This is the first paper that assesses the importance of different stabilization channels of an unemployment insurance system for the euro area (EA). We provide insights into the potential added value of common unemployment insurance as a fiscal risk sharing device which crucially hinges on its ability to provide interregional smoothing. Running counterfactual simulations based on microdata for the period 2000–2013, we find that 10% of the income fluctuations due to transitions into and out of unemployment would have been cushioned through interregional smoothing at EA-level. Smoothing gains are unevenly distributed across countries, ranging from −5% in Malta to 22% in Latvia. Our results suggest that the interregional smoothing potential is as important as intertemporal smoothing through debt. We find that four member states would have been either a permanent net contributor or net recipient. Contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also study heterogeneous effects within countries and discuss moral hazard issues at the level of individuals, the administration and economic policy.
