Pensions: Greece and the European Central Bank

July 14, 2015

We’ve been hearing a lot about pensions in Greece lately. These have been a major target of the creditors in their negotiations with Greece. According to a recent article in the New York Times, 60 percent of Greeks receive a pension of less than $9,500 a year. An article in today’s Washington Post may lead people to ask what sort of pensions the top officials at the European Central Bank (ECB) get.

The article briefly recounts how Greece and other crisis countries got themselves into difficulties. The piece includes this strange line:

“The tipping point, though, came in 2010, when markets realized how much these governments now needed to borrow to make up for their bad economies.”

Actually it was not so much a market realization as a statement by the ECB that it was not committed to standing behind the sovereign debt of euro zone members. This led to the sudden realization that the bonds issued by these countries could default.

The fact that serious imbalances were building within the euro zone should not have been difficult for numerate people to recognize. Most of the crisis countries had persistently large current account deficits. (Italy is the major exception.) Portugal’s peaked at 9.5 percent of GDP in 2008, Spain’s at 10.5 percent, and Greece’s at 13.9 percent. These are the sorts of current account deficits that one would expect to see in a fast growing developing country like China (of yeah, they have a large trade surplus), not relatively wealthy countries that are not growing especially rapidly.

This should have led a bank that had the responsibility to maintain financial stability to take steps to try to reverse these imbalances, for example, by dampening the flows of credit that were sustaining it. However the ECB largely ignored the imbalances. When the first ECB president, Jean-Claude Trichet retired in the middle of the crisis in 2011, he patted himself on the back for keeping inflation under the bank’s 2.0 percent target.

Since it is apparently possible to take away the pensions that Greek people spent their life working for, some people may want to know if its possible to take back the much higher pensions earned by top officials at the ECB.



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