EU newcomers want pension reform excluded in deficit

Hungary, Poland and Slovakia stuck to their guns on Tuesday in their battle for a change in the treatment of pension reform costs under the European Union's revamped budget deficit rules. The three states, among the biggest EU newcomers, reiterated their demand for pension reform costs to be excluded from the budget deficit under the bloc's Stability and Growth Pact.
"This type of spending should not be included in the deficit because it amounts to savings. It does not increase domestic demand," said Hungarian Finance Minister Tibor Draskovics.
Analysts say that unless those countries have their way on pension reform costs under a the revamp of the Pact, they - especially Poland - may have problems with meeting their targets of adopting the euro in 2009 or 2010.
EU President Luxembourg has proposed that pension reform expenditure could be treated only as a mitigating factor in assessing whether a country should face an EU disciplinary action if it breaches the Pact's 3 percent of gross domestic product limit.
But the newcomers believe that proposal is not enough, diplomats said. Some diplomats said that the new member states' stance on pensions was partly responsible for blocking an agreement on revamping the Pact, which France and Germany want to water down against demands of some smaller member states.
The ministers are to meet against on March 20 to try to clinch a deal.
The 3 percent of GDP ceiling is a key requirement for countries wishing to join the euro zone.
Hungary's Draskovics insisted that his country's budget deficit would be below that level in 2008 regardless of whether pension reform costs are included or not in the deficit. But some economists are not certain that will be the case.
Slovakia would also benefit from a favourable decision on pensions, but its euro timetable is based on conservative budget forecasts and it is seen having least difficulty among large new EU members in meeting euro criteria.
The EU's statistics office Eurostat has allowed Poland to book transfers to newly created private pension funds as part of public finances only until March 2007.
A change demanded by Eurostat will inflate Poland's budget deficit by 1.6 percent of GDP. Hungary's deficit is some 1 percent of GDP higher if costs pension reforms are included.
Among the EU's 25 members, pension reforms have been implemented by Slovakia, Hungary, Poland, Sweden and Britain.
Economists say other large EU members will sooner or later also have to overhaul their pension systems to better cope with the effects of ageing populations.