Risk sharing problem in the EU

 The lack of effective risk sharing mechanisms among the member states of the Euro has imposed high costs on some member states, like Spain, and has deepened the crisis according to the most pessimistic views. 

Two options to solve the lack of effective risk sharing mechanisms have been suggested: a basic common European scheme and a reinsurance fund.  

The first one, a common European scheme, tries to gather national schemes and make an inter-national European scheme for a specific period. It requires non-permanent transfers for cross country risk-sharing and issuing debt if it´s necessary for the stabilization. But two problems arise: firstly, countries schemes should converge and not all of them may be able to change their national systems. Secondly, this kind of insurance is efficient in the short-term unemployment (cyclical) but once the specific period of European insurance ends, unemployment will remain an issue for each country. This European common scheme can be financed by a share of employers' and employees' contributions to their social security. All simulations suggest that a European scheme would absorb less than 1% of countries’ GDP. 

The second one, a reinsurance fund, consists on making a reinsurance among countries that would be employed, fundamentally, in periods of crisis. This option is more respectful with national systems, so no changes are required, and it seems easier to be applied. Here, the problem has to do with efficiency; we don´t know where to fix the trigger to act and if we don´t act in the right moment, we can become inefficient. 

But, what if I had to give my point of view? Well, I would definitely discard both options. 

As I commented before, the common European Scheme proposed doesn´t solve the long-run unemployment, so it doesn´t look like the best solution. I should also mention the problem of changing all national insurance systems; it would require a considerable harmonization of the regulations of the labor markets and the welfare systems of the Eurozone Member States, what seems to be very unlikely. In addition, a full fiscal union could lead countries to large transfers, which could be very risky for the common economy. And last but not least, the risk of the Moral Hazard (in economics, Moral Hazard occurs when someone increases their exposure to risk when insured). Governments of recipient countries could choose not to take unpopular measures like cuts in education services or pension reforms, if it knows that this will be compensated by increased financial support from the federation. 

Let´s think about a car insurance. We know that after an accident, the insurance premium raises, and this makes that the insurance company recovers the money corresponding to the losses of the accident along time. Something similar could be applied in our wide unemployment system. 

For example, let´s say that a small percentage of our GDP goes to some funds (it´s difficult to estimate a concrete %, so I assume that it´ll be less than 1% of countries’ GDP): a half to a national fund and a half to a common European fund. We´ll use our national fund to solve “light” problems and the European one when it becomes strictly necessary, and here is where the idea of the introduction of a trigger returns. In our case, the indicator chosen for the trigger is the unemployment rate (I don’t have the knowledge to know where to set the trigger: 15%? 20%?) Those countries hit by a big economic crisis and an increasing unemployment rate (car accident), will rise the quantity contributed to the common European fund and once the crisis ends and the country starts to work on its own again, quantities destined to national and common European funds will progressively get back to the initial 50-50.  

In conclusion, this system could be a good option not only because of its low cost but also for its stabilizing power without the necessity of the convergence of the labour markets of the Member States.