Transcript Sustainable public finances in a turbulent EU economy

DG ECFIN
Sustainable public finances in a
turbulent EU economy
Lucio PENCH
Head of Unit, Fiscal policies in the euro area and the EU ,
European Commission, DG ECFIN
Federal Planning Bureau
«Potential Growth and Fiscal Challenges», Brussels
27 October 2009
DG ECFIN
Outline
I.
Direct costs of the crisis
II.
Indirect effects on growth
III.
Long term sustainability and ageing
IV.
Consolidation and policy responses to ensure
sustainability
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
2
DG ECFIN
The public finance situation in the EU
A looser fiscal stance
25
3
20
23
20
2
11
10
15
11
8
1
10
5
5
% of GDP
2
0
0
-5
-1
-10
-15
-2
Output gap (lhs)
-20
CAPB EU-27 (lhs)
Number of Member States with a deficit above 3% of GDP (rhs)
-25
-3
2003
2004
2005
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
2006
2007
2008
3
2009
2010
DG ECFIN
Fiscal costs of the financial crisis
Direct fiscal costs and total fiscal costs
Types of fiscal costs from financial crises
Economic costs
Fiscal costs
= foregone output grow th
Direct gross costs
Indirect costs 1/
= measures addressed tow ard the
financial sector
= automatic stabilisers and measures
addressed tow ard the non-financial sector
Recapitalisation
Purchase of troubled assets
Pay-out to depositors
Default on liquidity loans
Shortfalls from guarantees
Other
−
Asset sales, asset returns and
other recovery payments
Direct net costs
Revenue effect from
elasticity and
composition changes
Expenditure effect
from drop in output
(automatic stablisers)
Fiscal stimulus effect (from
discretionary revenue and
expenditure measures)
Market efffects (e.g., via
interest and exchange
rates)
Notes: 1/ Measured in percent of GDP.
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
4
I. Fiscal costs of financial crises
DG ECFIN
Direct Fiscal costs of past crises
Past rescues of the banking sector have often been expensive
60
Recovery
(% of GDP)
Net cost
50
40
30
20
Brazil (1990)
Ukraine (1988)
Estonia (1992)
Romania (1990)
Argentina (1995)
Turkey (1982)
Norway (1991)
Latvia (1995)
Poland (1992)
Lithuania (1995)
Sweden (1991)
Columbia (1982)
United States (1988)
Spain (1977)
Russia (1998)
Ghana (1982)
Bolivia (1994)
Argentina (1989)
Columbia (1998)
Croatia (1988)
Czech Rep. (1996)
Argentina (2001)
Hungary (1991)
Vietnam (1997)
Finland (1991)
Paraguay (1995)
Philippines (1997)
Brazil (1994)
Nicaragua (2000)
Japan (1997) 2/
Slovenia (1992)
Bulgaria (1996)
Venezuela (1994)
Mexico (1994)
Malaysia (1997)
Ecuador (1998)
Uruguay (2002)
Israel (1977)
Cote d'Ivoire (1988)
Korea (1997)
Chile (1981)
Turkey (2000)
Thailand (1997)
Jamaica (1996)
Argentina (1980)
Indonesia (1997)
0
Dominican Rep. (2003)
10
Notes: 1/ Gross fiscal costs are government outlays during the crisis. Recovery values are for the period t to t+5, where t is the first year of the crisis. No data on
recovery values are available for Spain, Hungary, Israel, Poland, Romania, Slovenia and Turkey (1982). For the US net fiscal costs are from Spilimbergo et al. (2008).
2/ For Japan, revised Laeeven and Valencia data on gross fiscal costs are 14% of GDP while they were previously estimated at 24% of GDP (e.g., Caprio et al. 2005).
Spilimbergo et al. (2008) put the gross costs at only 9.1% of GDP of which 4.7% of GDP were recovered
until 2008 (in contrast to the shorter recovery period assumed
5
L.(until
Pench,
Head
Unit, Fiscal
