strong economic rationale, since it would provide a limited and predictable short-term stimulus to economies undergoing a downturn in the economic cycle – something that every country is going to experience sooner or later.

Such a scheme could therefore boost market confidence in the EMU, and thus help to avoid a vicious circle of downgrades and austerity in the euro zone. This would help to uphold domestic demand and therefore economic growth in Europe as a whole.

I will make my case in five steps:

First, I will draw some main lessons from the financial and economic crisis in Europe since 2007.

Second, I will highlight the social consequences of Europe’s double-dip recession and remind you of the huge divergence in employment and social outcomes which now characterises the EMU and so threatens the future of the EU as such.

Third, I will show that Europe’s weakness in confronting the crisis is a systemic problem, rooted in the incomplete character of the EMU as designed 25 years ago – the EMU 1.0 as it is sometimes called.

Fourth, I will explain why the EMU 1.0 needs to be upgraded to EMU 2.0, with fiscal transfers between Member States.

Finally, I will detail my proposal for a basic European unemployment insurance scheme, and, I will explain why the advantages far outweigh its costs.

All in all, I hope to convince you that a basic European unemployment insurance scheme would be a predictable, reliable, fair and at the same time effective instrument for improving the functioning of the EMU – something that could and should be put in place in the next few years.

I am aware that explicitly calling for transfers of taxpayers’ money between euro zone Member States may be seen by some as a provocation in Germany, where the word “Transferunion” has a rather pejorative meaning.

Some might also say such an effort is just a waste of time after the European Parliament elections that have sent to Brussels and Strasbourg an increased number of populists and Eurosceptic nationalists.

Personally I think that the best way to take account of the EP election result is precisely to explore such innovative proposals.

There are two possible reactions to the EP election results. One is a panic reaction, which assumes that the populist agenda should be partly absorbed by mainstream parties in order to restore their credibility. This approach points toward deconstruction of the EU, even if deconstruction is often euphemistically referred to as 'reform' in political debates and the media.

On the other hand, one can choose a strategic response, aiming at reconstruction of the EU, by sorting out the fundamental problems that have caused frustration in society in recent years. If you choose this alternative, you have to go to the root causes of our economic, social, and now also political troubles.

What you will hear now is a plea for monetary reform because I believe this is the factor behind our complex problems and it also holds the key to a progressive reconstruction of Europe.

1. Lessons from the financial and economic crisis in Europe

Ladies and Gentlemen,

I believe it is my responsibility to share key conclusions from my four and a half years’ experience as Member of the European Commission – lessons from years of financial and economic crisis that was unprecedented in EU history and that should never be repeated.

In fact, Europe has been going through two crises and not one. The first we shared with the rest of the world, while the second one specifically originated from the inherent weaknesses of the current EMU architecture and brought us on a different path than the rest of the industrialised world.

The financial and economic crisis, which started in August 2007 in the subprime mortgage sector of the US financial system, reached Europe within a matter of weeks.

When it escalated in Autumn 2008, following the fall of Lehman Brothers, European governments agreed a coordinated stimulus known as the European Economic Recovery Plan, amounting to €200 billion or 1.5% of GDP, including through temporarily increased deficits of national budgets.

Governments paid unemployment benefits to people who lost jobs, tried to maintain investments and refrained from raising taxes. This stimulus helped Europe to overcome the first deep recession, but unfortunately could not be followed up in many countries when the sovereign debt crisis hit in 2010-11.

Speculation about the solvency of the Greek state was followed by many months of hesitation at the European level ahead of the Nordrhein-Westphalian elections on 9 May 2010. Only then was an emergency loan to Greece agreed and announced, in a much larger volume than would have been the case if Europe had taken collective action more promptly.

Speculation then continued about sovereign debt restructuring and about possible exit of various countries from the euro zone, meaning that interest rates in the euro zone ‘periphery’ climbed to very high levels and a number of additional countries had to apply for bailouts.

Debts from financial markets were replaced by debts from official sources, which turned the euro zone into a club of debtors and creditors, set against each other.

The elected governments of Greece and Italy were replaced with technocratic administrations as the democratically elected ones were unable or unwilling to implement front-loaded fiscal consolidation.

The fiscal impact of bank bailouts added to the financial problems of sovereign borrowers, and so contributed to the destabilising trend in the euro zone.

