The Pébereau Report

According to the French writer Rabelais debt and deceipt are almost invariably inextricably linked. So it is appropriate that it should be a French banker – Michel Pébereau – who takes it upon himself to try to bring this harsh reality home to a French public which still seems excessively steeped in the finer details of the arts of self-deception. Pébereau does not mince words: over a quarter of a century century French public policy has accumulated for itself a national debt has neither supported economic growth nor reduced unemployment. The debt is “asphyxiating” and unless the State acts to reduce its spending now France will “lose control of the financial situation” before the end of the decade. Indeed so stark is the picture Pébereau paints that French economy minister Thierry Breton, on reading the report, was moved to comment: “Unbeknownst to them, our children are already financing part of our standard of living.”
Continue reading

The End of the Dolce Vita?

Are the good times and the good life still going to continue to roll in the Italy of the twenty first century? This is the core question the Economist’s Europe editor John Peet asks in the latest Economist Survey: Italy, Addio, Dolce Vita. As Peet says:

Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today’s Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.
Continue reading

Turnering The Screw

The Turner Report is about to appear. The Turner in question is the UK peer Lord Adair Turner, and the subject of the report the future of the UK pensions system. Although the final report is not due till the end of the month, the FT has been ‘ leaking’ some of the possible contents.

The commission will apparently suggest that the age at which workers can claim their full state pension should, over time, rise from 65 to 67. The increase is intended to come in stages, starting after 2020 when the UK’s women’s state pension age is set to be aligned with men’s at 65. Thereafter, state pension age should rise in line with increasing longevity, the commission will say. Now this idea seems to me to be a very important one, and I’d just like to take the time out to explain why I think this.
Continue reading

Something Worries Me About Peter Bofinger

Really I realise I have been remiss in another important sense. I have long assumed that in fact the decision to reduce deficits was taken due to the coming fiscal pressure from ageing. This certainly was the background to the discussion. However now I look at the details of the SPG this area is not mentioned (as far as I can see) and the other – the free rider and associated – is the principal consideration.

So those who criticize the bureaucratic and infexible nature of the ECB are in the right to this extent. Of course the underlying demographics *should* be part of the pact, but that is another story.

I find myself in a tricky situation, since I am deeply sceptical that the euro can work, and now after the French vote even more so, but since it has been set in motion, the best thing is obviously to try and make it work (even while doubting). So I am thinking about all this. Obviously I should try and write a longer post making this clearer.

The SGP was adopted at the Amsterdam Council 1997. A history of the implementation of the pact, and a summary of the debate over the new pact can be found here. The Stability and Growth Pact was designed as a framework to prevent inflationary processes at the national level. For this purpose it obliges national governments to follow the simple rule of a balanced budget or a slight surplus.

Now if we go back to the origins of the pact, to the communication of the European Commission on 3 September 2004, you will find the following:

“As regards the debt criterion, the revised Stability and Growth Pact could clarify the basis for assessing the “satisfactory pace” of debt reduction provided for in Article 104(2)(b) of the Treaty. In defining this “satisfactory pace”, account should be taken of the need to bring debt levels back down to prudent levels before demographic ageing has an impact on economic and social developments in Member States. Member States’ initial debt levels and their potential growth levels should also be considered. Annual assessments could be made relative to this reference pace of reduction, taking into account country-specific growth conditions.”

Now curiously I have found nothing in Bofingers argument which seems even to vaguely recognise this background.

A good starting point for this topic would be the conference “Economic and Budgetary Implications of Global Ageing held by the Commission in March 2003.

The European Council in Stockholm of March 2001
agreed that ?the Council should regularly review the
long-term sustainability of public finances, including the
expected strains caused by the demographic changes
ahead. This should be done both under the guidelines
(BEPGs) and in the context of the stability and
convergence programmes.?

This document on the history of EU thinking on ageing and sustainability is incredible.
Continue reading

They Huffed, and They Puffed, and They….