policies
in the euro area and EU
2002)
in theofLaeven
and Valencia
database).
European
Commission,
and
Financial Affairs
Source: Data
from LaevenEconomic
and Valencia
(2008).
DG ECFIN
Fiscal costs of financial the crisis
Support to the banking system has focused on guarantees and liquidity measures
EU public interventions in the banking sector (in % GDP)
Capital injections
Guarantees on
bank liabilities
Relief of impaired
assets
Liquidity and
bank funding
support
Total
Approved
Effective
Approved
Effective
Approved
Effective
Approved
Effective
Approved
Effective
Total EU
2.7
1.7
24.6
7.8
0.9
0.8
3.2
2.3
31.1
12.5
Total euro area
2.7
1.7
20.5
7.8
1.1
1.0
1.0
0.4
25.2
10.9
25.Some selected countries
Austria
5.5
1.7
25.7
6.8
5.5
0.4
1.6
1.6
38.3
10.6
Belgium
5.3
6.1
70.8
16.3
8.1
8.12
N/A
N/R
84.2
30.6
Denmark
6.1
2.4
253.0
2.5
0.0
0.0
0.3
0.3
259.4
5.2
France
1.2
1.2
16.6
5.5
0.2
0.2
0.0
0.0
18.1
6.9
Germany
4.4
2.0
18.6
7.2
1.4
1.4
0.0
0.0
24.4
10.6
Ireland
6.6
6.5
164.7
164.7
0.0
0.0
0.0
0.0
171.3
171.2
Italy
1.3
0.1
N/A
0.0
0.0
0.0
0.0
0.0
1.3
0.1
The Netherlands
6.4
6.8
34.3
7.7
3.9
3.9
7.5
1.6
52.0
20.0
Sweden
1.6
0.2
48.5
11.0
0.0
0.0
12.6
0.0
62.7
11.2
United Kingdom
3.5
2.6
21.7
11.3
0.0
0.0
16.4
14.7
41.6
28.5
Notes: N/A: not available indicates that the amount is not available in the state aid decision
N/R: not reported indicated that the amount was not reported by the Member States in its reply to the EFC questionnaire
Source: Commission services
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
6
DG ECFIN
Fiscal costs of the financial crisis
Estimates of direct fiscal costs in the current crisis (net of recovery rates)
Risk scenarios for direct fiscal costs 2/
 Upper bound estimate of
13% of GDP is in line with
average past direct fiscal
crises costs (13% of GDP).
 In individual Member States
the direct fiscal costs risk to
be much higher than this
average.
 Crisis is costly for the
taxpayer.
 Policies need to ensure that
crises costs are contained and
long-term sustainability
maintained.
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
(% of GDP)
Based on
Based on
effective
approved
measures
measures
A
Recapitalisation
A.1 As of 21 October 2009
A.1.1
Loss rate (80%)
A.2
Assuming a doubling of recapitalisation needs
A.2.1
Loss rate (80%)
1.7%
1.4%
3.4%
2.7%
2.7%
2.2%
5.4%
4.3%
B
B.1
B.2
2.3%
0.2%
0.7%
3.2%
0.3%
1.0%
8.6%
25.5%
1.3%
2.6%
3.8%
7.7%
C
C.1
C.2
Liquidity and bank funding support
Loss rate (10%)
Loss rate (30%)
Govt. guarantees on bank liabilities and relief of
impaired assets 1/
Loss rate (15%)
Loss rate (30%)
TOTAL net fiscal costs
Lower bound(=A.1.1+B.1+C.1)
2.9%
6.3%
Higher bound(=A.2.1+B.2+C.2)
6.0%
12.9%
Notes: 1/ In percent of 2009 GDP (European Commission Spring Forecast 2009).
Includes blanket guarantees (AT, ES, IE, NL) but not the potential
shortfalls of deposit insurance schemes nor government guarantees
where amounts have not been specified (e.g. BG, IT, PL, UK).
Source: Commission services.
7
DG ECFIN
Fiscal costs of the financial crisis
Real economy support
EERP: 1.8% of GDP discretionary stimulus measures in addition to large
automatic stabiliser effects.
Discretionary fiscal stimulus measures in the EU (2009-10) 1/
1.2
1.1 1.1
EU-27
Euro area
1.0
0.8
0.8
0.7
0.6
0.6
0.5
0.5
0.5
0.5
0.4
0.4
0.3 0.3
0.3 0.3
0.2
0.1
0.0
0.0
2009
2010
2009
Total
2010
Revenue
2009
2010
Expenditure
2009
2010
Public investment