From a fragile recovery we entered a double-dip recession in 2011. At the same time, the lack of confidence in the sustainability of the euro zone resulted in capital flight from less stable countries towards more stable ones, causing further financial and economic polarisation.

During these years, we learned expressions like financial fragmentation, and observed a deepening core-periphery divide within the euro area. This became an existential crisis of the monetary union, and of the EU as a whole.

While Europe went into a second recession in 2011, the US economy was already steadily growing because the US had relevant instruments in place and the US Government and central bank did not hesitate to use them to generate growth and jobs.

The EU only started to emerge from the financial whirlpool when the ECB announced that it would be actually ready to act as a central bank in a crisis, and the Presidents of the European Council, the Commission, the ECB and the Eurogroup came forward with a long-term plan about the reconstruction of the EMU.

In short, the sovereign debt crisis of the past four years has shown us that without a lender of last resort, a central budget or a coordination framework geared towards stimulating aggregate demand, the EMU 1.0 has been – at best – a structure for fair weather, but not for a financial and economic crisis.

At the beginning, the euro provided some shelter for its Member States. Austria, for example, was challenged by capital markets but its membership in the euro zone helped to calm them down. For countries losing access to financial markets altogether, emergency lending was always agreed.

But the euro has also been a trap, because Member States can no longer adjust to economic shocks through tailor-made monetary policies and devaluation in their exchange rate, while at the same time being subject to strict rules on fiscal policy.

For more than five years now, many European countries have been struggling to strengthen their growth potential inside the monetary union mainly through a muddling through strategy. The contractionary effects of these strategies have put the EU at a competitive disadvantage in global terms.

Furthermore, the long crisis has led to social consequences that cannot be acceptable in the European Union.

2. The social consequences of the double recession

Ladies and Gentlemen,

The Treaty on European Union establishes the objectives of balanced economic growth in a highly competitive social market economy, aiming at full employment and social progress.

Back in 2010, when the Barroso II Commission was just starting its term, we built on the Treaty obligations by proposing the Europe 2020 Strategy for smart, sustainable and inclusive growth.

This Strategy was agreed by the European Council and established a model of social and economic development based on five headline targets to be reached by 2020. These targets include 75% employment rate among 20-64 year-olds and at least 20 million fewer people in or at risk of poverty or social exclusion.

However, Europe’s performance has unfortunately worsened since then due to the long economic crisis. While the employment rate was 68.5% in 2010, it fell to 68.3% in 2013. The number of people in or at risk of poverty or social exclusion was 118 million in 2010, but 124 million in 2012. Crucially, these aggregate figures hide enormous disparities between Member States.

It is obvious today that while some countries like Germany are enjoying economic growth and record-high employment, many other countries are struggling with economic stagnation or continued contraction, with unemployment rates near or over 20% and with declining household incomes and rising levels of poverty.

This graph shows the divergence in unemployment rates, to give just the most obvious example.

But in adjusting countries, where economic growth is negative and unemployment is on the rise, poverty has also risen significantly.

Demand for the services of food banks has grown and many young people lacking opportunities choose to emigrate, often to other continents, which of obviously results in a loss of human capital for Europe as a whole.

Why did Europe become so divided in terms of economic and social outcomes?

A key factor has been the design of our Economic and Monetary Union, with monetary policy being centralised at the European Central Bank, but fiscal and structural policies being predominantly under the responsibility of national governments, without there being any euro zone budget in place.

This means that instruments that were historically used to limit the social impact of crises were not available any more, while there has been nothing newly introduced to replace them.

For us this also means that the Europe 2020 targets cannot be expected to be achieved, not even with big delay, when so many governments in Europe lack the ability to conduct economic policies that could generate sufficiently strong economic recovery.

What I would like to highlight, also in relation to the 2014 European elections, is that the sovereign debt crisis since 2010 and the fiscal consolidation strategies implemented in response to it have substantially weakened the power of the welfare state.

In particular, they have weakened the effectiveness of so-called automatic fiscal stabilisers at the national level, which basically means the ability of a state to immediately act in a countercyclical way as tax revenues drop and social expenditure increases.

Until 2010, national budgets were able to counter the economic downturn. Since 2010, many national governments have lost this ability and austerity policies in many cases actually aggravated the economic crisis.

The point is that macroeconomic instability in Europe stemmed predominantly from the incomplete design of the Economic and Monetary Union: troubled countries could not unilaterally devalue, could not call upon a lender of last resort and could not count on any fiscal support from other Member States that would enable them not just to survive but to stimulate economic recovery.

