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Thursday, March 20, 2003

Pedro Solbes is Concerned

More from the CSIS / EU Commission Ageing Conference. Pedro Solbes informas us that he is 'concerned', "concerned that there is a serious gap between the commitments to prepare for ageing populations and the actual reform measures which are being taken". This I think explains a little the recent exchanges within the Commission itself, most notably between Romano Prodi and the very same Pedro Solbes. For my part, I feel that number of important points emerge from Pedro Solbes' contribution to this conference.

Firstly, from his own perceptions, many EU governments are not living up to their obligations to try and leave a solvent pensions and social security system for their citizens. Too many are placing short run political steering problems above the need for long run stability.Secondly, having 3% annual growth rates as an objective is not the same thing as achieving it. On present showing, this is far from lkely to become a reality. When labour force participant numbers begin to decline, a number of European economies will be hard pressed not to decline, and if we add to this the possible presence of deflation, then this decline will only be more pronounced.

Thirdly, the EU seems to be working on a model of R&D which, if not totally out of date, is at least highly questionable. Targetting a percentage of GDP is no solution. The problem is to find the kind of creative dynamic which can produce genuinely productive innovation. This in part passes through a policy of abandoning 'national champions' and stimulating a genuinely new climate of enterprise and initiative. As I argue elsewhere, if unit information costs are declining, it is not clear that the old in-house expensive projects are the answer. A fourth, and important point, is that one of the consequences of all the welfare cutbacks will be an increasing number of elderly people in poverty. Apart from the ethical considerations (which are partly mitigated by the fact that there may be no real alternative, this must have an impact on domestic consumption. In general all contributions to the conference seem to pay little attention to the problem of negative re-inforcing, and negative feedback problems generally.

Europe has diagnosed the challenges but the pace of reform is inadequate

The EU, has in my view, correctly diagnosed the long-term challenges it faces. The EU Heads of State or Government set Europe an ambitious goal of becoming a dynamic economic area by raising potential growth rates to 3% by 2010. Detailed programmes for product and factor market have been defined to achieve this goal. Labour markets in particular have been singled out as essential for raising growth potential and preparing for ageing population and specific targets have been set. A three pronged strategy has been agreed to deal with demographic changes:

first, a fast pace of debt reduction;

secondly, raising employment rates especially of women and older workers;

thirdly reform of pension and health care systems.

These are all laudable objectives, and if achieved would go a considerable way to offsetting the economic and budgetary impact of ageing. But I am concerned that there is a serious gap between the commitments to prepare for ageing populations and the actual reform measures which are being taken.For example: four years after the launch of the euro and six years after agreement on the Stability and Growth Pact, several Member States continue to have large underlying budget deficits or debt levels well above 60% of GDP. The failure to reach our mediumterm budget objective cannot only be attributed to an unfavourable economic cycle. It is to a large extent driven by a failure to run sound fiscal policies in good times, unfunded tax cuts and a consistent failure to control public expenditures;reforms to raise employment rates, and in particular those measures needed to increase the employment of older workers are lagging. The Lisbon targets are therefore in jeopardy of not being met.

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