No soft landing
From Griffith REVIEW Edition 25: After the Crisis
© Copyright Griffith University & the author.
Written by Ryan Heath
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Ryan Heath's biography and other articles by this writer
'Tis against some men's principle to pay interest,
and seems against others' interest to pay the principal.
– Benjamin Franklin
For a continent following the trajectory of the Great Depression, Europe exudes a surprising calm. In politics, no new phoenix is rising from the ashes of past policies. And in the media, the crisis plays to a weary audience. Lacking the heroes, villains and global relevance of the American debate, and the naked assertions of power that the crisis has encouraged in China, Europe is snoozing.
Complacency is a mistake. The countries most affected may be small and the losses largely on paper, but Europe is missing its last chance to change its economic culture and individuals' behaviour before a much bigger crisis hits: a pension crisis. With more than A$6 trillion in loans, guarantees and direct aid given to banks in the past year, European governments are stretched like bungee cords. Yet The Economist predicts that the coming pension deficit will involve figures up to ten times that size.
While the current crisis renders the future of some private pension funds uncertain, and new debts diminish the capacity of states to meet their pension commitments, the systemic problems long predate it. Neither public policy nor private savings have adjusted to greater life spans. When Bismarck created the aged pension, in 1889, you had to be seventy to qualify – well above the average life expectancy. In 2009 Europeans live far longer but qualify for the pension earlier. The average retirement age for men is below sixty in Belgium, France, Hungary and Italy, and millions more aspire to early retirement.
This seeming social progress sits uneasily with the shrinking ratio of workers to retirees, and rising unemployment rates. Today's generosity may be tomorrow's fiscal nightmare in a region where public pensions can be up to three times as generous as Australia's. Even before the postwar baby boom is added to the bill, pensions are already costing more than 14 per cent of GDP in some Western European countries. With A$5 trillion of private pensions funds ‘up in flames' – as the OECD delicately puts it – in the past year, pensioners are likely to demand even more of politicians in the future.
Twenty years of patchy and incremental pension reforms have not prepared European pension systems to meet these demands. If anything, close observation reveals a repeat of the patterns that generated the sub-prime crisis: a failure of government to keep up with a changed economic landscape, allowing systemic risk to develop; a culture of trying to squeeze too much from a financial system, generating economic shocks; and the misuse of other people's money. The difference is that when the pension crisis unfolds, governments will have little fiscal ammunition left to fire at the problem.
Even if governments can agree to continue an aggressive monetary and fiscal policy for a number of years and then correctly time their transition to more conventional policies, European leaders will struggle to win political acceptance for the tough debt-repayment plans that may give them a chance to tackle the pension problem. However, other potential disasters – like the collapse of a car-industry pension fund alongside a parent company – may conspire to send pensions policy in the other direction.
To guard against this, European governments must start the unenviable task of pursuing cultural change and more radical pension-policy reform, while also managing the recession. The cultural issues will be the hardest to address, because legislation alone cannot solve them. Europe has become a continent of modern-day Marie Antoinettes, funding lifestyles with credit cards, asset bubbles and loans denominated in foreign currencies instead of hard work. Europe's public sector unions reinforce this culture in their united belief that no one should have to sacrifice their ‘rights' to relatively early retirement and generous pensions. Even the well-off – and market-oriented – staff of the European Central Bank are striking over proposed reforms.
The best thing would be for government leaders to convince Europeans that they need to lower their expectations, that they must accept pain in the next economic upswing to reduce long-term difficulties. But with confidence already low and attention distracted by the current crisis, it is easy for politicians to delay this discussion. Predictably, citizens are not clamouring for such tough-love approaches. Indeed, because many stand to gain at the expense of their children, they have strong incentives to stay silent or punish
those who act tough. Younger generations, meanwhile, are focused on more immediate and fundamental matters, like getting out of insecure temporary jobs, and do not see beyond the immediate future, let alone save for it.
I might not even have a job in two months. Why do I care what I might get when I am sixty-five?
That's why I pay tax – so the government will think about these issues for me.
– Adele Vanthournhout, 31, Belgium
IN THEORY, THE EUROPEAN Union exists to think about seemingly intractable big-picture issues like pensions on behalf of Adele Vanthournhout and her peers. Yet the EU is absent from this debate, providing only a toothless secretariat, the Committee of European Insurance and Occupational Pensions Supervisors, to monitor market developments. This policy vacuum is a product of the tension between the EU being the world's biggest democratic experiment and it being made up of national governments who hold the purse strings.
Without centralised executive powers – the gouvernement économique of President Sarkozy's dreams – the diversity of Europe also works against top-down change. Today's economic outlook ranges from Latvia's forecast 18 per cent ‘negative growth' for 2009 to Poland's actual growth. The financial cultures stretch from Britain's credit-bingeing property-flippers to Germany's discount-supermarket-addicted savers. What hope do Spaniards and Italians have of coping with a common pension policy when they cannot afford a universal unemployment benefit?
When the workforces of Western Europe begin to shrink from 2011, as they are forecast to do, will that fragile safety net break altogether? It is hard to know, because no one can predict a country's total liabilities – though the OECD thinks the average is 200-400 per cent of GDP. The maths is simpler than unravelling toxic assets – the living are a good audit trail – but we can't know how long people will live or when their private savings will run out. With each year of increased longevity adding 3-4 per cent to liabilities, even a small adjustment to calculations can make a great difference. Such uncertainty is compounded by state secrecy: nearly all European governments keep future liabilities off public pensions on their balance sheets.