Now What About Fiscal Sustainability?

The director of Brussels think tank, the Lisbon Council, says Europe should apply its visionary thinking to policies beyond the environment

by Ann Mettler

Last month, the European Commission published a paper on the long-term sustainability of public finances. It is a timely effort to kick off a broad public debate on this key issue, which will occupy policymakers for decades to come. If the Commission is smart and wants to exert real pressure on Europe's member states to get their fiscal house in order, a look to the past might be a useful reminder of how to direct the forthcoming public debate.

Above all else, Europe today prides itself on its global leadership in environmental protection and sustainable development. We feel vindicated that we long ago foresaw the threat of global warming and environmental degradation.

And to this day we look down on countries that exploit their resources and engage in opportunistic, short-term, political and economic strategies without considering the long-term consequences. Now it's time we learned a lesson from what we preach to others.

Root of the Problem

Despite the recent economic recovery, the past years of stubbornly high unemployment, low growth, and ballooning budget deficits have taken a toll on Europe. The mood has been unusually dire on the old continent. Survey after survey shows that a majority of citizens believe the future will be worse than the present.

The reason for this insecurity isn't that European governments aren't spending enough on social programs—social spending in many countries is at an all-time high—or that they are asking people to make unreasonable sacrifices. Indeed, despite modest reform efforts in recent years, no other region in the world works less, vacations more, or retires earlier.

No, the root of the problem is that we are violating the very values we claim to hold so dear—first and foremost sustainability, a concept first embraced by European citizens and governments some 30 years ago. Back then, during a time of unprecedented economic expansion and rising prosperity, many of us vowed to protect nature for future generations.

Violating the Pact

Today, we must be equally visionary and bold in applying the principle of sustainability to other policy areas that affect our quality of life. Topping the list: the state of public finances and the longevity of social security systems, particularly pensions and health.

In 2005, a staggering 12 of the European Union's 25 member states were in violation of the 3% public deficit ceiling required by the Stability and Growth Pact. Bear in mind that these same nations conceived and signed off on the pact as a means of ensuring the sustainability of public finances. Even if Europe didn't face its most serious demographic crisis in history, this would be a serious breakdown of fiscal discipline and solidarity between members of a political and economic union.

But in view of our rapidly aging and shrinking population, this serious lapse in our ability to manage public finances shows nothing less than utter disrespect for our young people and future generations. Nonetheless, political leaders who dare to tackle these fiscal imbalances face an uphill battle.

No Generation Pact

Belgian Prime Minister Guy Verhofstadt last year proposed a "Generation Pact" to ensure the long-term sustainability of pensions among his aging citizenry. Far from embracing this important reform, trade unions twice brought the country to a standstill through general strikes because they deemed the prime minister's demand to raise the early retirement age from 58 to 60 as "unsocial."

Given that Belgium has the second lowest effective retirement age in the Organization for Economic Cooperation and Development (OECD) and considering that the number of years that workers can expect to spend in retirement has risen dramatically in OECD countries—from 11 years for men and 14 years for women on average in 1970, to 18 years for men and 23 years for women in 2004—absolutely nothing could be further from the truth.