A European Unemployment Benefits Scheme: The rationale and the challenges ahead

This paper aims to frame the debate on a European Unemployment Benefits Scheme (EUBS), as a shock absorber for EU economies, around its origins on the one hand, and its most controversial aspects, on the other. The paper focuses on several key aspects of the EUBS, the first being the options for financing the scheme. This can be divided into those requiring the imposition of an ad-hoc tax in member countries and those relying on general contributions from these countries, which can in turn be financed in various ways. Second, it focuses on the extent to which harmonisation of current national unemployment benefit schemes would be needed. Harmonisation implies changing national legislation and practices, which creates political and administrative difficulties. Third, the study examines the problem of schemes generating regular monetary transfers from certain countries to others, and the associated problem of moral hazard. There are two broad ways to solve this problem: ex-ante or ex-post balancing. Fourth, it discusses which countries should join the EUBS. There are arguments for limiting membership to euro-area members, or for extending it to the entire European Union, but participation should in any case be mandatory. Finally, it reviews the costs of the various forms of EUBSs proposed in the literature, concluding that they tend to stay below 1% of the member countries� aggregate GDP. This paper constitutes the first paper prepared in the context of a research project on �The Feasibility and Added Value of a European Unemployment Benefits Scheme�, commissioned by DG EMPL of the European Commission and carried out by a consortium of researchers led by CEPS. It is re-published by CEPS with the kind permission of the European Commission and can also be downloaded from the Commission�s website.