August 17, 2010 / 2:58 PM / 9 years ago

EU states seek new budget rule due to pension reform

BUDAPEST/BRUSSELS (Reuters) - Nine mostly eastern European Union states have asked the bloc to consider changing its accounting rules in a way that could cut the budget deficit and debt levels of states that implement pension reforms.

Germany, however, immediately voiced skepticism about the proposal.

The call to review accounting rules comes after months of market turmoil prompted many EU governments to cut costs and tackle huge debt piles to try to allay concerns that weak public finances could potentially lead to national bankruptcies or break apart the euro zone.

In a letter to the European Commission dated August 6, Lithuania, Latvia, Bulgaria, Sweden, Slovakia, Hungary, Romania, Poland and the Czech Republic backed automatic sanctions proposed by Germany for countries that breach the EU’s 3 percent of gross domestic product fiscal deficit ceiling.

However, they also asked the bloc to consider reviewing how to treat costs related to pension reforms, which they argue are inflating their budget shortfalls despite creating longer-term benefits.

“Maintaining the current approach to debt and deficit statistics would result in unequal treatment of member states and thus effectively punish reforming countries,” the nine countries said in the letter obtained by Reuters on Tuesday.

The European Commission said the proposal was “relevant” and that it would soon prepare a position. One EU source said there was likely to be sympathy for the position, but it may be to convince all 27 members to agree on changing the Stability and Growth Pact, the treaty that dictates the Union’s budget rules.

That was illustrated almost immediately when Germany, the Union’s main economic motor and the leading proponent of strict punishment for budget-rule breakers, said it was “very skeptical” about the proposal.

“The introduction of exceptions in the definition of debt would make the figures more difficult to interpret at the EU level,” a German finance ministry spokesman said. “It would also disadvantage governments that have chosen different ways of reforming their pension systems and share the costs of the reform differently.”


The main issue is that countries that have reformed pensions so younger workers also pay into private accounts, rather than only into single pay-as-you-go systems, now lack revenues to cover the costs of older workers and retirees.

In 2005, the EU altered the Pact’s rules to deduct pension reform costs at diminishing rates for five years from the moment the reform is started. For those who had the new pension system already in place in 2005, the five years were counted from 2004.

With the deductions now ending for countries like Poland and Hungary, costs tied to plugging those holes will appear in fiscal deficits and government debt.

The nine countries therefore call for the costs of pension reform to be excluded from the deficit and debt calculations not only for five years in diminishing parts but permanently, a Hungarian government official said.

“Raising the issue (in the letter) means that this practice should be brought back — that is allowing the opportunity which existed earlier temporarily to exist permanently,” Economy Ministry Secretary of State Andras Karman told Reuters.


Hungary added a mandatory private pension pillar to its state pension system in 1997. Since then, payments into the private funds are missing from state revenue but, according to Citibank, private pension funds hold 10 percent of Hungary’s gross domestic product, 50 percent in state bonds.

Analysts said the proposed accounting change would lower Budapest’s budget deficit by about 1.7 percent of GDP each year, from a government goal of 3.8 percent this year.

In Poland, contributions to private funds account for about 2 percent of GDP each year. Earlier this month, Poland’s ruling Civic Platform party caucus leader, Tomasz Tomczykiewicz, said an exclusion could cut Poland’s public debt to around 40 percent of GDP, from an estimated 50 percent now.

“This will be a key matter for us during our EU presidency. That would also speed up Poland’s euro zone entry,” he said. Hungary will hold the EU’s rotating presidency in the first half of next year, and Poland in the second half.

Analysts have a mixed view. They agreed the pension reforms helped the relevant countries’ long-term fiscal outlooks.

But Peter Attard Montalto, an economist at Nomura, said any review of the Stability and Growth Pact would take years to complete and no proposal would come into force any time soon.

He also said any move to remove debt and spending from state balance sheets was not good from a market perspective and cited Greece, where billions of euros in debt tied to state companies and the health sector endangered the country’s finances.

“I think this move goes in the wrong direction,” he wrote in a note. “If anything, more debt ... should all be accounted for.”

Additional reporting by Krisztina Than in Budapest, Jan Strupczewski in Brussels and Karolina Slowikowska and Gabriela Baczynska in Warsaw; writing by Michael Winfrey; editing by Patrick Graham and Susan Fenton

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