Proposal for a Stabilisation Mechanism for the EU Budget

The question of how to give the European Union budget a stabilising function in the event of shocks has long been a concern for economists and economic policy-makers. Our paper proposes a mechanism that is automatic and relies on unemployment figures, similar to the role of automatic stabilisers at the national level. A novel feature of the proposal is that, instead of considering the overall unemployment rate as most studies do in the literature, it uses excess unemployment data. As a result, structural unemployment differences between countries can be discarded. A system based on excess unemployment would not involve the modification of national systems, but would introduce a complementary, top-off system. Benefits are paid in addition to payments through the national unemployment systems and are channelled into a fund set up in advance for this purpose. Annual payments to the fund are made in proportion to GDP. The payment would represent an additional cost for Member States, which could be financed by jointly guaranteed long-term loan.