A Skeptical View of Mechanisms for Business Cycle Harmonization in the Euro Area

By: Karl Brenke in: DIW Economic Bulletin 01/2013.

The European Monetary Union brought with it a standardization of monetary policy and a system of fixed exchange rates. This was accompanied by disincentive effects which, in turn, resulted in serious economic distortions. Proposals are currently being made - not only by DIW Berlin - as to how compensatory payment mechanisms could be used to better synchronize the economic development of the member states in the euro area in future. The present article discusses some of the problems of such transfer systems in detail and, on the whole, evaluates such mechanisms far more skeptically than the previous two articles in this issue. Comprehensive compensatory payment systems are always associated with a risk of resource wastage. Furthermore, these systems can also have undesirable negative effects. The alternative to a compensatory payment system, some form of common European unemployment insurance, is not a workable solution since national benefits already act as automatic stabilizers. Such a move would ultimately only lead to a transfer of competences to the supranational level. This would be accompanied by a harmonization of national unemployment benefit systems and the deferral of control functions to a neutral European authority - and thus, more red tape. Moreover, the introduction of a common unemployment insurance scheme would, at least initially, result in a significant redistribution of resources, which could raise questions about distribution in the donor countries.

A Skeptical View of Mechanisms for Business Cycle Harmonization in the Euro Area (PDF, 124.66 KB)