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Global Risks: Japan, Germany, France

Frits Bolkestein, the European Union's Internal Market Commissioner, openly worries that divergent fiscal policies among EU members could set Demographics 53 in motion a chain of events that would unravel the continent's economy. “Pension payments could easily turn into a vicious circle. If pension spending were not reformed, but led to higher deficits, some countries would not respect their obligations under the growth and stability pact; which in turn could lead to inflationary pressures; which in turn would result in the ECB [European Central Bank] having to set higher interest rates with negative impact not only on investment, but also on growth and employment, which are the basis of sustainable pension systems . . . "Pay more, work longer, get less,' is not an easy message to sell."

In the developed world, unfunded liabilities for pensions, plus projected healthcare costs, amount to a staggering $70 trillion (U.S.) - six times the size of official public debts.32 How will developed countries pay the bill? One possible solution is to increase already heavy tax burdens, as is happening in countries like Japan. However, in many countries, higher taxes may not be sufficient to cover the spiraling costs of providing for the elderly, and these days there is not much room for tax increases. In Germany, France, and Italy, payroll taxes already exceed 40 percent of total payments to workers. (The average total tax burden for the European Union is 46 percent.) Paying for promised benefits through increased taxation is simply not feasible, since doing so would raise the total tax burden by an unthinkable 25 to 40 percent of every worker's taxable wages.

Financing the costs of these benefits by borrowing would be just as disastrous. Governments would run unprecedented deficits that would quickly consume the savings of the developed world, driving up interest rates and increasing the cost of debt among highly indebted nations. Most European countries wouldn't even be able to pursue this option unless they decided to ignore the Economic and Monetary Union's imposed ceilings on budget deficits, which amounts to 3 percent of GDP.

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