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Wednesday, March 12, 2003

German Pensions Warning

Well the bad news from Germany continues, as it will, I'm afraid, continue. This time it's pensions. When will we learn 1980 - 2000 we were on the virtuous circle. Now we're on the other one, the vicious kind. All the pension numbers go out of the window if economic growth drops near zero. This fall in pensions expectations produces a fall in consumption as people try to save more (the so called Ricardian effect). The decrease in consumption causes a fall in profitability, which causes equity (and hence pension fund values) to fall. All of which reduces economic growth expectations, which reduces pensions expectations, which........

Meantime house prices start to fall, and then we really are mired in it. No, I know it's not that simple. But why, oh why doesn't someone older and wiser than me try to examine this process a bit more rigourously (I think this is a kinda unveiled hint for Paul Krugman). Well everybody: did you enjoy the ride up?

German economic reform efforts will face a further setback on Thursday when its leading pensions association warns that statutory contributions will have to increase sharply to cover a looming gap caused by feeble growth in Europe's biggest economy.The VDR association of statutory pension funds, an advisory body that influences government policy, will say increasing contributions to the state-run pay-as-you-go pension system from 19.5 to 19.9 per cent of gross wages may be unavoidable given the weak economy and high unemployment.

The warning comes as a bruising blow to Gerhardt Schröder, the German chancellor, who will deliver a keynote parliamentary speech on Friday aimed at reducing the non-wage labour costs borne by employers. An increase in pension contributions, shared by employers and employees, would further push up costs, increasing the competitive pressures on the economy. An increase of 0.4 percentage points is equivalent to €3.5bn. Any increase in pension costs will also fuel tensions between Mr Schröder's Social Democrats and the Greens, the junior coalition partners. Green opposition to the increase to 19.5 per cent last year was overruled. The forecast of higher costs came as the opposition Christian Democrats threatened to withhold crucial support for Mr Schröder's reforms unless he used Friday's speech to present a far-reaching "master plan" for recovery. Mr Schröder has promised a package of labour market and social security reforms. He said last night the measures would involve "sacrifices by many people".
Source: Financial Times

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