On June 23rd Great Britain’s voters have decided to leave the European Union. The dust of this earthquake has not settled yet. The EU now faces its biggest challenges: where do we go from here? And, will the EU itself survive?

 

Whether and when the UK will invoke Article 50 is yet to be understood. According to the latest news coming from Brussels, no formal or informal negotiations with the EU will start until the UK will invoke Article 50. This makes any analysis, both political and economical, on what the future of the relationship between the EU and the UK will look like no more than mere speculation. However, the lesson to be learned from Brexit is something that shall not be forgotten.

 

Ongoing struggle to save Europe seems to be confined within two camps. On the one hand, we have those people who are arguing for incremental adjustments in the European legislative machine. They do not advocate for  changes in the treaties. They are also skeptical about introducing legislations that could potentially signal a willingness to increase political and economical integration. On the other hand, we have those who would like to use this opportunity (i.e. Brexit) to foster a drastic change on how the European Union works. This means to create the prerequisite for a stronger Union by promoting upward convergence.

 

Who will win this battle is yet to be seen. And the prize at stake is very high. As this were not enough, results of the negotiations currently taking place among the European leaders will most likely shape the European Union path for the foreseeable future. That is why there hasn’t been a better time to push for the implementation of a courageous European reform agenda.Many have called for reforms in the structure of the European Union itself. Particularly of the  Eurozone governance. Some of these reforms include: i) the institution of a common fiscal framework; ii) the mutualisation of debt (eurobond, and banking union); iii) harmonization of capital taxation to reduce distortion among member states; iv) change the mandate of the European Central Bank (ECB), from its single minded focus on inflation to a broader mandate including growth, employment, financial stability.

 

In the aftermath of the Brexit, the European leaders are called into action on at least two different dimensions. First, they need to dissolve uncertainty, both regarding the exit of the UK and its economic implication. Second, they need to transform the political discourse within their member states. This means to neutralize populist political parties by showing people a clear vision of where the European project will lead them, and why they should follow it. This means to negotiate in the European political arena an ambitious agenda for reforms.

 

One point on this agenda should  be the so-called European Unemployment Benefit Scheme (EUBS).

 

The different economic crises, which have affected the Eurozone since 2008, have left the Continent with high level of unemployment. Unemployment has gradually decreased, but it remains above 2008 levels. According to the latest figures, unemployment has reached 8.7% in the European Union as a whole, and 10.2% in the Euro area (EA). Long-term unemployment, while declining of 0.6% points, if compared with the last quarter of 2015, is still at 4.3% of labor force. In other words, despite efforts to get a job, around 10.5 million people have been unemployed for more than one year. Long-term unemployment is almost 50% of the total unemployment.

 

It is still a subject of debate whether unemployment in the EU has become structural or whether it is still the short-term effect of the economic crisis. In any case, if a Member State is affected by slower growth for a lengthy period, it is likely unemployment to be a problem in the long-run. To this phenomenon,  member states have dealt differently. Different responses to the same problem have slowed upward convergence among member states. As this were not enough, they have favored the erosion of the European project by highlighting the negative effects of austerity programmers for economic growth.

 

However, there have been many attempts to steer the wheel of the European reform agenda  towards  more promising directions. The creation of an EU Unemployment Benefit Scheme (EUBS) is certainly one of those. The European Commission is currently studying different models of the EUBS. Some of those options will be presented on June 11 in Brussels in a conference co-organised by CEPS, the Slovak Presidency of the Council of the EU, and the European Commission. The three main alternative are briefly described below.

 

1) The first option entails the creation of an automatic income support mechanism, which would automatically redistribute resources to every eligible unemployed person in the case of major economic downturns, defined on the basis of the output gap. It would apply to short-term unemployed (no long-term unemployed). This system could be funded by a dedicated labor taxation.

2) The second option is analogous to the insurance system. In this case, the insured would not be the worker but national insurance funds. This model would be active when unemployment in one of the member states reaches levels that are higher than normal. The insurance would be funded by member state contributions. Such scheme would make a stronger and more visible impact during crises, while lacking a role in case of more fluctuations.

3) A third solution would be a partial pooling of unemployment benefit systems. It would entails some sort of common minimum standards across countries (minimum replacement rate, and duration). The minimum standard would not be the maximum, and countries could always top up payments from the common pool as well as extend coverage from their own resources. This model would have a stabilization effect, while incorporating a symbolic solidarity across states.

The three  different models described above would have different consequences in terms of frequency of transfers, definition of final beneficiaries, and need for harmonization and governance, as well as the sourcing of the model.

 

In order for the EUBS to be effective, it is important to decide what form it should have.  The final outcome of this political negotiation will tell us whether European leaders have understood the needs for change as a result of the Brexit.

 

The EU unemployment scheme could be a game changer for the EU. It would help member states to deal with the negative effect of unemployment, while showing people the importance of standing together. It would demonstrate that the EU is attempting to address some of the issues that are raising together with Brexit. Such as the pressures from euroskeptics who have repeatedly accused the EU to be useless at best. The EUBS would make a robust  case for the importance of a United Europe.

 

At the same time, it would provide a counter-cyclical stabilization mechanism to the economy.

 

From a macroeconomic stand, stabilization means dealing with asymmetries and cyclicality. Since perfect ex-ante solutions (through policy coordination) cannot be developed, it seems that an ex-post solution should be studied. This means to develop a fiscal capacity for economic shocks absorption. By doing so, countries in the European Area could overcome coordination failures and individual country’s crisis budget constraints.

 

For today’s debate, it is important to notice that this mechanism could have not only a great economic impact, but also can it strengthen the Union at the social and political levels. It would show citizens that European solidarity do exist in a visible and tangible way. The EUBS would introduce a mechanism for permanent/long-term redistribution. It might also help to set shared standards across member states.

 

A system of this sort would also help liberating labour mobility across the EU. This means to put an end to the scaremongering often heard from populist parties – namely that EU mobile workers are welfare shoppers who take advantage from other countries resources.

With an efficient EUBS, it would not matter the country from which a worker gets his or her unemployment benefit.

 

 

The idea of one European Unemployment Benefit Scheme, if properly designed, could help countries experiencing a severe recession to recover faster. It would also decrease the levels of poverty and income inequality for which the EU has been often blamed.

 

If Europe is to survive, it must acts now, swiftly and decidedly. Holistic and comprehensive policy proposals such as the EUBS could  help the process  of transformation of European politics. Leaders should understand that playing the same old game with different cards won’t bring them success this time, nor it would serve the interest of European citizens. It is time to change the game all together.