Notes: 1/Figures for 2010 include permanent measures taking effect in 2009 plus measures taking
effect in 2010.
Source: European Commission
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
8
Fiscal costs of the financial crisis
DG ECFIN
Automatic stabilisers and discretionary policies lead to large deficits
Government balances in 2007-10 in the Commission Services’ Spring
2009 Forecasts
5
% of GDP
2
-1
-4
-7
Nominal balance 2007
-10
Nominal balance 2008
-13
Nominal balance 2009
Nominal balance 2010
3% of GDP threshold
-16
FI
DK LU SE BG NL CY DE AT
SI BE CZ SK PT
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
IT
EE LT FR HU ES PL LV MT EL RO UK IE EA- EU16 27
9
DG ECFIN
Large deficits lead to rapid increases in debt
Change in debt as a share of GDP – Commission Spring 2009 forecasts
2007
2010
120%
100%
80%
60%
40%
20%
0%
EE LU BG RO LT DK SI SK CZ FI SE CY LV PL ES NL MT AT DE EU- IE PT UK HU EA- FR BE EL IT
27
16
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
10
DG ECFIN
The effect of crises on debt
Total fiscal costs of past crises
Gross public debt crises episodes (% of GDP) 1/
90
Large fiscal deficits
contributed to public
debt-to-GDP ratios
ratcheting them up by
20 points of GDP, on
average. This impact
has taken a long time
to reverse in the past.
Gross public debt crises episodes (% of GDP) 1/
80
90
70
80
60
70
50
60
50
40
40
EU-27 2/
EU-15
EU-27 3/
2/
Big
5 industrial
country-crises 4/
EU-15
3/
Big 8
5 emerging
indus trial country-cris
es 4/
Big
market-crises
5/
Big 8 em
TOTAL
6/erging m arket-cris es 5/
TOTAL 6/
EU27
Current donwturn 7/
EU27 Current donwturn 7/
30
30
20
20
10
10
00
t-4
t-4
t-3
t-3
t-2
t-2
t-1
t-1
tt
t+1
t+1
t+2
t+2
t+3
t+4
t+5
t+6
t+7
t+7
Notes:1/
1/Based
Basedon
on49
49crises
crises episodes
episodes as
as presented
presented in
in the
the 2009
2009 Public
Public Finance
Notes:
Finance Report
Report
Unweighted country averages. t = start of the crisis.
Unweighted
country
averages.
t
=
start
of
the
crisis.
2/ Includes crisis episodes in Czech Republic, Finland, Hungary, Latvia, Poland, Slovak
2/Republic,
IncludesSpain
crisis and
episodes
in Czech
Republic,
Hungary,
Latvia, Poland, Slovak
Sweden.
For new
MemberFinland,
States data
from 1991.
Republic,
Spain
and
Sweden.
new Member
States
data from 1991.
3/ Includes
crisis
episodes
in For
Finland,
Spain and
Sweden.
Includescrisis
crisis episodes
episodes in
in Finland,
Finland, Spain
Norway,
3/4/Includes
andSweden,
Sweden.Japan and Spain.
5/
In
principle
includes
Argentina
(2001),
Indonesia,
Malaysia,
(1994), Turkey
4/ Includes crisis episodes in Finland, Norway, Sweden,
JapanMexico
and Spain.
(2000), Philippines and Thailand. But data for the last three are missing.
5/ In principle includes Argentina (2001), Indonesia, Malaysia, Mexico (1994), Turkey
6/ Excludes Nicaragua which in 2003 (t+4) received a public debt relief.
(2000),
Philippines
and tThailand.
7/ All EU27
countries,
= 2008 But data for the last three are missing.
6/Sources:
Excludes
Nicaragua based
which in
(t+4) received
a publicStatistics
debt relief.and AMECO.
Calculations
on2003
IMF International
Financial
7/ All EU27 countries, t = 2008
11
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
Sources: Calculations based on IMF International Financial Statistics and AMECO.
European Commission, Economic and Financial Affairs
DG ECFIN
Potential growth in the aftermath of the crisis
Impact of the crisis on potential growth

