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. 

Members of the Club

All the drama surrounding Europe’s debt crisis has prompted a great deal of discussion about which countries are fit for membership in the club –should Greece stay, should it go from the Eurozone., etc. But the economic crisis has both overshadowed and exacerbated problems of another sort in Europe - whether countries meet the minimum requirements of a democracy to belong to Europe.

Yesterday a referendum was held in Romania to try to oust center-right President Traian Basescu, organized by his rival, the center-left Prime Minister, Victor Ponta. It failed only because it was unable to attract 50% of the voters but 80% of those who did vote were in favor of recall, at least in part because of unhappiness of the dire economic situation in Romania which has seen tax increases, a currency losing value against the Euro, and a 2009 bailout by the IMF with heavy conditionality.

The political turmoil has in turn exacerbated the economic situation since the uncertainty over governance has frightened international and domestic investors in a country where investments depend on the backing of the state. More important, however, is the way in which politics are being conducted. The political machinations that have undermined the Constitutional Court, intimidated the judiciary, and led to emergency decrees to place the recall on the ballot, have called into question the rule of law in Romania.

In a scathing report by the EU published 10 days ago, the Commission noted:

"[T]his report is adopted at a time when important questions are raised with regard to respect for rule of law and the independence of the judiciary in Romania. Overall progress [in terms of judicial reform and anti-corruption] has to be assessed in the context of a wider social recognition of key principles such as the rule of law, and the independence of the judicial process as part of the checks and balances of a well-functioning democracy. A well functioning, independent judicial system, and respect for democratic institutions are indispensible for mutual trust within the European Union, and for gaining the confidence of citizens and investors.

The Commission considers that recent steps by the Romanian Government raise serious concerns about the respect of these fundamental principles. These steps took place in an overly polarised political system where mistrust between political entities and accusations are a common pattern; however this political context cannot explain the systematic nature of several actions. While certain actions may be partly explained by this political polarisation, they raised serious doubts about the commitment to the respect of the rule of law or the understanding of the meaning of the rule of law in a pluralist democratic system… The Commission is in particular extremely concerned by the indications of manipulations and pressure which affect institutions, members of the judiciary, and eventually have a serious impact on society as a whole. [T]he current controversies pose a serious threat to the progress achieved so far and raise serious questions as to the future of the reforms already launched."

Romania is the second country (after Hungary) where alarm bells have gone off about a recent entrant's commitment to democratic principles that in theory are part of the admission price to the EU club.  Calls for increased monitoring and report writing by Brussels only serve to highlight the fact that as with EMU, the EU lacks any real mechanisms for persuading countries to follow the rules of a club to which they were admitted prematurely in the first place.