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We the People, Not the States!

  • The EU should shift from focusing on states to focusing on people. A change in the policy paradigm is warranted and will allow the union to integrate further and overcome the current state-centric challenges.
  • The EU should create a European-wide unemployment scheme to replace the national ones. An EU-wide unemployment scheme will create the first European automatic stabilizer, it will eliminate labor mobility barriers inside the single market, and will be well suited to absorb asymmetrical shocks.

The European Union has become the epicenter of the global ‘coronavirus’ pandemic that ravages the world, already killing over 50,000 people worldwide. It has shut down the global economy, forced hundreds of millions into home confinement and governments to spend money they do not have.

The Southern Europeans are hit particularly hard by the pandemic, with Italy in ongoing total lockdown and with hundreds of people dying every day from the disease. Spain is in a similar situation, just a week behind Italy. In the midst of all this, the European Union seems to be again embroiled in a bitter and highly emotional conflict over financial and monetary matters. The pandemic and the economic recession it (will) produce forces governments to spend money on (a) medical supplies to fight and contain the pandemic and (b) economic stimulus to avoid a significant drop in economic output. Countries like Italy, Spain, and Greece have never truly recovered from the eurozone crisis and their fiscal space is non-existent. This means that they need access to cheap and easy credit to finance both of those immediate needs. The ECB does what it can (and it cannot do a lot) to help by providing QE and maintaining negative interest rates, but that is not enough. There is a stringent need for a fiscal intervention and everyone is aware of this. 

The problem is that not everyone is Germany and Germany does not want everyone else to become Germany in the eyes of the financial markets, so countries like Italy and Spain need to pay a higher premium to borrow money. Italy says that it needs about 50 billion to fight both the pandemic and the economic repercussions of this. As Erik Jones from SAIS Europe was saying during his political economy class, that’s a lot of money for a country like Italy, with its $2 trillion GDP and a debt-to-GDP ratio already very high, at 135%. This is why Italy, together with other 9 countries, asked the EU to issue a collective ‘coronabond’ to borrow money on the financial markets at a very low cost, close to zero, which should be repaid very far in the future. Obviously, the Northern Europeans, particularly Germany and the Netherlands, answered with a very strong and emphatic nein. I am not gonna discuss the various details and arguments that each side in this debate makes in support of their position.  Instead, I want to look at the underlying premise that permeates this entire conflict: the state as the unit of analysis. 

In this debate, the state is the unit of analysis and every solution refers to state problems and ways of making insolvable states solvable again. This creates a permanent conflict between the Northerners and the Southerners. The Northerners cannot be seen bailing out the Southerners and encouraging moral hazard, and for the Southerners, which cannot accept to be seen, again, as subservient to Germany, thus are bound to refuse the strict conditions that come with getting money via existing frameworks (ESM). Why not go a level of analysis lower and provide European-wide solutions that target the people, not the states, and thus diminish the pressure on state coffers while at the same time enhance European integration?

Bailing out states does not even need to be on the table if the EU builds for itself a European-wide framework of automatic stabilizers and social transfers that circumvents the states, thus eliminating the moral hazard dilemma of the Nordics but still providing economic assistance to the Southerners. If we look at the United States, which in many ways is very similar to the eurozone, one of the mechanisms that make its monetary union functional is its ability to provide federal social transfers which act as automatic stabilizers. Why not create a European-wide unemployment scheme to replace the national ones?

The European Commission is currently proposing a €100 billion re-insurance unemployment scheme to cover the costs directly related to the creation or extension of national short-time work schemes. This program could be supplemented with a European-wide unemployment scheme which would replace the national programs and be made permanent. It would become the first European-wide automatic stabilizer.

A European-wide unemployment scheme will

(a) Shift the burden of paying the huge costs associated with the unemployed during recessions at the European level.

(b) Allow for smooth social transfers from less-affected regions of Europe (i.e. North-Western Europe) to more affected regions (i.e. Southern Europe).

(c) Be less politically problematic because an EU agency would manage the funds and its payments (no moral hazard).

(d) Will increase labor mobility in the EU; laborers would no longer be required to live and find work in the country where they receive unemployment benefits. 

A European-wide unemployment scheme will also effectively absorb asymmetric shocks in the eurozone and thus increase the resilience of the monetary union when exposed to exogenous shocks. 

The EU has the chance to change the entire logic under which it operates and to put the European people at the center while simultaneously reducing the many dilemmas and unresolved issues of the last decade.

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