Critical challenges for the EU are to
prevent reductions in potential growth
from:





Lower or unproductive investment due
to risk aversion, credit constraints or
government intervention
Permanent rebalancing of internal
demand
Labour market hysterisis
Past crises (e.g. SE and FI) show that
policy responses matter
Case No 1: Full return to earlier path
Potential output level
No loss in potential
output level after some
time
Slope = long-term potential
growth
Case No 2: Permanent loss in GDP level
Potential output level
Permanent loss
in potential
output level
Same long-term potential growth
after the crisis (same slope)
Years
Case No 3: Permanent loss on growth rates
Potential output level
Different scenarios are possible i.e. a
full return to earlier path, a
permanent loss in level terms only or
a permanent loss on growth rates
Potential growth before
crisis (e.g. 2%)
Potential output
loss increasing
overtime
Lower long-term output growth after the crisis
(e.g. 1.5%)(lower post-crisis slope)
Years
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
12
The path of actual and potential output in previous
financial crises in Japan, Sweden and Finland
DG ECFIN
SWE
JPN
FIN
7
7
7
5
5
5
3
3
3
1
1
1
-1
-3
-9 -8 -7 -6 -5 -4 -3 -2 -1 T
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
YP
-1
-9 -8 -7 -6 -5 -4 -3 -2 -1 T
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
YP
-3
-1
-5
-5
-5
-7
-7
-7
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
13
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
YP
-3
Y
Y
-9 -8 -7 -6 -5 -4 -3 -2 -1 T
Y
DG ECFIN
Hypothetical GDP trajectory for Belgium
Pre-crisis: average annual growth of 2.3%
Post-crisis: average annual growth of 1.4%
By 2020 and going forward: GDP 11% lower
Pre-crisis
Post-crisis
07 008 009 010 011 012 013 014 015 016 017 018 019 020
0
2
2
2
2
2
2
2
2
2
2
2
2
2
2
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
14
Fiscal sustainability
DG ECFIN
Required consolidation to bring debt to 60% by 2020
Required primary balance
Budgetary effort
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
15
IE
IE
UK
FR
LV
IT
ES
B
EU E
27
EL
PT
EA
PL
AT
M
T
DE
SI
LT
NL
HU
CZ
SK
RO
FI
SE
CY
EE
DK
BG
LU
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Developments in debt up to 2020
DG ECFIN
Graph I.3.6: Developments up to 2020 in the gross debt-to-GDP ratio in euro-area Member States
assuming no consolidation on top of fiscal stimulus withdrawal
% of GDP
205
IE
185
165
EL
FR
IT
145
Gross debt
BE
PT
EA
ES
NL
DE
SI
MT
AT
125
105
IT
EL
85
CY
BE
SK
EA
PT
DE
65 FR
MT
CY
45 AT
NL
ES
FI
FI
LU
25 SK
IE
5
SI
LU
2007
2008
2009
2010
2012
2011
IE
MT
CY
IT
FR
PT
SI
SK
EL
LU
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
2013
ES
2014
FI
16
2015
EA
2017
2016
DE
2018
NL
2019
AT
2020
BE
DG ECFIN
Some background figures on demographics
EU
EU15
Belgium
2008
2060
2008
2060
2008
2060
Fertility rate
1.52
1.64
1.64
1.72
1.75
1.79
Life expectancy at birth
– men
76.0
84.5
77.2
84.8
