I argued recently that John Snow should check out some economics before arguing that structural reforms in Europe and Japan would resolve the problem of global economic trade imbalances. Well……….
I was thumbing through the economics working papers section of the OECD yesterday, and I found this:
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Hungary risks missing its 2010 target for adopting the euro unless its government reduces the budget deficit and improves policy co-ordination with the central. This at least is the view of the OECD as expressed in its annual report on Hungary out today. According to the OECD:
“the key conclusion is that further reductions in the general government deficit have to come about through spending cuts because of the already high level of taxation. Failure to reach deficit targets have damaged credibility in the recent past and the Chapter discusses ways of providing more realistic budget targets, more transparent fiscal planning, better assessment of progress over the budget year and improved estimation of outcomes.”
I can think of two pertinent questions to put to the authors of the report: will the euro still be around by the time we get to 2010 (in its present form, I doubt it), and if it is, are they sure that it’s a good idea (looking at what has happened eg to Portugal, Greece and Italy) for Hungary to join.
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At Moody’s we spend a great deal of time studying the issue of pension burdens for countries around the world.
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Confronting Demographic Change is the title of a two day conference currently being organised by Employment, Social Affairs and Equal Opportunities Commissioner Vladimir Spidla. The emphasis of the conference is on gender and family impact issues.
You can find a background briefing paper here.
This is also an interesting presentation.
Here’s a summary of the objectives. It’s very ‘commission speak’ of course, but at least it marks a growing recognition of the problems we are all going to face. I’m also intrigued by something: “Demographic changes, globalisation and rapid technological change are the three major challenges facing Europe today”. I’m intrigued to know when the hell they figured this out, especially since (if for globalisation you read China) it is something I have been arguing for over five years now, in this precise combination.
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Well actually it’s called ?Treasure Hunting Ship;? in Chinese, the CNOOC bid for Unocal. Read some intersting discussion and analysis here.
I have felt for some time that Rober Maroni would not have been so outspoken without at least the tacit permission of Silvio Berlusconi, and now we have the evidence to back my hunch:
“Italian Prime Minister Silvio Berlusconi called the euro a “disaster,” blaming the currency for Italy’s economic slump and seeking to use anti-euro sentiment in his election campaign against opposition leader Romano Prodi.
“Prodi’s euro has been a ripoff,”
With Italy in its second recession in as many years, the euro is proving to be a “disaster,” Berlusconi, 68, said. Berlusconi has blamed the euro for raising prices and choking exports.
According to Oded Galor it has become evident that in the absence of a unified growth theory that is consistent with the entire process of development, the understanding of the contemporary growth process would be limited and distorted. He quote Copernicus to the effect that:
?It is as though an artist were to gather the hands, feet, head and other members for his images from diverse models, each part perfectly drawn, but not related to a single body, and since they in no way match each other, the result would be monster rather than man.?
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And no, it isn’t gout, though plenty of port and fine stilton are to be recommended in any event.
No, the ailment here is an economic one. The EU Commission has just been lenient with Portugal: she has three years, not two, to put the deficit straight.
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.
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Business week has just popularised what was previously a minority sport: debating the ‘global savings glut’ issue. Steven Roach has already responded. Really with all this high-powered economics going on, I feel sorry for the ‘layman’, since it must be kind of hard to reach a conclusion about whether or not to buy a house, or whether to take a summer break or wipe the credit card debt instead.
The issues are pretty complex, but I think can be broken down into two main issues.
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