Greece’s future in the Eurozone remains up in the air as the looming default draws one step closer. Overnight, negotiations over the new bailout funds reached a dead end — for what must be the umpteenth time. European Central Bank supremo, Mario Draghi, confirmed that time was running if Greece was to conclude a deal with its creditors.
Yet there is some hope that this seemingly endless drama may finally be nearing its end. That’s because the latest battle has pitted the Greek government between its creditors and its most influential voting bloc. Who am I referring to? Pensioners. You can be sure that any imminent bailout agreement with creditors will be contingent on a comprehensive pension reform.
Greece’s creditors have said as much. Here’s the IMF’s Olivier Blanchard, providing a case for pension reforms:
‘We believe that even the lower new target cannot be achieved without a comprehensive reform of the value-added tax (VAT). [This would involve] a widening of its base, and a further adjustment to pensions’.
The reason why they’re targeting aged pensions is because they make up 16% of total GDP spending. The IMF want to see Greece shave that 16% figure by at least 1% for now. And they’ll have to. Pensions, alongside wages, make up 75% of all government expenditure.
The other 25% of the economy has already been targeted in prior bailout funding agreements. Greece will have little choice but to reform pensions if they’re to comply with creditor demands.
The problem for the Greek government is that they were brought to power on the back of a key election promise. They assured voters that pensions would remain off the table in any future negotiations. But with nowhere left to go, changes will be necessary if they’re to secure a new deal with creditors.
So if Greece carries out pension reforms, they’ll face the wrath of Greek voters. If they don’t, then a Grexit is all but confirmed over the next few months. No pressure then.
Why pensions are so important in Greece — and most rich nations
Pensions are a big deal in Greece. In fact, they’re one of the biggest long running issues across most developed economies. The reason for this is simple enough.
Rich nations have a disproportionate amount of older people. Without going into too much theory here, it’s enough to know that the richest nations also tend to have the oldest populations. And that comes with its own added pressures.
Namely, how do economies address the issue of lower tax revenues as the number of working people decreases, while the number of dependents (on the state) increases?
It’s a difficult question to answer, and one that few nations have successfully managed to figure out so far. Australia, for example, has achieved some success through its progressive immigration policy.
But Greece is at the deep end among ageing nations. Take their demographics for a start.
Greece has just under 11 million people living within its borders. And, like most developed economies, their population is heavily skewed towards middle aged and elderly people. The most populous age range is for people between 35 and 45 years of age. Below that, the replacement numbers are anaemic. Greece’s 1.34 fertility rate is well below the recommended 2.1 replacement level which would be enough to maintain a balance in the economy.
There’s simply not enough people born in Greece to offset the pressures of paying for the elderly. That’s true now, and it’s only set to get much worse in the future. As the number of Greek pensioners increases over the next few decades, its sustainability will come under increasing pressure.
The importance of young people to an economy’s health
People of working age are the lifeblood of any functioning economy, for the simple reason that they pay the most taxes. As you may or may not be aware, a nation’s economic health is derived from its tax revenues. That applies to government revenues generated by both businesses and people.
Taxes dictate what a government can and can’t spend on. If there’s not enough revenue being generated in the system, then governments cut back on all kinds of spending. From infrastructure and transport; to healthcare and pensions; nothing is sacred when a nation’s population is skewed too heavily towards the elderly.
The problem for Greece is that, by 2050, they’ll be left with a completely inverted population pyramid. In other words, it’ll be a nation full of people over 60, with every generation below it numbering fewer in size.
As I’ve mentioned, that’s a problem that most developed and ageing nations will need to deal with. Some do it better than others. Australia is very dependent on immigration to support an ageing domestic populace. But Australia can also attract young workers because economic conditions are still relatively stable. Greece, which appears like it’s on the cusp of bottoming out and starting from scratch, isn’t as ready.
While the debate over pension reforms is something we’re now seeing in Australia, it’s nothing compared to what Greece will have to go through. That, of course, will depend on whether or not Greece stays in the Eurozone. The issue over age pensions may very well be the start of the end for Greece’s brief affair with Europe.
Contributor, The Daily Reckoning
PS: If the issue over pensions proves to be the final straw for Greece, it will wreak havoc on global stocks. Markets, already tetchy on rumours, will go into a frenzy if Greece’s gets the boot. The Aussie stock market may take a battering as investors flee to other assets.
The ASX200 is already down 1% since the start of February, losing $29 billion of its value. In fact, falling stock valuations already point to a much larger collapse soon. A Grexit could prove the catalyst to send the ASX over the cliff.
The Daily Reckoning’s Vern Gowdie believes we’re going to see a catastrophic crash in stocks. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. And he thinks the ASX could lose as much as 90% of its $1.8 trillion value.
That’s why Vern’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, Vern wants to help you avoid the coming wealth destruction. He’ll show you which five blue chip Aussie companies could destroy your wealth. And you almost certainly own one of them. To find out how to download the report, click here.