76.7
84.4
Life expectancy at birth
– women
82.1
89.0
82.6
89.1
82.3
88.9
Old age dependency
ratio
25
53
26
51
26
46
Net migration flows
(thousands)
1683
804
1647
750
51
23
0.3
0.2
0.4
0.2
0.5
0.2
Net migration flows (%
population)
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
17
DG ECFIN
Budgetary costs of population ageing
Costs set to increase substantially but with wide variation
between countries
Pension spending
2010
Change
2010 to
2060
Poland
10.8
Estonia
Long-term care,
unemployment
and education
Healthcare
2010
Change
2010 to
2060
-2.1
4.1
6.4
-1.6
Latvia
5.1
EU-27
Total
2010
Change
2010 to
2060
2010
Change
2010 to
2060
0.8
4.2
0.1
19.1
-1.1
5.1
1.1
3.2
0.4
14.8
-0.1
0.0
3.5
0.5
3.6
0.8
12.3
1.3
10.2
2.3
6.8
1.4
6.1
0.9
23.2
4.6
EA
11.2
2.7
6.8
1.3
6.4
1.1
24.5
5.1
Belgium
10.3
4.5
7.7
1.1
8.9
1.0
26.8
6.6
Slovenia
10.1
8.5
6.8
1.7
6.2
2.4
23.1
12.7
Greece
11.6
12.5
5.1
1.3
5.2
2.2
21.9
16.0
8.6
15.3
5.9
1.1
5.4
1.7
19.9
18.2
Luxembourg
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
18
DG ECFIN
Fiscal sustainability
Sustainability gaps (S2 in percent of GDP)
(latest available unpublished, data)
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
19
IE
EL
LU
UK
SI
ES
LV
RO
CY
CZ
SK
LT
NL
M
T
EA
EU
27
FR
PT
BE
AT
FI
DE
PL
SE
IT
EE
BG
DK
HU
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
DG ECFIN
Fiscal sustainability
Decomposition of the S2 indicator
LTC (% of GDP)
14.0
12.0
S2=0
S2=2
S2=4
10.0
8.0
6.0
S2=6
S2=8
S2=10
S2=14 S2=16
LU
EL
Sustainability gap
(S2>0)
SI
CY
No sustainability gap
(S2<0)
IE
MT
ES
NL
BE
4.0
FI DE
2.0
SE IT
HU DK
BG
Unfavourable long-term projections
0.0
Favourable long-term projections
AT
RO
EA
UK
CZ
LT
EU27
SK
FR
PT
S2=12
LV
EE
PL
-2.0
Favorable initial fiscal position
-4.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
Unfavorable initial fiscal position
0.0
2.0
4.0
6.0
8.0
10.0
IBP (% of GDP)
IBP: required adjustment given the initial budgetary position
LTC: required adjustment given the long-term change in age-related expenditure
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
20
DG ECFIN
Fiscal sustainability
Comparing the sustainability gaps in 2009 and 2006
10
5
0
-5
Difference due to IBP
Difference due to LTC
Residual (extension of projection 2050-60)
Total difference between 2006 and 2009 reports
-10
HU
PT
IT
DE
CY
FR DK
CZ EA* SE EU27* LU
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
PL
BE
EE
SK
21
AT
FI
SI
LT
NL
MT
UK
ES
LV
EL
IE
Examples of debt and consolidation in Belgium
DG ECFIN
Trajectory of debt as a share of GDP based on different levels
of consolidation
Baseline
0.5% per year
1% per year
150
140
130
120
110
100
90
80
70
60
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
22
Time to design exit strategies?
DG ECFIN
 EU Council - 17 September
“Exit strategies need to be designed now and implemented in a coordinated manner as soon as
recovery takes hold, taking into account the specific situations of individual countries.”

