When it comes to specific details in the monetary union, key factors are an integrated economy with fiscal transfers and labour market flexibility. His remark that transfers such as equalization and the health transfers help “stabilize the impact of asymmetric shocks” and “Fiscal transfers are thus an important element of a successful monetary union” was for me an interesting perspective by a central banker on the links between federalism and monetary and fiscal policy. With his talk of fiscal transfers and the need for pan-European employment insurance, it would appear that from his new platform as the head of the Bank of England, Mr. Carney will embark on a Canadian mission civilisatrice to spread the benefits of Canadian-style fiscal federalism in Europe.
As Carney remarked in his address: “In the medium term, one of the building blocks of European fiscal federalism could be a pan-European unemployment insurance benefit scheme built on a common European labour market. This would reduce impediments for those looking across the continent for work, while providing a cross-country automatic stabilizer.” Of course a pan-European unemployment insurance system means a common set of rules across Europe particularly when it comes to things are eligibility and generosity of benefits. Well there is some room for flexibility in terms of benefit levels and eligibility requirements even within a federation – as is the case in Canada- there are some major differences in the current European system that makes a common system a bit of a challenge.
Here is an example of the challenges facing anyone who wants a common employment insurance system in Europe – the wide range in benefits both in terms of the length of time you can obtain them as well as their level. For example, in France: “The duration of benefit payments depends on the period during which the jobseeker has been registered with the scheme and their age. Benefits are paid for a minimum period of 122 days and a maximum period of 730 days for private-sector employees aged under 50, and 1,095 days for employees aged over 50.” In other words, in France, if you lose your job, you can get replacement income for as much as three years in over age 50. The German system has benefits that vary more according to age and length of employment prior to losing your job and are less generous with the maximum being 832 days for workers aged over 54 years.
The differences in systems also come to the fore if one compares the available OECD numbers for unemployment insurance benefits (data last updated July 2012) as a percentage of previous earnings in 2009 for an assortment of European countries (See Figure 1, with Canada thrown in for comparison purposes). The percentages range from a high of 52.6 percent in Denmark to a low of 8.3 percent in the Slovak Republic. As for France and Germany, the French system is more generous according to this measure with unemployment benefits at 39 percent of previous earnings whereas in Germany they are 23 percent.
These comparisons are limited and imperfect but they do raise the following question. If we move to a pan-European unemployment insurance system, where will the standard be? Should Germany - which has the most robust economy - set the standard? This is just one small limited example of the diversity within the European Union and the challenges of harmonizing policies within their federal arrangement. European policy diversity makes the diversity of provincial differences in Canada look like a tea party. Mr. Carney has his work cut out for him.