Europe's Economic Predicament: the Broken Bismarckian Promise
The World Pensions Council's M. Nicolas J. Firzli on how post financial crisis policy is shifting the state/private consensus across the European Union and irreparably damaging the European economy.
During the six decades
of generally positive macroeconomic conditions that followed the post WW2 Marshal
Plan and Treaty of Paris, the European Union created an integrated
legal-commercial bloc that eventually rivaled the United States in terms of
economic dynamism while seemingly simultaneously preserving the progressive
social model inherited from Germany's Bismarckian tradition and Britain's
Liberal "welfare reforms".
And Germany and the UK
were very much the twin engines of European economic growth throughout that
period, with the highly innovative and lightly regulated City of London
becoming progressively more important than Wall Street for the origination and
trading of key asset classes, including fixed income instruments, currencies,
derivatives and asset-backed securities.
But things changed
abruptly after 2008: European and British policymakers must now confront a
series of crises unfolding inauspiciously at the same time.
The unending Euro
"debt crisis', the social unrest resulting from the harsh austerity measures
imposed by the EU Commission and/or national governments, the newfound (and
sometimes not thought out) regulatory zeal of EU lawmakers, with their sudden
passion for "financial regulation" and "banking supervision" which comes after
years of complacent laissez-faire.
But the most serious
crisis is the least visible: Europe's growing pension predicament means that
millions of European retirees now live in poverty, and, more dramatically, tens
of millions of European workers are likely to retire in the next ten years with
inadequate pension benefits that will leave them far below the poverty line,
even in relatively rich member states such as the UK and Germany.
We have to remember
that the European Union was established precisely to put an end to an "age of
austerity' that lasted for more than five years after the Second World War.
The renewed social
contract underwriting that European experiment was founded precisely on the
dual promise of generous pension plans and modern infrastructures for all
citizens. Tellingly, these basic promises are being broken across most of the
European Union today.
Two weeks ago, HSBC
Holdings plc, Europe's leading financial services company and the UK's largest
private sector employer, announced abruptly its unilateral decision to
terminate the bank's generous defined benefit (DB) pension fund from next year
for all existing members, an unprecedented move for a firm of that size and
likely to inspire other plan sponsors across the EU.
By a cruel irony, a
team of HSBC economists and actuarial experts published a special report the
same week, showing that most UK workers are not preparing adequately for
retirement, with 19% saving nothing at all!
The first age of
austerity (1945-1949), often cited by David Cameron and George Osborne as a
metaphor for Europe's current economic circumstances, was a short hiatus: the
Marshall Plan and the Treaty of Paris (from which the EU was derived) rapidly
restarted the European growth engine.
This is unlikely to
happen this time around as the United States is unable ("Fiscal Cliff", "Debt
Ceiling") and unwilling to "bankroll' the rest of the world, the European Union
is divided against itself and exposed to severe demographic, macroeconomic and
fiscal pressures and, more importantly, the energy and commodity producing
nations of Latin America and the Arab world are no longer ruled by pliable
"comprador" technocrats eager to please the West by adjusting supply to the
economic cycle of Europe and America.
All this is happening
at a time when the European Central Bank and the Bank of England are pursuing a
particularly hazardous monetary policy (the "quantitative easing" series), in
essence keeping interest rates at artificially low levels for an extended
period of time.
This has a doubly
negative impact for pension funds and pension beneficiaries: several
consecutive years of lower returns for the fixed income asset class as a whole
will further widen the pension funding gap in the medium-term, and, in
parallel, rampant inflation will erode salaries in real terms (a fact recently
recognized by the Office for National Statistics in the UK), forcing workers
and pensioners alike to dip into their savings to pay for food and fuel.
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