Bolkestein lays down the law
The gloves are off in the European pensions ring and EC internal market commissioner Frits Bolkestein means business.
With the ink barely dry on his tax communication, the commissioner has countered any arguments that his ‘communication’ route might be the softer brother of a fiscal directive by urging European companies and employees to report any cases of tax discrimination concerning the transfer of occupational pension schemes between member states.
Speaking at the recent Invesco-sponsored European Press Club conference in The Hague, Bolkestein stressed that member states will be taken to the European Court of Justice (ECJ) if they flout the fundamental anti-discriminatory principles of the 1958 Treaty of Rome.
The commissioner did not pull his punches: “I would like to stress that the Commission would very much like to hear from companies and employees if they have encountered instances of tax discrimination concerning occupational pensions so that it can take appropriate action with the member states concerned.”
Explaining why the Commission had opted for the communication route as opposed to a legally binding directive, Bolkestein commented: “We are merely interpreting in a fairly obvious way what was in the treaty. The big question to ask is why we haven’t been doing this in the past – the treaty is in existence since 1958, so what have we been doing in all those 40 years?
“That would be a good question and it is a question which I don’t have an answer to, unfortunately.”
While Bolkestein says he would prefer mediation with member states, he is adamant that legal action will be taken if compliance to the treaty is not forthcoming:
“The reason it is a communication is that I don’t need a directive. I’m merely reminding member states what was stated in the treaty and we will enter into discussion with them over any infringements and if necessary take them to court over it.
“In that area – discrimination of pension funds – I have all the instruments at my disposal.”
Bolkestein also announced that a number of member states are already facing the possibility of ECJ legal action under the communication.
“The first is a Finnish case and has been referred to the European court by a Finnish judge. The basis is discrimination against a particular person who wanted to contribute to a non-Finnish pension fund and was not getting the same treatment as if they wanted to contribute to a Finnish scheme.”
He noted that a similar case was also being investigated concerning Denmark.
“This is still being dealt with by the Commission and has not yet reached the stage of going to the European Court of Justice.”
However, Bolkestein reiterated his desire that such cases could be dealt with on a conciliation basis by the Commission.
“In pension cases 10% are referred to the European court, whereas 90% are settled between the offending member state and the Commission and that of course is our ambition because it is cheaper, faster and more efficient and doesn’t attract so much public attention.”
The commissioner has given his sternest warning yet that a lack of pensions reform in Europe could jeopardise the future of the euro.
Bolkestein said the biggest test for the future success of the single currency would be centred around the pensions timebomb issue: “The ability to pay pensions requires sound and sustainable public finances, which in turn is needed for the success of the EMU and the euro, which in turn sets the right economic environment for investment, growth and job creation, which in turn creates the ability to pay pensions. A virtuous circle.”
Underlining future demographic issues, Bolkestein pointed out that if unfunded pension liabilities were budgetised, then in some member states this would represent a debt of over 200% of GDP.
He also noted that, even with current reforms in place for public pension schemes, spending would increase by between 3% and 5% of GDP in most countries, adding: “These figures are more than explicit, and could become even worse if, for example, there were a significant increase in life expectancy.”
Such possibilities, he argued, could turn a potentially virtuous set of circumstances into a vicious circle: “If pension spending were not reformed, but led to higher deficits, some countries would not respect their obligations under the growth and stability pact; which in turn could lead to inflationary pressures; which in turn would result in the ECB having to set higher interest rates with negative impact not only on investment, but also on growth and employment, which are the basis of sustainable pension systems.”
Bolkestein placed the reform ball firmly in the court of member states, noting that they were the only entities that could bring about the necessary changes.
“Let me be clear – the primary responsibility for meeting this pensions challenge lies with member states. They have to make the tough political decisions on reform of the public pension; how much workers must pay in contributions, how long they will have to contribute, how much pension they will get.”
The Commissioner conceded, however, that the obvious reply to these questions – pay more, work longer, get less – would not be an easy message for governments to sell.
But he warned of the consequences of inaction. “The true test of the euro will not be brought out with the exchange rate issue against the dollar. It comes when the baby boom generation will come and demand their pensions, ie, from the year 2010 onwards.
“The Commission believes it is best to draw the attention of member states to this issue, but we are non-existent in telling member states how they should make up their books or how their public finances should be presented to the public.” IPE