The only mechanism through which troubled countries inside the EMU have been able to restore economic growth is so-called internal devaluation, i.e. cost-cutting in both the private and public sectors by shedding labour and reducing wages. Internal devaluation has resulted in high unemployment, falling household incomes and rising poverty – literally misery for tens of millions of people.

Moreover, it is a recipe that cannot be applied in many countries at the same time because it undermines overall demand. If many countries cut their wages and lay off workers, nobody wins in terms of relative competitiveness but everybody loses.

At a time when Europe would need to invest significantly in its human capital in order to cope with the growing demographic challenge, we have allowed a financial crisis to push millions of people out of work and into poverty. This has damaged Europe's economic potential and social cohesion for many years to come.

Now that we have analysed the economic and social dynamics within the EMU 1.0, you may ask: Why and how was this system created?

3. The construction of the EMU and its design flaws

Ladies and Gentlemen,

The EU has from the start been aiming at ever closer union. However, the need for and the possibility of a single European currency was first considered when the Bretton Woods system was coming to an end.

In 1970, the Werner Report proposed a plan to establish currency union within a decade, without a budget and without a central bank. It was based on the conviction that such elements could come later and that the monetary union would act as “a leaven for the development of political union, which in the long run it cannot do without”.

The first actual attempt at monetary policy coordination, the so-called ‘snake in the tunnel’, lasted only from 1971 till 1973. Subsequently, two high-level reports prepared for the European Commission warned that a common budget as well as stronger political union would be needed for a monetary union to work.

The Marjolin Report of 1975 actually proposed a “Community Unemployment Benefit Fund”.

The MacDougall report of 1977 estimated that a monetary union between EEC Member States would need a shared budget to the tune of 5 or 7% of Community GDP in order to function well.

The proposal was in fact that regions with a current account surplus should contribute and deficit regions should draw down funding, as normally happens within nation states, so that social cohesion and aggregate demand could be maintained within a monetary union.

However, in the European Community of the 1970s, agreement on such a large budget was impossible. The European Monetary System launched in 1979 then collapsed in September 1992 under the weight of speculative attacks.

The Economic and Monetary Union was enshrined in the Maastricht Treaty of February 1992, foreseeing the creation of a European Central Bank and launch of a single currency at the end of a convergence process. It did not foresee a central budget: it was assumed or hoped that individual national governments would always be able to conduct the right fiscal policy for their country, by tightening budgets in good times and accumulating debt in bad times.

By comparison, another monetary union was being created in Europe in the early 1990s that was set up quite differently. It was the monetary union between East and West Germany, which was from the beginning founded on the acceptance of lasting fiscal transfers. Public spending would help to keep up aggregate demand in East Germany when many companies became uncompetitive under the Deutsche Mark and many working-age people moved to the West.

Certainly, Germany is a country while Europe is not a country. But it is still remarkable that two very different monetary unions were launched in Europe nearly at the same time: one complete with political union and a very strong fiscal pillar, and the other one incomplete, with no collective mechanism for economic policy-making and no fiscal capacity at all.

The social implications of the EMU's rules on national deficits and debts were considered as secondary, also because the EMU 1.0 was designed largely by central bankers. After two decades of monetary instability in Europe, it was assumed in the early 1990s that political stability and better economic performance in Europe require first and foremost monetary stability. We know now that the price for monetary stability has been fiscal and social instability.

Did Helmut Kohl, François Mitterrand, Jacques Delors and other founding fathers of the EMU not understand that the incomplete structure they were setting up would be prone to crises? Was it not reckless for them to launch an irreversible monetary union without a proper fiscal pillar? Did they not care about the possible social consequences of macroeconomic adjustment based predominantly on internal devaluation?

In fact, political leaders in the early 1990s were far from ignorant about the importance of social cohesion, but they believed that it could be essentially achieved through legislation and social dialogue.

As the Single Market was being constructed since the mid-1980s, an important body of labour law was developed, with close involvement of social partners.

For Jacques Delors and other leading politicians at the time, the social dimension of the Single Market and of the EMU was predominantly about preventing a race to the bottom in employment and working conditions.

However, there is little we could achieve today through further employment and social legislation at the European level, particularly when it comes to dealing with asymmetric cyclical shocks that by definition affect only part of the monetary union.

