Get exit strategies ready now, says Commission

The European Commission has given its starkest warning yet that member states need to have their exit strategies ready for deployment now, as member states face the double burden of ageing populations and a heady deterioration of government accounts.

Action on structural economic reforms must be taken quickly to counteract predicted high levels of unemployment compounded by an ageing population, the Commission recommended in a report published yesterday (14 October). 

Without a reorientation of fiscal policy, the report puts the gross debt-to-GDP ratio for the EU as a whole at 100% as early as 2014. The Commission stressed that fiscal expansion must be temporary and phased out once the recovery takes hold in order to deliver a sustainable public purse. 

At a meeting last month the EU’s finance ministers agreed on a plan for a coordinated exit strategy from expansionary stimulus packages but did not agree a date for its implementation (EURACTIV 02/10/09). Discussions due to take place in December are expected to clarify the details and timing of exit strategies. 

Later retirement to tackle ageing population 

Yesterday’s report, which measured the sustainability gaps of the bloc’s 27 member states, stressed that those gaps will not be closed if fiscal expansion continues beyond the recovery. 

Loosely speaking, such gaps in sustainability are measured by an overall assessment of the long-term risks posed to public finance by debt, government assets and pension projections. 

The report’s projections show that, in the absence of structural reforms and rebalancing government accounts, there would be very large increases in expenditure on debt interest and public pensions, as well as on healthcare and long-term care during the coming decades. 

According to Commission figures, for every retired person there are still five in employment. By 2025 that ratio will drop to 3:1, and by 2050 to 2:1. Policy can counteract this shift by increasing retirement ages in line with gains in life expectancy, argues the Commission report. 

The average retirement age in the EU is 62 but as life expectancy is expected to rise by six years by 2060, the EU executive argues that it provides enough scope for bumping up the retirement age. 

Age-related spending 

Government deficits in the EU are forecast to average 6% of GDP in 2009 and around 7% in 2010. The report takes into account projected costs in age-related expenditure and which countries will likely cushion the blow of an ageing population. 

In Bulgaria, Denmark, Estonia, Finland and Sweden, age-related expenditure over the next few decades is projected to be well below the EU average but in Belgium, Germany and Austria, governments will bear costs of ageing close to, or above, the EU average. 

Though in Finland the projected increase in age-related expenditure is substantial, it will likely be absorbed by the large stock of financial assets in the country’s social security portfolio. 

France, Italy, Hungary, Poland and Portugal, according to the report, are in dire straits even without considering any increase in age-related expenditure due to poor fiscal policy. 

High risk countries 

The sustainability gaps of the Czech Republic, Cyprus, Ireland, Greece, Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovenia, Slovakia and the United Kingdom are all above 6% of GDP and over double that level in Ireland, Greece, Spain, Slovenia and the UK. 

Twenty of the 27 EU countries – including 13 in the euro zone – are facing EU disciplinary procedures because their deficits have exceeded the 3% deficit ceiling in relation to GDP as set by the Stability and Growth Pact (EURACTIV 08/10/09

The Commission took the procedural step last week against Austria, Belgium, the Czech Republic, Germany, Italy, the Netherlands, Portugal, Slovakia and Slovenia. 

Another 11 of the EU’s 27 member countries are already subject to the disciplinary action under the bloc’s Stability and Growth Pact, which is meant to underpin the euro currency. 

Among the countries already facing disciplinary procedures, Ireland has until 2013 to correct its deficit, France, Poland and Spain until 2012, and Hungary, Lithuania and Romania until 2011. Greece should do so by the end of next year. 

In 2000, the EU launched its ambitious 'Lisbon Strategy' to become "the world's most dynamic knowledge-based economy by 2010". 

After five years of limited results, EU heads of state and government re-launched the strategy in March 2005. In response to public concern about climate change, ageing populations and social exclusion, EU leaders agreed to shift the Lisbon Agenda away from the purely "growth and jobs" focus of the past three years, putting the environment and citizens in the foreground instead (EURACTIV 18/03/08). 

Given the current economic turmoil, the pendulum has seemingly swung back again, making job creation and increasing competitiveness the bloc's key priorities (see EURACTIV LinksDossier on 'Growth and jobs: Reshaping the EU's Lisbon Strategy').

The Stability and Growth Pact, conceived under the 1992 Maastricht Treaty, allows the Commission and the Council to monitor the fiscal health of member states that have adopted the euro. 

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