Eastern EU Asks Bloc to Look the Other Way on Debt

Bulgaria, Poland, Sweden and six other countries have sent the European Union a letter asking for a change in the way country debt is calculated. File photo

By Marcin Sobczyk

The Wall Street Journal

A group of European Union members in central and eastern Europe, plus Sweden, asked the bloc to take into account the cost of pension system overhaul when assessing debt levels. The move would reduce sovereign debt as measured by the EU, but only on paper. The countries are in fact asking for debt to be swept under the carpet.

Several countries in the EU have over the past years introduced funded pension schemes that invest and generate money to future pensioners using the funds saved by contributors over the course of their professional careers. It’s a radical diversion from the pay-as-you-go scheme, where the money contributed by employees is immediately distributed to pensioners.

The phase-out of the pay-as-you-go system will take decades. Once it’s over, governments should be able to play a much smaller role in making sure there’s enough money to pay pensions. In the meantime, the state has to subsidize the old scheme that’s left without much of the current revenue from people in the productive age. In most cases, governments issue more debt to keep monthly payments going to current pensioners.

In a letter sent to the EU, nine countries in the eastern part of the union asked for a revision of the bloc’s debt rules so that the countries that have moved toward a funded pension model don’t include its costs in their statistics of their general government debt and deficit.

The document was signed by Lithuania, Latvia, Bulgaria, Sweden, Slovakia, Hungary, Poland, Romania and the Czech Republic.

According to the letter, the member states that have introduced such reforms have seen a significant deterioration of their EU-measured statistics of their general government debt and deficit, while statistical data reported by member states that haven’t introduced the change are not subject to the same deterioration.

“As a result, as long as such reforms have only been introduced by some member states, evaluations and assessments of the general government debt and deficits in countries with ‘pay-as-you-go’ systems and those with funded pension schemes are not comparable,” reads the letter.

Indeed, they are not. The countries that stick to the pay-as-you-go system will most likely, at some point in a distant future, have to issue more debt to cover the rising cost of paying pensions to their aging populations. The countries with pay-as-you-go systems will be able to rely on the capital accumulated by pensioners.

But the reality today is that the first group doesn’t need to issue more debt now, while the second does, and a lot of it. The request is for a portion of debt to be simply overlooked.

In Hungary, independent budget watchdog Fiscal Council called this proposal “basically a beauty treatment.”

“This would be something we would believe, but markets wouldn’t,” the organization’s deputy chairman Adam Torok told a press conference Wednesday.

As Poland’s former president Lech Walesa once observed on a different matter, “Break the thermometer, you won’t have a fever.” This seems like the treatment the EU’s eastern members are proposing.

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