We can call this ‘the Delors paradox’. On the one hand, we introduce social legislation to improve labour standards and create fair competition in the EU. On the other hand, we settle with a monetary union which, in the long run, deepens asymmetries in the community and erodes the fiscal base for national welfare states.

Social legislation cannot make up for the absence of a euro zone budget or a genuine lender of last resort. Delors' idea of Social Europe is unfortunately offset by Delors' model of the EMU.

That is not to say that the EMU was fundamentally unfair at the time. To borrow a famous metaphor from John Rawls, the EMU 1.0 may have well been designed behind a veil of ignorance (or Schleier des Nicthwissens).Nobody knew exactly how well the euro would work for any particular country. All countries were also given ample time to meet the convergence criteria and the poorer ones received support from the newly established Cohesion Fund.

However, it is quite clear today that the EMU’s functioning in practice has not been fair. We know now that the EMU 1.0 contains an inherent bias towards internal devaluation as the prevailing if not the only mechanism of adjustment to economic downturns.

Due to the absence of a lender of last resort or a common countercyclical budget, financial market panic can force EMU countries to adopt austerity policies. We know that such developments have a particularly negative impact on workers, the unemployed and everyone whose quality of life depends on public services.

With such asymmetric allocation of costs and benefits, the EMU is not functioning well and its sustainability cannot be taken for granted.

In the history of the European Communities, two attempts at monetary cooperation have already broken down because the system was not resilient enough. The existence of a single currency in itself should not be seen as a sufficient guarantee against such a breakdown to happen again.

New pillars, new stabilising mechanisms are needed in the architecture of the EMU.

What should therefore be done in the wake of European elections with protest votes at record high is a re-run of the fairness test for the EMU. We should again put on the Schleier des Nichtwissens, forget about the individual strengths and weaknesses of individual countries and adapt the EMU in a way that it can be trusted to function equally well for each Member State and each social group.

4. The reconstruction of the EMU and the importance of automatic fiscal stabilisers

Ladies and Gentlemen,

The euro zone crisis triggered more coordination and more solidarity from the very start. First the EFSM and EFSF were put together and then a permanent European Stability Mechanism was established as a permanent tool able to bail out various smaller euro zone countries.

A banking union has recently been agreed, including a framework for the restructuring and resolution of large banks that would otherwise rely on weak sovereigns for their recapitalisation. It is based on the bail-in principle, so that creditors of failed banks get burnt earlier than taxpayers.

But does this mean that the core weaknesses of the EMU have been addressed? I do not think so. The main design flaws, namely the absence of a lender of last resort and of common fiscal capacity are still present.

As President Barroso said, we have reached the limits of European Union based on the Single Market and an incomplete monetary union.

Any proper strategy for economic recovery in Europe needs to have reconstruction of the EMU at its core. One aspect of such reconstruction should in my view be a widening of the ECB’s mandate so that economic growth and employment are on a par with price stability. But what is particularly evident is that the EMU 1.0 needs to be upgraded through the establishment of a reliable mechanism for cross-country fiscal transfers.

Probably there are many who believe that we do not need to do anything more than what has been agreed so far, i.e. not to undertake any further integration beyond strengthened coordination of national economic policies and the launch of minimalist banking union.

However, even with strong policy coordination and banking union, the EMU is not resilient enough to cope with economic shocks in a way that would be acceptable from the viewpoint of the EU’s treaty objectives such as balanced economic growth, full employment and social progress.

When I advocate fiscal transfers between euro zone countries, I do not do it only out of concern for the employment and social situation. The current functioning of the EMU is suboptimal first of all for economic growth – for all Member States without exception.

That said, employment and social outcomes are probably the decisive factors for the sustainability and legitimacy of the monetary union.

The ‘social dimension of the EMU’ therefore has to be strengthened. This expression has been somewhat misleading, since the point is not to bring the competence over social policies to the European level, but rather to reach a higher level of protection from financial market failure and rebalance the economic growth potential of participating Member States. The starting point is to better reflect on employment and social outcomes and on ways to ensure convergence within the EMU.

The creation of a fiscal capacity at the level of the EMU is clearly foreseen in the Blueprint for a deep and genuine EMU, which the European Commission put forward in November 2012. The subsequent report of the Presidents of the European Council, the Commission, the ECB and the Eurogroup specifies that such fiscal capacity should help the EMU to be able to absorb economic shocks.

