Austerity And "Punishing The Shorts"

 From the New York Times:

PARIS — Across Western Europe, the “lifestyle superpower,” the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II. . . .

With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.

“We’re now in rescue mode,” said Carl Bildt, Sweden’s foreign minister. “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

See also Tyler Cowen today on How Will Greece Get Off The Dole?

And across Europe:

Greece:  May 20 (Bloomberg) -- Thousands of Greeks marched through Athens today in the fourth general strike of the year to protest planned pension cuts and other austerity measures the government pledged to secure emergency European financing to avoid default.

Police estimated that between 15,000 and 20,000 protesters marched to parliament in central Athens, some waving banners that read, “Hands off our pensions!” The strike was the first since three people were killed on May 5 after demonstrators set fire to a bank in the capital. About 1,500 police officers were deployed, with officers stopping protesters around Exarchia, a stronghold of the anarchists police blame for the May 5 mayhem.

Romania: Romanians protest against austerity measures  Published: May 19 2010

 Thousands of Romanian trade unionists and pensioners took to the streets to protest against public sector wage and benefit cuts on Wednesday in a test of Bucharest’s resolve to pass austerity measures required by international lenders.

Some 30,000 people rallied outside the government’s headquarters in opposition to plans to cut public sector wages by 25 per cent and pensions and unemployment benefits by 15 per cent.

PORTUGAL - Union leaders have pledged to step up protests against the government's austerity package. Prime Minister Jose Socrates and opposition leader Pedro Passos Coelho have drawn up steps to slash Portugal's deficit, including 5 percent pay cuts for senior public sector staff and politicians. The deficit, which stood at 9.4 percent in 2009, is to fall to 7.3 percent of GDP in 2010 and 4.6 percent in 2011 under the plan.

* SLOVENIA - Thousands of students flooded the capital Ljubljana on Wednesday to protest against government plans to curtail their benefits as part of a wider austerity package.

-- The government of the euro zone member plans to limit students' right to work, reduce state scholarships and lower state spending on student meals as part of its plans to reduce a big budget deficit.

 * SPAIN - Spanish unions vowed on Thursday to fight austerity measures in the courts as the Socialist government said it would introduce a contentious cut in public sector wages through a royal decree, bypassing parliament.

-- The UGT union, which was already planning a public sector strike on June 8, said it would contest the legality of such wage cuts at the center of plans for budget reductions of 15 billion euros ($18.62 billion) announced last week.

But, all is well. The Germans have banned naked shorts, and the Italians have suspended mark-to-market accounting.  

That should fix everything. 

Photo image source

Comments

[Paul M. Secunda]

Kim:

Very interesting post. The problem is different in different countries when it comes to pensions. Some countries, like the US's Social Security system, have primarily a pay-as-you-go (PAYG) system where current generations support the pension payments of previous generations. This system is also a big problem in Japan, for instance, with its aging population. The US and others have tried to somewhat overcome the shortcomings of the PAYG system (read: population decline) by also promoting company-based pensions (defined contribution plans, 401K plans, etc.) with decidedly mixed results.

Many other countries, including much of Europe, have general or capital funds system where pension benefits are paid directly out of the government fisc. Of course, when government loses money in the short-term because of an economic recession, it impacts not only current jobholders but also the interest rate assumptions that older workers' pensions are built upon. Capital requirements should lessen the danger of pension cuts like the ones you describe above, but not even the most dire assumptions took into account the Great Recession of 2007-?. So countries who have this model are also in for rough sledding for some time.

The best bet, I believe, is some combination of a traditional pension plan based on the capital funds model, with some mechanism for both annuities and define contribution plans (e.g., 401K plans). The United States and Europe currently have an underdeveloped annuity market. Yet only such a diverse approach to global pension finance trends can really keep this type of situation from repeating itself.

If people are interested in this area of law, there is an emerging field here called Global Employee Benefits Law. Check out the Global Pension website or my recent co-authored book with Estreicher and Connor, Global Issues in Employee Benefits Law (West 2009).

Paul

[Kim Krawiec]

Thanks for this detailed information, Paul -- very helpful. The extent to which various countries are able to successfully implement austerity measures will be interesting -- if painful -- to watch. I continue to think that some countries won't be able to simply "austere" themselves out of this crisis, in the absence of improbable economic growth or (probable) debt restructurings, regardless of current EU rhetoric. But we'll see.