Greek-Spanish Pension Split Illustrates Europe’s Dilemma

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The New York Times
Monday, October 01, 2012

Greek-Spanish Pension Split Illustrates Europe’s Dilemma

By LANDON THOMAS Jr.

The differences in approach could not be more distinct — or telling.

Two of the most economically distraught countries in the euro zone, Greece and Spain, mapped out additional budget cuts last week.

In the case of Greece, under last-chance pressure from its international creditors, the governing coalition tentatively agreed on an austerity package that includes some of the most severe cuts in public pensions ever imposed in a developed country. Pension payouts to retirees would be trimmed by as much as 10 percent.

And then there was Spain, where last Thursday the government of Prime Minister Mariano Rajoy introduced one of the most draconian budgets in the country’s history. It was intended to reassure international investors and demonstrate the fiscal discipline that the euro zone was demanding of Madrid.

The markets need reassuring: Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request European aid.

Nevertheless, Mr. Rajoy declined to cut pensions or even to freeze them. Instead, his budget would actually increase payouts 1 percent next year on pensions for former public employees as well as on the social security payments that go to all retired Spaniards.

Politically, it is understandable that Mr. Rajoy would want to put a protective bubble around the country’s 10 million retirees at a time when people are marching in the streets and the economically crucial region of Catalonia is threatening to secede.

But pension expenditures represent the single biggest line item in the Spanish government’s budget, at nearly 40 percent of public spending and 9 percent of Spanish gross domestic product.

That 9 percent still trails France (15 percent) and Italy (13 percent). But given Spain’s rapidly aging population — 30 percent of Spaniards are expected to be older than 65 by 2050 — the portion of government spending on pensions seems certain to rise in the future.

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