Wednesday, August 1, 2012

You've Got to Move

The collision of demography and politics in the current crisis should push EU policy makers to move quickly on some of the unfinished business of European integration. In response to my recent post on the outmigration of qualified young people from the parts of Europe undergoing the worst of the recession, Steven Hill asked why that is a bad thing - isn't that what labor mobility is supposed to mean?

Yes, in the US, at least before the housing collapse meant that many people are stuck with homes they can't sell, people in areas with high unemployment moved to places where jobs were more plentiful. And that is how labor markets should work.  In Europe, though, even beyond the difficulties imposed by factors like language and culture, there are impediments to labor mobility that need policy action.  The portability of pensions is an issue that has to be solved.

While state pensions are relatively straightforward and EU workers who retire in a different EU country than the one(s) where they were employed can apply for the accumulated pensions.  However, in the case of private supplementary pensions, which are not covered under current EU regulations, many people face the loss of significant contributions when they move across borders, which is an obvious disincentive for mobility. 

One thing we know from the crisis is that state pensions in the future will be wholly inadequate to support the elderly. Lower state revenues and aging populations will put tremendous pressure on pension systems. Dependency ratios (the proportion of the very young plus the old to the working population), already high in Europe, are expected to double by 2060 in low birthrate countries, which also in large part are the countries in the worst financial shape. This makes it imperative to put incentives into place for additional savings beyond state schemes, to ensure that retirees are able keep accumulated private funds wherever they live and to sort out how they are to be taxed.

Recently, Benoît Cœuré, a member of the Executive Board of the ECB, noted that the European Council has taken measures to increase mobility and pension portability.  With this shift in thinking, he claims, European policy makers "are acknowledging that the smooth operation of the single currency requires flexible markets for goods, services, and labour."

Still, it has been close to a decade (2005) since the Commission published its first proposal for a directive covering supplementary pensions. Little progress has been made in that time. This year, the Commission is supposed to restart work on a pensions portability directive. Although exact figures are hard to come by, it is clear that the number of young and talented Europeans leaving home to find work is exploding - last year 1.7% of the Irish population, mostly in their 20s and 30s, left and between 2001 and 2010, the percentage of Italians with college degrees who were living abroad doubled from 8.3% to 15.9%. 

These trends highlight how critical it is that the Commission move on a new directive and push member states to come to an agreement. 

1 comment:

  1. Hello Trisha, as a contribution to this conversation, I am posting the relevant part from my original post. Cheers.

    Steven Hill

    Native out-migration in Europe, especially among young and educated people is a tricky issue, allow me to explain. No one would say that a young Californian who picked up and moved to New York or Texas or Florida to get a job was somehow a tragic situation. Mostly because, over time, other young people from New York or Texas are going to move to California or Florida or elsewhere in the US. That's the type of natural ebb and flow of migration that one should expect.

    In fact, one of the critiques of the European system has been that while capital has been hyper migratory, labor has not been (primarily due to reasons of language and culture). So should we now lament such labor migration?

    I recall a recent conversation with a German friend who was lamenting about all the young Germans who are moving out of Germany. So I asked her, "where are they moving to?" When she said Austria and Switzerland, I couldn't help but laugh. That's like someone from Oregon complaining that their young people are moving to Idaho or Washington.

    So I actually view the out-migration of young Spaniards, Italians and Greeks as a positive, and something that Europe needs to get used to. Sure, to the extent that it represents a brain drain from these states, that is a downside. But Spain, Greece and Italy need to do more to attract businesses from other parts of Europe to relocate there, and with it will come those businesses' skills and expertise. If Europe is to have a dynamic continental economy, it really can't work any other way, can it?

    Steven Hill