China’s campaign to buy up ‘known brands’ continues. This time it is the US centenarian bicycle manufacturer Huffy. This bid has an interesting twist: Huffy is in bankruptcy, apparently for problems with a defined benefit pension scheme. IMHO this could be the tip of a looming iceberg. Best known canditates for forthcoming problems here would be Ford and GM. With the pace at which things are moving, you need to ask how long they can hold out?

Chinese suppliers and an agent of China’s government are poised to take control of Huffy Corp. (HUFCQ.PK: Quote, Profile, Research) , a venerable U.S. brand name, as the bicycle maker restructures under bankruptcy protection, it said on Tuesday.

Huffy, making bikes for Americans for more than a century, said it had agreed to a reorganization plan which would allow it to terminate its staff pension plans. The company would turn responsibility for the benefits over to the Pension Benefit Guaranty Corp., a unit of the federal government that insures pension plans.

Promising Elections

The Guardian today has a short profile on Angela Merkel, while the FT looks at some of the proposals which may well form part of the SPD campaign manifesto. Far be it from me to worry about ‘sting the rich’ tax proposals, but as far as I can see the main isssue is getting Germany back to work, and Schr?der’s time might be better spent adressing this issue.

Talking of which, this could be a good moment to mention the whacky world of Hans Werner Sinn.
Continue reading

No Answers Only Questions

One person who could rightly claim to know more about global ageing and its possible consequences than anyone else in the business is the German Director of the Manheim Research Institute for the Economics of Ageing Axel B?rsch-Supan. If there’s a conference being organised, he seems to be there. Actually his comments at both these meet-ups are well worth reading in and of themselves (here, and here).

In a sense B?rsch-Supan is almost uniquely qualified to express opinions on the topic since he has both devoted a large part of his professional career to studying the question, and he lives and works in a society which is already reeling under the impact. As he says:

“Today?s Germany has essentially the demographic structure that the United States will reach in a quarter of a century. The dependency ratio (the ratio of persons aged 65 and over to those aged from 20 to 59) is at 28 percent, and it will reach 75 percent in 2075, if we dare project that far. Almost one-fifth of the German population today are aged 65 and over. One quarter are aged 60 and over, which is relevant because the average retirement age in Germany is 59.5 years. Thus, in this sense the United States is not ?entering largely uncharted territory,? …. Rather, they can look to Europe?in particular to Germany and Italy?to see what will happen in the United States.”

I mention B?rsch-Supan because he serves as a good pretext for going over where we are to date with the issue. As he says himself. watching demography change is rather like watching a glacier melt, on a day-to-day basis it’s hard to see that anything is happening, but over time the impact is important.

One of his recent papers has the intriguing title: “Global Ageing: Issues, Answers, More Questions“. It is a good up-to-date review of the ‘state of the art’, and a quick examination of the points he makes probably serves as a good starting point, since I can’t help thinking, in the case of global ageing, it isn’t so much what we know that matters, it’s what we don’t know.

So here we go, a review of what we “know”, what we think we know, and what we don’t know:
Continue reading

Gloomy, or Just More Realistic?

One of the problems of being a ‘dissenting voice’ is that it is hard for others to get a grip on a yardstick for evaluating what you are saying. Normally I am considered ‘gloomy’. But if what I am arguing against is a concoction of all the ‘best case’ scenarios rolled meticulously into one, it might be fair for me to ask, aren’t those who point the finger really guilty of presenting an excessively rosy panorama.

Latest case in point are the consensus projections for life expectancy, as highlighted by the forthcoming UK pensions Commission interim report, details of which are ‘leaked’ in today’s FT:
Continue reading

Fiscal Tickery

Thanks David for the link. I haven’t commented on this because like Dutch finance minister Zalm (who I imagine working away weblogging into the early hours under a dim light provided only by his mobile phone) I am tired. I can’t help feeling that everything that needs to be said has already been said, and many times over. Now all we can reasonably do is wait and see the consequences.
Continue reading