A number of options for automatic fiscal stabilisers at the level of the monetary union have been proposed in the expert literature over the past few years. What most of them have in common is their focus on mitigating short-term cyclical downturns occurring in parts of the EMU as opposed to compensating for structural differences among the EMU economies.

The idea of EMU-level automatic stabilisers is to be able to respond to asymmetric shocks or endogenous pressures in the monetary union and to uphold aggregate demand in the short term, before factors of production can be reorganised in the affected economy and recovery can resume.

In other words, the point is to maintain enough spending during a downturn, before failed companies are turned around or replaced by new ones and before workers who lost their jobs can find new employment.

Governments will never be able to offset an economic downturn completely, and economic restructuring will need to happen anyway, but the point is to minimise the overall economic and social damage.

The source of countercyclical financial support should be countries that perform above average at that moment, i.e. where the national exchange rates and interest rates would have been higher than the ECB rates and where the risk of rising inflation is bigger than the risk of rising unemployment.

Focusing fiscal transfers on mitigation of asymmetrically distributed cyclical shocks means that over the long term, all participating Member States are likely to be both contributors and beneficiaries of the scheme.

But even if the balance is not exactly zero after a certain period of time, the effect that economic crises would be less deep and last less long would be good for all countries.

My proposal is far from being a technical one. In fact, it is about providing a rule based response to a key concern expressed by citizens in last month’s European elections.

People’s disillusion with the EU as well as with national politics stems mainly from the declining ability of national governments to deliver what citizens ask from them: counteract the economic crisis, provide good-quality public services and ensure good socio-economic opportunities for everyone. As I said, the welfare state has been substantially weakened over the past five years. Europe’s monetary union with strict rules for national fiscal policies is often seen as a constraint rather than a solution.

However, the fact is that in order for Member States to gain greater autonomy and ability to strengthen their economies, they will need more European integration, particularly by completing the monetary union with a fiscal capacity. We can call it the ‘2014 paradox’.

What I am arguing for is not ‘more Europe’ for its own sake, but a mechanism that strengthens the autonomy of each Member State precisely by stabilising the EMU.

Only through an automatic mechanism of short-term support to countries in crisis can the euro zone and its individual Members regain some of the lost ability to shape their own economic and social destiny.

5. Key questions about a basic European unemployment insurance scheme

Ladies and Gentlemen,

The best idea for an EMU-level automatic fiscal stabiliser is in my view a scheme where fiscal stimulus is provided to countries of the monetary union based on developments in their short-term unemployment.

Unemployment is an indicator whose big advantages are that it very closely follows developments in the economic cycle, it is easily understandable, and it is easily and promptly measurable.

The best arrangement, as I see it, would be to define basic European unemployment insurance, which would replace the corresponding part of national schemes. The levels of the contribution and of the benefit should represent a relatively low common denominator between the rules of the various national schemes.

The scheme should clearly focus on cyclical unemployment caused by a drop in aggregate demand, as opposed to structural unemployment caused by skills mismatches, less efficient labour market institutions and the like.

For example, the basic European unemployment benefit would be paid only for the first 6 months of unemployment and the amount would represent 40% of the previous reference wage. These exact parameters would of course need to be discussed, depending on the desired macroeconomic stabilisation effect.

The eligibility conditions should not be too strict, so that also workers in short-term or part-time jobs could contribute and qualify for corresponding support. But in any case there would be clear conditionality in terms of the job-search and training effort.

Each Member State would be free to levy an additional contribution and pay out a higher or longer unemployment benefit on top of this European unemployment insurance. What the European scheme would do is to ensure a fairly basic standard of support during short-term unemployment.

Crucially, this basic European unemployment insurance would help EMU Member States to share part of the financial risk associated with cyclical unemployment.

Citizens would directly benefit from EU solidarity at times of hardship, and Member States would be required to upgrade their employment services and labour market institutions to the best EU standards.

The jobseekers would continue to interact with national authorities (public employment services). However, every month these national authorities would send to the European fund the basic contribution from all their employed workers.

Likewise, every month the European fund would pay to the national authorities an amount corresponding to the sum of all the basic European unemployment benefit payments to be made that month in the country.

In principle, each country would therefore make every month an overall contribution and receive an overall payment from the European scheme. In practice, these two could of course be offset and only the net balance would be paid.

