Poland, Hungary at odds over pension reform ahead of EU summit

Pensions 9June2010.JPG

The European Commission confirmed yesterday (13 December) it had reached an agreement with Poland on giving countries that have reformed their pension systems more leeway over fiscal policy. In the meantime, the parliament in Budapest voted to effectively dismantle pension reform. The issue will be on the agenda of EU leaders at their 16-17 December summit.

The European Union's executive arm gave few details about the deal, which emerged on Friday, saying it needed unanimous backing from the EU's 27 finance ministers.

The Commission said that when assessing whether a country should face EU budget discipline steps, the EU executive would take into account whether the state had carried out pension reform.

"The assessment would be carried out on a case-by-case basis. It will take into account whether the [budget] deficit is justified by systemic pension reform," Commission spokesman Amadeu Altafaj told a regular news briefing.

Commission President José Manuel Barroso and Polish Prime Minister Donald Tusk clinched the deal by telephone late on Friday. Barroso will send a letter to Tusk with details on Monday or early on Tuesday.

Polish officials have said the agreement would allow Poland to have a budget deficit of up to 4.5% of economic output, 1.5 points more than the official ceiling, without facing the EU's disciplinary steps.

Altafaj would not confirm the figure and said that to count on leniency, a country's public debt must be below 60% of gross domestic product.

As part of its reform from late 1990s, Poland is transferring sums worth up 2.5% of GDP annually to private pension funds which invest them in securities, mainly Polish treasury bonds.

EU disciplinary steps could in principle lead to fines for eurozone members and freezing some EU aid for other countries of the bloc.

EU governments are working on tightening the rules to prevent budget deficit overshoots such as that of Greece, which sparked investor worry about the stability of the euro zone.

EU leaders are expected to discuss briefly the pension issue when they meet in Brussels on 16-17 December and the debate will continue at finance ministers' meetings early in 2011.

Poland and other budget reformers have fought for permanent fiscal leeway, but Altafaj said it will only be temporary.

Warsaw says its proposal would encourage other countries to carry out reforms that are necessary because of their ageing populations, but which have provoked protests in some cases.

Hungary seizes 10 billion euros of private pension funds

In the meantime, Hungary effectively dismantled its pension reform. Hungarian lawmakers voted to roll back a 1997 reform of pensions on Monday, effectively allowing the government to seize up to 10 billion euros in private pension assets to cut the budget deficit while avoiding austerity measures.

Parliament passed the pension legislation with 250 votes for, 58 votes against and 43 abstentions. Orban's ruling Fidesz party has a two-thirds parliamentary majority.

The legislation imposes stiff penalties on Hungarians who do not transfer their pension assets back into the state system by the end of January.

The government will sell the assets and use the income to cut debt, plug holes in the state pension fund and create room for tax cuts for households and small companies.

By plugging its budget shortfall with the pension funds and new taxes on banks and mostly foreign-owned businesses, Orban has promised to end years of austerity and bolstered the popularity of his right-of-centre Fidesz party in opinion polls.

But the strategy – which also includes regaining "financial sovereignty" by ending a 20 billion euro safety net deal with the European Union and the International Monetary Fund – has worried investors, caused losses in Hungarian assets, and prompted a downgrade by Moody's ratings agency last week to Baa3, the lowest investment grade.

Economists say that by raiding private funds, Orban will cut the deficit to below 3% of gross domestic product next year. But he will also only delay reforms which they say are vital to tackle a debt pile equivalent to 80% of GDP – just above the EU average but higher than any other country in the bloc's post-communist East.

(EURACTIV with Reuters.)

At an EU summit in October, a group of nine EU member states from the former communist bloc demanded that the cost of reforming their costly pension systems be taken into account when calculating their public debt and deficit.

The call was supported by Poland, Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Romania and Slovakia as well as Sweden.

However, they failed to secure a majority to get their proposal through.

Romanian President Traian Basescu said "more arguments" would be raised before the 16-17 December summit, when the EU's revised economic governance structure is to be agreed, including sanctions for budget sinners.

Polish Prime Minister Donald Tusk said he assumes there will be "many debates and quarrels," but insisted that the debate should continue. But in the meantime, Hungary and Bulgaria tooks steps to nationalize their pre-funded pension schemes, triggering a row with the European Commission.

Until now, the countries of the so-called Visegrad group, Poland, Hungary, the Czech Republic and Slovakia, have made efforts to coordinate their positions on the eve of EU summits. Hungary will take over the rotating EU presidency in the first half of 2011, followed by Poland in the second half.

  • 16-17 Dec.: EU summit to briefly address taking into account pension reform in budget rules.

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