Money for old (Eu)rope

During the second weekend of May 2010, EU Finance Ministers met in Brussels to discuss the impact of the Greek debt crisis within the eurozone. Early on Monday 10th May, it was announced that after 11 hours of discussion, an agreement had been reached on a package to defend the euro and eurozone economies.  

The 16 countries that use the Euro will have access to the newly created European Financial Stability Mechanism – 440bn euro of loan guarantees, with the European Commission offering 60bn euro to support member states experiencing “difficulties caused by exceptional circumstances beyond their control”. In addition, the IMF has agreed to contribute a further sum of at least half the EU’s contribution – expected to be around 250bn euro. These huge amounts of money are separate to the 110bn euro loan package to be given to Greece, agreed on Friday 7th May, and backed by the EU and IMF.

As is the nature of these things, the exact details of the talks are not known. But having watched various updates on TV, the world noted that the Finance Ministers were in each other’s company all weekend. This was deemed necessary by the plunge in European, US and Asian stock markets during the second week of May, based on fears that a debt default by Greece could paralyse the world’s financial system – just like the collapse of Lehman Brothers in 2008. The race against time was to allow the world’s financial markets to bounce back on Monday morning, with Europe providing a united fiscal front. Bounce back they did; at midday in London, the FTSE 100 share index was trading up 255.5 points since opening, at 5,314. Yet the calm brought to the world’s stock markets is a sideshow; the more pressing concern of the loan guarantees is to prevent the crisis in Greece spreading to other eurozone countries with high public debts and low economic growth, most notably Portugal, Spain and Ireland.

Toward the end of May, market reaction to these defensive actions can best be described as ‘not too negative’, although currency markets have remained uncertain. Only time will tell what will become of them, as indeed what will become of the Euro itself. But in the coming years, it’s pretty certain that the European Community will have to confront another financial crisis, and this is a crisis that dwarves these current loan figures – its OAPs and the impact this has on each country’s economy.  

Perfect demographic storm
Europe has a rapidly aging population, yet its birth rates are low. The baby∞boomers post∞Word War II are now considering retirement, meaning a large number of elderly people to care for,  but with less revenue to pay for state pensions. Take Italy for example; one in five Italians is a pensioner, and by 2024, the country is projected to have a million over the age of 90. By 2030, its workforce will be 16 percent smaller than it was in 2005. Europe wide, at the moment, there are four people of working age to support every pensioner. In the coming decades, this will decrease to only two. Add the fact that life expectancy throughout the eurozone is expected to increase by more than six years for men and over five years for women until 2050, and it’s not difficult to see that these impacts on household incomes in old age (so too the increased amount that governments will have to pay in pension and care costs) are largely understated and under-stressed. As a final blow, in many European countries, people are not saving enough for their retirement.

Most European Member States have a three pillar pension model in place. However, due to the diversity of different retirement systems, there is no common model of EU pension structure. For an area that operates with one currency, allows its citizens to cross to other member states freely, and has common business and political goals, to me, this seems short-sighted on a policy level.

That is not to say that various economic and demographic research bodies within Europe, including member state pension fund bodies, are not trying to highlight the problems that different structures, and indeed the overall aging population, could have. Yet the simple fact is that in the short term, pension reforms often have a negative effect on the government budget, and the benefits of such reforms only become visible years after the government implementing them has been voted out of power. The long-term improvement of structural debt will never really be a political priority until it has to be, and for pensions, that always means a difficult battle-plan to put in place.

The austerity measures to be implemented in Greece demonstrate this situation perfectly.  After borrowing heavily and spending without worry, the Greek government now plans to freeze public sector worker’s pay (a public sector which has doubled in size during the boom years), cut civil servant’s benefits and increase its sales tax and fuel duty. The country’s pension gap currently stands at ¤4bn for 2010, while its budget deficit is 13.7 percent of GDP – more than four times higher than eurozone rules allow. This resulted in swift pension cuts to try and save the country’s ailing retirement system from collapsing. The reforms include cuts to pension benefits, the introduction of penalties for early retirement (six percent of their pension for every year taken early) and a reduction in the formula to calculate pensions. Hard pills to swallow, but completely necessary. Ireland, Portugal and Spain will take note.

Member States who reformed their pension systems in the 1990s serve as good examples (most notably Sweden after their banking crisis of the early 90s); there were short term negative impacts on State budgets due to less inflow and constant outflow of pension payments; but this sacrifice was for long∞term sustainable state pensions and reductions in government debt burdens.

Now I’m not writing to say that EU Finance Ministers should have their pensioners as their main priority at the moment. The current stability of the eurozone is paramount. Yet sooner or later, the aging population and Europe’s pension dynamic will need to be addressed.  President Sarkozy has made some tough decisions in the French pension arena, whilst Belgium has innovated its regulations and industry in order to allow itself to be used as a pan-European pension hub for multi-national companies. Although the UK’s pension stability reverses every 10 years from positive to negative and back again, calls for a permanent Pensions Commission, committed to rebuild confidence in all matters retirement related, are gathering pace.  

On a UK level, a specialist advisory unit with industry experts can only be a good thing. To widen this thought, when considering how closely eurozone countries interact, surely to build one advisory board, akin to the European Central Bank, which can review and advise on the reform of pensions for all (as well as advising on specific country problems) will go a long way to ensuring that despite current potential concerns, longer term worries can be left to the experts for the benefit of individual societies. How can a government forced to make difficult decisions now for immediate impact make decisions with planned impacts in at least ten to twenty years time?  

Unless current policies change in the medium term for longer term benefit, commentators will not just be talking about the lost generation of young workers who currently can’t get jobs; they’ll be talking about the lost generation who can’t afford to stop working. This may be because the State retirement age is at least 10 years higher than what it currently is, or they just can’t afford to stop working until infirmity makes that decision for them. The sooner politicians communicate this message, the faster Europe can understand the changes needed.