Pittsburgh Summit – 24-25 September
“We will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy
support in a cooperative and coordinated way, maintaining our commitment to fiscal
responsibility.”

Informal ECOFIN – 1-2 October
“In order to anchor expectations and reinforce confidence, it is necessary to start designing and
communicating credible exit strategies, even if implementation will have to wait.”
 IMFC Statement – Istanbul 4 October
“As the recovery takes hold, we are committed to work together in articulating and implementing
credible and coordinated exit strategies for the withdrawal of public support for the financial
sector, orderly unwinding of monetary policy support, and fiscal consolidation needed to
underpin long-term sustainability.”
 ECOFIN Council – 20 October
“The Council agrees that preparing a coordinated exit strategy for exiting from the broad-based
policies of stimulus is needed.... The Council underlines that an early design and
communication of such a strategy would contribute to underpinning confidence in our
medium-term policies and to anchor expectations”
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
23
DG ECFIN
ECOFIN Council 20 October 2009
Designing fiscal exit strategies



Withdrawal of stimulus should be timely.
Consolidation should start in 2011 at the latest,
with some countries needing to consolidate earlier.
Consolidation will need to go well beyond the
benchmark 0.5% of GDP per annum.
Important additions:



Strengthened national budgetary frameworks to underpin
credibility of consolidation.
Measures to support long-term fiscal sustainability
Strengthening of structural efforts to enhance productivity
and support long term investment
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
24
DG ECFIN
What do we know about how to consolidate
successfully?

Extensive literature on the subject including Alesina and Perotti (1995), Public
finances in EMU 2007, Kumar et al. (2007).

Consolidations based on expenditure cuts tend to be longer lasting



Gradual adjustments have proven more effective (Public finances in EMU
2007)


Often accompanied by structural reforms
Improvements in the fiscal institutions can be important complements to
consolidation


Especially true if also focus on structural reforms increasing work incentives and
public sector efficiency
Tax based consolidation tends to work better if it is gradual and starts from a lower
level
Countries with existing strong institutions consolidate more effectively
Difficult macroeconomic and public finance starting points can be catalysts for
successful consolidations
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
25
DG ECFIN
The quality of the public finances in Belgium
Size of government
EU 15 mean
Belgium
Fiscal position and
sustainability
Fiscal governance
Composition and
efficiency of revenue
systems
Composition and
efficiency of spending
Note: a higher value indicates outcomes more conducive to long-term growth
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
26
DG ECFIN
Belgium – what choices are available?

Reducing expenditure?



Increasing tax?



Tax and SS revenues high and relatively inefficient
Increasing them further could be costly and hard
Structural reforms?


Government spending is high, so possibility to reduce it
Efficiency gains also possible
The tax system has strong disincentives to work in it
Pension changes for the long term?

Scope to change the pension system but can only be a
part of the answer
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
27
DG ECFIN
How to reduce the cost of ageing over time

Stockholm strategy from the 2001 European Council

Reduce debt to allow pre-financing




Increase employment rates and productivity



Would need to be in addition to reversing debt increases due to
crisis
Could only be achieved very gradually
Might add to global imbalances
Can accompany fiscal consolidation
May not reduce the cost of ageing much due to accrual of
pension rights
Reform pension, healthcare and long-term care systems



Shifting to private provision also has risks
Adequacy of provision must be ensured to make any changes
effective
Raising retirement ages is a serious consideration
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
28
DG ECFIN
Exit ages from the labour market
65
64
63
62
61
60
59
58
57
56
55
LU
SI AT
BE MT FR BG IT
PL HU SK EA
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
EL EU CZ
FI
NL
29
ES DE DK UK RO LT
LV
EE PT
CY
IE
SE
How can changes to the labour market or
pension structure aid sustainability?
DG ECFIN
Baseline value for the sustainability gap in % of GDP
Increasing overall employment rate by 1% between 2010 and 2020
Increasing employment rate of older workers by 5% between 2010 and 2020
Increasing the pension age by 5 years between 2010 and 2060
8%
7%
6%
5%
6.5%
5.3%
6.2% 6.3%
4.8% 4.9%
4%
5.8%
5.4% 5.5%
4.8%
4.2%
3.6%
3%
2%
1%
0%
BE
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
EU27
EA
30
DG ECFIN
Conclusions

Crisis has had both a direct and indirect impact on
public finances

Increase in government debt substantial and
worrying

The existing challenge of ageing looms large over
the future

Exiting the crisis will be a delicate exercise

Measures addressing both medium-term deficits and longterm increases in the cost of ageing are required
L. Pench, Head of Unit, Fiscal policies in the euro area and EU
European Commission, Economic and Financial Affairs
31