A European problem, a European solution!
We are condemned to each other. The European economies are highly interwoven, especially after the establishment of the monetary union. A cliché. The consequent need for budgetary discipline, long term stability and new institutional structures is discussed far less. To tackle the economic results of an ageing population, Europe has to approach the issue in commonality. If not, the pain will be felt across all European wallets.
By Ton Monasso
A growing number of elderly, both in absolute numbers as well as compared to the working population, has numerous effects on the financial health of the European system. The first branch is the pensions. Many countries, for example Italy and Austria, do not have adequate savings, but finance a substantial part of their (state) pensions from direct transfers. That is going to be problematic when the group of people that need to pay for it, the workers, shrinks. Either the premiums will become sky-high or the pensions will be lowered resulting in a diminished purchasing power. Furthermore, there are two important disadvantages regarding to the “direct transfer” system. First, it is almost impossible to absorb risk regarding to macroeconomic changes or investment risk on the capital and financial market. Secondly, it is almost impossible to generate any profit by investments, with a return of around 10% per year in the last decade.
A second set of problems relates to the state budgets. Many countries have severe problems in reducing their budget deficit, not to mention a surplus so the enormous bonds can be redeemed. These budgets will be affected in two ways. First, the tax revenues may fall, depending on the height of the pensions and the ratio of retired versus working people. Secondly, the costs for health care, particularly, will rise significantly. In many countries, the state pays at least some piece of the cake.
One might be tempted to think as long as the European countries autonomously deal with the problems and clean their sheets, the problem is solved. How much harsher is reality. European nations have intensive trade relationships, and the interdependencies have risen significantly with the introduction of the euro. Budget deficits may undermine the low inflation, as it leads to an increased demand for euros. A smaller European labour force results in lower production. These two aspects, decreasing production levels and a higher inflation level, may result in a lower international competitive position. And as we all know a strong international competitive position is the key element for a healthy forward-looking economy.
The interdependency of the European Union member states, especially the countries in the eurozone, is also the source of a moral obligation. An obligation to restrict oneself to a policy aimed at long-term stability and affordability. The current institutions do not seem to live up to that demand. As long as the Stability Pact leaves the most difficult decisions to the most volatile decision-makers, politicians, a fair and stable economic policy cannot be guaranteed.
It would be wise to institutionalize a tough policy by means of an independent watchdog. Maybe the European Central Bank or the European Commission can be entrusted with this task.
As politically engaged youngsters, we should demand a change in European economic policies. For the better of young and old, in the near and the far future!
Ton Monasso is president of the Jonge Democraten, The Netherlands. The Jonge Democraten have campaigned frequently for structural economic reforms that prepare their country for an ageing population.
Published in New Libertas, magazine of LYMEC.
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