European unemployment insurance: Finland is paying the price for a lack of transnational solidarity

Deutsch

By Manuel Müller

Unemployment in Finland is soaring. A European unemployment insurance scheme could help now – if it hadn’t been blocked during the euro crisis.

Since the beginning of January, Finland has had the highest unemployment rate of all EU member states. The country’s economic crisis has many causes, including a prolonged lack of innovation, the economic consequences of Russia’s invasion of Ukraine, and a fiscal policy that has weakened domestic demand by cutting social spending.

Although none of these factors is primarily the EU’s responsibility, Finance Minister Riikka Purra (PS/ECR) has repeatedly taken aim at the European monetary union in recent months. In September, she described euro membership as “one of our country’s biggest mistakes”, and in December, she called for “being more outspoken about the euro”.

The main argument behind these comments is that if Finland still had its own currency, its central bank could lower interest rates now. The European Central Bank, on the other hand, is not going to do so, as Eurozone-wide inflation is pretty much on target at two per cent.

Currency areas need automatic stabilisers

This criticism of monetary union is not new. It was one of the main topics of discussion in Europe during the euro crisis just over a decade ago, when Southern European countries were in a similar (albeit even more difficult) situation to that of Finland today.

At the core of the problem are “asymmetric shocks”. A central bank can only set interest rates uniformly across the entire currency area. However, if an economic shock hits one part of the area harder than the rest, the needs of the regions diverge. The crisis region would require lower interest rates in order to encourage investment. In economically stable regions, however, interest rate cuts could lead to investment bubbles. The central bank is thus caught in a “one size fits none” dilemma.

Currency areas therefore require mechanisms to align the economic development of its regions in the event of asymmetric shocks. Within nation states, the most important such “interregional automatic stabiliser” is the common tax and social security system. When unemployment rises, people in crisis regions pay less income tax and receive more from social security funds. Conversely, regions with rising employment see tax revenues increase and social security expenditure decrease. The common budget therefore results in financial transfers from boom regions to crisis regions, aligning economic cycles and enabling the central bank to pursue a consistent monetary policy.

A European unemployment insurance scheme

During the euro crisis, there was a debate about introducing such interregional stabilisers also at the EU level. The main proposal for this was a European short-term unemployment reinsurance scheme: a joint fund into which each member state would pay when national employment was rising, and from which it would receive payments when employment decreased. Several economic research institutes have modelled the effects of such a scheme and found that it would significantly stabilise the currency area – and while there would be high temporary financial transfers between member states, these would mostly balance each other out over the full economic cycle, meaning there would be little or no permanent redistribution.

But although the idea received considerable support from the European Commission and Parliament, many member states – including Finland – vehemently rejected the notion of transnational financial transfers, even on a cyclical basis. Consequently, the European unemployment reinsurance was never formally proposed. While the euro crisis was eventually overcome, with crisis countries suffering severe social cuts, the monetary union still lacks automatic interregional stabilisers.

Time to set aside Eurosceptic inclinations

Had a European unemployment insurance scheme been introduced in the past, Finland would be benefiting from it strongly today. The country is thus paying a price for the earlier rejection of greater European solidarity.

But there is still hope: Other ideas that were also rejected during the eurozone crisis, such as joint European debt, were implemented at a later time. If the Finnish government is serious about “being more outspoken about the euro”, it should set aside its Eurosceptic leanings and proactively put the idea of a European unemployment insurance back on the agenda. The upcoming negotiations on the EU’s next multiannual financial framework offers a good opportunity for this.

Manuel Müller is a Helsinki-based EU researcher and editor of the blog “Der (europäische) Föderalist”.

This article was first published in Finnish as a guest comment in Helsingin Sanomat.

Pictures: Flags: Finnish Government/Lauri Heikkinen, valtioneuvoston kanslia [CC BY 2.0 ], via Wikimedia Commons; portrait Manuel Müller: Finnish Institute of International Affairs/Eeva Anundi [all rights reserved].