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EC says lack of pension reform may harm euro

EUROPE – EC internal market Commissioner, Frits Bolkestein, has given his sternest warning yet that a lack of pensions reform in Europe could jeopardise the future of the euro.

Speaking at a European Press Club conference in the Hague, organised by investment manager Invesco, 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 the 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 viscious circle: “If pension spending were not reformed, but led to higher defecits, 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, i.e. 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.”





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