European Journal of Economics and Economic Policies: Intervention

A proposal for a federalized unemployment insurance mechanism for Europe

Leila E. Davis * * and Charalampos Konstantinidis * * and Yorghos Tripodis * *

Keywords: eurozone, unemployment insurance, fiscal transfers


The ongoing crisis in the eurozone, together with growing evidence of structural imbalances, points to a role for new institutions to support a more stable European Monetary Union (EMU) structure. As is well established in the context of monetary union when business cycles are not synchronized, a system of fiscal transfers can support monetary union. Unemployment insurance (UI) is, in particular, a key component of fiscal crisis management. UI supports household incomes during downturns, and also acts as an automatic stabilizer, thereby helping individual countries respond to asymmetric shocks. This paper proposes a ‘federalized’ EMU-level UI mechanism as one program that can contribute to a system of fiscal transfers in the EMU, and estimates the cost of the proposed system under different financing and eligibility scenarios. We find that, under a variety of reasonable institutional parameters, such a system is fiscally feasible with limited reason to expect adverse employment effects in member countries. We conclude that fiscal transfers extended via automatic stabilizers are a productive avenue towards a more stable eurozone architecture.

Author Notes

Corresponding author: Department of Economics, Middlebury College, Middlebury, VT, 05753; email:

Department of Economics, University of Massachusetts Boston, Boston, MA 02125; email:

Department of Biostatistics, School of Public Health, Boston University, Boston, MA 02118; email:

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