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Reflections On The Edge Of Bed

Published on May 9, 2012 by: in: Economy

Reflections on the destiny of the eurozone and on the steps being taken to avert the crisis reminds me of an old joke: one girlfriend whispers to the other that she has not enough sex in her new marriage and the other asks – Isn’t your husband interested in sex? – No, the former answers. – But he is a methodologist. He sits on the edge of the bed and describes how he is going to make love to me. And that’s usually that.

photo: @boetter

The same seems true of the current reflections on the eurozone. The European Commission has prepared three concepts of euro-obligations. The discussion grows more and more lively on which one is the best. Germany has prepared other concept – we discuss about merits and faults and chances of introducing a given idea. And so forth, da capo al fine. But this fine is approaching regardless of the numbers of concepts and their quality.

And nobody has asked the otherwise simple question  –  W h y    d o    g o v e r n m e n t s     b o r r o w? After all, they do not have to! Theoretically speaking, they may reduce public expenses and stop borrowing, or borrow much less. Unfortunately, there are not many eager supporters of such policy (in Poland either!). So, why doesn’t the practice follow the theory?

Because then, we would have to admit to bankruptcy, not of the European idea as that is not the point at all, but to the bankruptcy of the welfare state in its present pathological shape, growing for over fifty years. There is no money for the welfare state of such kind and there will never be. The point is that no politician wants to say it (on this side as well as on the other side of the Atlantic!) because it means losing the coming election. It is safer to roll over the debts, to take out new ones, and to rail at banks and other financial institutions which, realizing that the risk is increasing fast, demand higher and higher interest for buying bonds from potential bankrupts.

Western countries have created so many expensive obligations that there is no chance  the tax money will suffice to discharge them. Also, the number of working people who can be taxed will decrease compared to the number of the welfare state’s beneficiaries.

Calculations are rather complicated but one of them, made by an American research organization, is worth giving thought to it and citing as a warning. The researchers reckoned up the value of the social security and pension obligations in Western European countries. And they estimated the capital that the social security system should have if it was the capital-based system (like OFE – Open Pension Funds in Poland) and not the system in which the employed participate in financing the pensioners.

About Greece, the results are really shocking. To finance the pensions for the Greek (amazingly generous in comparison with their pays) the capital-based system should have funds worth 875% of annual Greek GDP !!! And in case of Greece, these reflections are not of theoretical nature only. As there is no such money, the generosity of the Greek pension system has  a l r e a d y  been drastically reduced.

Because of this shortage of money, the following cuts have been introduced: the equal minimum pension (not so high) was established, and the remaining amount above the minimum is cut by 20-40%. But this in not the end. Their IKA (the Social Insurance Institute) still needs 13 billion euros!, which is state budget financed of course. While reflecting on the debt problems within the euro zone, it is worth keeping this case in mind.

translation: Jolanta Gładkowska

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About Jan Winiecki

Economist, professor of Aalborg University and European University Viadrina in Frankfurt, co-founder and president of the foundation of Adam Smith Center, former member of the EBRD board, co-founder and former president of the Polish Economic Society, laureate of Kisiel Prize.

Fredrich Naumann Foundation For The Freedom
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