Cause and Effect in European Politics and Law

Those who make pension reforms - a step forward!

Ralitsa Kovacheva, December 12, 2010

We are close to a compromise – with these words Olli Rehn, European Commissioner for Economic and Monetary Affairs, summarised the discussions in the Council of EU finance ministers (ECOFIN) concerning the request of 9 member states (including Bulgaria) the costs of pension reforms to be removed from the budget deficit.

A proposal from the Commission in this direction has been discussed at the latest meeting of Finance Ministers (on December 7). The Belgian Presidency will prepare a special report on the issue for the European Council on December 16. According to Olli Rehn, “a compromise can be agreed shortly“, perhaps yet at the summit next week. In October EU leaders called on finance ministers “to speed up work on how the impact of pension reforms is accounted for in the implementation of the Stability and Growth Pact and report back to the European Council in December. Acknowledging the importance of systemic pension reforms, a level playing field within the SGP should be ensured”.

Although apparently there will be a decision in favour of the countries conducting pension reforms, no details are clear yet. According to Rehn, “we will allow not placing in excessive deficit procedure a country with a deficit somewhat above the 3% threshold, provided that debt is below the 60% threshold, when take into account the systemic pension reforms and their impact”. Each country will be assessed individually taking into account long-term sustainability, without increasing the risk for short-term fiscal position of any country, Rehn noted. He explained that it was important a balance to be struck between compliance with the Stability and Growth Pact and giving incentives to countries conducting systemic pension reforms.

To a journalist's question whether this would not change the Maastricht criteria for debt and deficit, Belgian Finance Minister and ECOFIN President Didier Reynders replied that nothing was being changed. While analysing debt and deciding whether to launch an excessive deficit procedure, the factors related to a supplementary pillar of the pension system will also be taken into account, Reynders said.

As you know, as part of the enhanced economic governance of the EU, it is provided for the excessive deficit procedure to be used in cases of excessive indebtedness too, though much earlier - before the debt limit of 60% of GDP is reached, as stipulated in the Stability and Growth Pact, when it is assessed that the debt is not diminishing at a satisfactory pace.

As early as September, though, when submitting its proposal on this issue, the Commission noted that the Excessive Deficit Procedure would not be applied automatically on debt and that some additional factors would be taken into account. For example, whether very low nominal growth is hampering debt reduction, together with risk factors linked to debt structure, private sector indebtedness and implicit liabilities related to ageing. These factors will be important too when assessing application of the Excessive Deficit Procedure, if a country fails to fulfill the deficit criterion (3% of GDP), but its debt is below the limit of 60%.

On this basis, the Commission is now apparently proposing the costs of systemic pension reforms to be apprehended as such an additional factor. From the words of Commissioner Olli Rehn we can judge that it is not about any recalculation of the deficit, but rather for attenuating circumstances while assessing whether to apply the Excessive Deficit Procedure. It is also obvious that the key to whether and when these costs will be recognised lies in the word "systemic" - what systemic reforms are and what their impact is will likely to be decided on a country to country basis, in the framework of the analysis of debt and deficit.

Curiously, two of the nine countries that requested an exemption for pension reforms (Latvia, Lithuania, Bulgaria, Sweden, Slovakia, Hungary, Romania, Poland and Czech Republic) have already surprised unpleasantly the European Commission. In a similar manner but in different scales Hungary and Bulgaria have made a step back from the implementation of pension reforms by announcing a kind of nationalisation of some private pension schemes.

And while the Bulgarian government reached out only to occupational pension funds and transfered 100 million levs (50 mn euro) to the National Social Security Institute, Hungarians face a hard choice – they must decide whether to keep their state pensions and give up their private pension savings to the state, or lose the right to a state pension, although they have contributed with their payments and to keep only their pre-funded accounts. As a result of these actions both countries have reached an artificial reduction of debt and deficit, excluding the costs of reforms from their public debt figures, which led to controversy with the European Commission, EurActiv commented.

Amadeu Altafaj Tardio, spokesperson for Economic and Monetary Affairs Commissioner Olli Rehn, said that the EC is concerned by the actions of the Hungarian authorities regarding the pension system. According to him, the Commission was concerned that wealth accumulated in pension funds would be used to finance current expenditure, artificially reducing public debt and deficit figures in the short term but putting the long-term sustainability of public finances in jeopardy. "In Hungary, they seem to reflect the intention to completely abolish the compulsory private pension pillar.”

“As for Bulgaria, the Commission is still studying the decisions made, which at first glance appear to have been less radical than in Hungary”, EurActiv commented.

It will be a real irony if, when in the end a formula on how to encourage countries undergoing pension reforms is found, Bulgaria and Hungary lose the right to benefit from it. Because what is happening in Hungary and perhaps is just beginning in Bulgaria can hardly be defined as systemic pension reforms. Rather - pension de-reforming (especially when we add all the concessions made by the Bulgarian government under pressure from trade unions) and statistical manipulating. Of which, as we know, Brussels has already been burned, and certainly will not allow again.

Furthermore, there was a quite logical journalistic question to Olli Rehn and Didier Reynders - whether they aren’t afraid of opening Pandora's box accepting a "relief" for pension reforms. Because other member states may try to take advantage of the precedent and the Commission will be buried in an avalanche of requests various costs not to be accounted for in the budget deficit.

Bulgaria, for example, already has a new claim – the bank guarantees which EU member states will have to take from European financial institutions for the Nabucco project, not to be calculated in their budget deficit. The position of the other countries participating in the project is not clear yet. The Commissioner and the Belgian Finance Minister did not reply to the question, but they were certainly considering this. Because ultimately, the purpose of the compromise they are searching for is to promote reforms and not to give a comfortable and favourable image to budgetary indicators. Which, as shown by the crisis in the euro area, could be quite dangerous.