The overall volume of such a basic European unemployment insurance scheme would be around 1% of GDP, mainly depending on the exact parameters such as duration and level of the benefit or the eligibility conditions. Of course, the net transfers from or into any particular country would be smaller, because drawdowns would be offset by contributions and vice versa.

The question who is a net contributor and a net beneficiary at any given point in time should be to some extent secondary. Sharing a currency really in many ways means sharing a destiny, and the euro is meant to be irreversible.

However, it is understandable that national politicians would probably want to make sure that their country is not permanently a net contributor, and especially that there are no free-riders in the scheme, i.e. countries that would be net beneficiaries most of the time.

The risk of ‘lasting transfers’ could be minimised through two mechanisms, which already exist in federal unemployment insurance systems elsewhere in the world, namely experience rating and clawbacks.

Experience rating means that the contributor vs. beneficiary profile of each Member State in the scheme is monitored, and the contribution or drawdown parameters can be adjusted at the beginning of each period so as to bring the Member State closer to a projected balance with the scheme over the medium term.

Clawbacks, on the other hand, enable to neutralise net transfers ex post, meaning that Member States are allowed to be net beneficiaries for several years, but then their contribution and/or drawdown rates are modified so as to compensate for the net transfers that had occurred.

Similar safeguards feature for instance in the US federal unemployment insurance system. They limit its macroeconomic stabilisation power to some extent, while maintaining the basic function as an automatic fiscal stabiliser against asymmetrically distributed cyclical shocks or endogenous pressures in a diverse monetary union.

Very importantly, an automatic fiscal stabiliser in the form of basic European unemployment insurance could have a meaningful macroeconomic effect in counteracting a cyclical downturn. It would have a few basic parameters agreed in advance, and its functioning would be entirely predictable and calculable on the basis of these clear rules.

The parameters could be adjusted in response to actual experience, but governments, citizens as well as financial markets would be able to rely on the principle that an EMU country undergoing a cyclical downturn receives a limited fiscal transfer to support the cost of short-term unemployment.

The predictability, limited volume and limited duration of fiscal transfers would make a basic European unemployment insurance scheme a much safer option than various scenarios for mutualisation of euro zone countries’ sovereign debt.

The fact that the scheme would trigger countercyclical transfers automatically and immediately is also a major advantage compared to bailout programmes or bank rescues. These are always surrounded by uncertainty which pushes up their cost. The basic European unemployment insurance would be relatively cheap precisely because of its automaticity.

Conclusion

Ladies and Gentlemen,

Crises have always put pressure on the European integration process and Europe has always managed to find a way forward. On the other hand, it is true that all our problems cannot be resolved at a stroke of a pen.

As Robert Schuman famously put it in his declaration on 9 May 1950:

"Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity."

As regards solidarity, the eminent philosopher Jürgen Habermas has issued passionate calls for it in the period of the EMU crisis. Over the past years he has repeatedly reminded us that solidarity is not charity; it is support provided to a fellow in difficulty, based on confidence that it may be reciprocated in the future.

Solidarity is support provided because of a will to build a common future together. Refusing solidarity means giving up on building a common future.

The idea of basic European unemployment insurance represents an example of such forward-looking solidarity. It is much better to help each other out in times of crisis than to put the fate of the union and of its individual members at stake whenever a financial crisis occurs. Sharing short-term fiscal risks in a monetary union is what I would consider a proper social contract.

The point is to make the EMU work in such a way that it allows every Member State to grow, even if exogenous factors or endogenous pressures happen to put it at a momentary disadvantage. A scheme of fiscal transfers that helps mitigate asymmetric shocks in the short term can help achieve precisely that.

There is a lot to learn from the years of sovereign debt crisis in Europe and also from the recent EP elections.

We need less muddling through and more systemic reform for a proper European recovery.

The EU cannot live together for too long with the risk of monetary breakdown, which also would bring with itself social and political breakdown.

If our Economic and Monetary Union is meant to be irreversible, it must also be fair and it must be based on solidarity. We must pay attention to the employment and social outcomes, and try to prevent lasting divergence.

For that, an automatic fiscal stabiliser is needed at the euro zone level.

Either we give up the dogma of ‘no fiscal transfers’ in the EMU, or we give up the European Social Model and everything the Europe 2020 Strategy ever stood for.

Thank you very much for your attention.


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