Roger Dale: Education and the European Union: towards a common education policy in Europe?
Pensions and Children
Public pension systems in most countries are based on the pay-as-you-go principle, in which current contributions are used to pay the pensions of people in retirement. Under current conditions, most pay-as-you-go pension systems in Europe are not sustainable: the old-age dependency ratios are forecasted to grow from the current 0.2–0.3 range to as high as 0.4–0.68 pensioners per worker in 2050, which would eventually require a very large increase in tax rates, and/or a reduction in pensions. Reform is required and it should aim not only at fixing the budget problem but also at designing a more efficient pension system.
A general slowdown in the growth of living standards associated with ageing is inevitable. Pension reform that entails a move to a partially funded system (in which workers make savings in personal accounts toward their future pensions) will not prevent the slowdown and cannot benefit all generations. However, such a move may help stimulate national savings and smooth the pension burden across generations. The pension crisis results from a lack of human capital. Partial funding means filling the human capital gap with real capital. It thus helps in mitigating the forthcoming provision crisis when the baby boomers begin to claim their pensions. Funded pension components may also increase the scope for individual flexibility by allowing people to choose their pension level and retirement age at an actuarially fair rate, and thus alleviate political conflicts associated with ageing.
One should ensure that private pension funds have an appropriate risk structure. That includes limiting exposure to stock market fluctuations and minimizing the correlation between the financial risk of pension wealth and labour market risk. Thus, portfolios of pension funds should be adequately diversified, with a critical mass of risk-free assets and a very limited exposure to assets in the firm and sector in which the worker is employed. Simple legal rules should be designed to supervise and regulate fund management so as to minimize budget risks and social costs associated with financial instability and moral hazard in financial markets. These rules should also provide strong incentives to contain the managing costs of pension funds.
Especially in the initial phase of a reform, these costs may levitate in a privatized system because of aggressive advertising by an excessive number of providers. The introduction of an individually based, privately managed, funded pillar of the pension system would allow for a great deal of individual flexibility, provided it satisfies these requirements. It would be a good idea for those European countries that have not already done so to complement the existing pay-as-you-go system with such a pillar.
A number of other margins of manoeuvre also exist that would contribute to fixing the problem of sustainability of the pension system. To the extent that part of ageing is due to an increase in life expectancy and that people are healthier, it is perfectly natural to raise the retirement age, which has trended downwards for many years in most countries. Pre-retirement schemes that are meant to artificially reduce registered unemployment, while increasing the burden on pensions, should be avoided altogether. Structural reform in the labor market, although desirable in its own right, will also have a positive effect on pension finance by increasing employment, thus increasing the tax base for contributions.
The fiscal system could be amended so as to reduce its distortionary impact on people’s decision to have children. When deciding on the number of children, people may ignore the fiscal benefits brought by children to society in the form of contributions to pensions and they may therefore have fewer children than is socially desirable. One could envisage reforms to address this issue. A partial indexation of pay-as-you-go pension claims on the number of children is one possibility. Additional self-financed mandatory funded pensions for those who have no or only few children could then supplement the pay-as-you-go pension for those with no or only few children. People who do not raise children have on average more funds to save for their old-age pension. Personal income taxation can also be differentiated according to the number of children and systems of child allowance be used to provide stronger incentives towards having children.
Prospects for Education Policy in Europe
Education is an important productive input into the wealth of a nation. It enhances individual productivity, which shows up in higher wages. The rate of secondary enrolment comes out as one of the significant determinants of differences in GDP per capita across countries. An educated workforce is also a valuable asset at times of rapid technological change, because educated workers are better at adopting new technologies.
In most European countries, the public sector holds a quasi-monopoly on the provision of education. While government intervention may be justified on the grounds that education has social aspects and that parents’ decisions may not reflect their children’s best interest, it is not clear that direct provision is the adequate form of government intervention. One may consider a more decentralized approach that would contain costs and allow for greater diversity of individual choices.
In many countries, primary and secondary educational systems are under pressure. On the one hand, the costs of education are soaring as both enrolment rates and the length of studies trend upward, while the cost per pupil grows as fast as GDP per capita. On the other hand, there is a perception that standards and achievements are going down.
Some argue that in order to solve these issues, one should spend more resources on facilities, hire more teachers to reduce class size, and perhaps employ more staff to take care of discipline and other non-curricular aspects. Others insist that educational systems can be made a lot more efficient by relying on competition and free parental choice.
What does the evidence say?
The EEAG points out in this chapter that there are large disparities between countries in terms of achievements in reading, mathematics and science. These disparities occur among countries that are similar in economic and demographic terms. Therefore, the way schools are organized seems to matter a lot. Furthermore, the amount of resources devoted to education does not seem to have a large impact. In a cross section of countries, it only has a small impact on achievements; the US spends a large amount per student, but does worse than the Slovak Republic that spends only little. Econometric studies at the individual level suggest that traditional recipes based on increased spending fail. For example, there is hardly any evidence that reducing class size has any impact on achievement. These findings are confirmed by event studies such as those of the unsuccessful French “Zone d’Education Prioritaire” experience. On the other hand, a growing body of empirical studies that compare similar groups of pupils exposed to different policies suggests that enhancing competition between schools has positive effects on achievements. Competitive mechanisms re-allocate resources from the worse to the best schools by allowing parents to choose and by adjusting school resources so that the successful schools can grow to accommodate increased demand. These mechanisms can take different forms: they can rely on the private sector to different degrees and involve different compensation mechanisms in order to offset potential unwanted effects on the distribution of income.
For example, vouchers of some amount can be given to attend private schools. The amount of vouchers can be adjusted to reflect distributional concerns. It has been shown that such schemes also benefit pupils who continue to attend public schools, because these are disciplined by competition from private schools. Hence, even students that are too poor to attend a private school, despite the voucher, indirectly benefit from school competition. But one can also think of other mechanisms where parental choice is increased and management is decentralized to the school level, but where there is less reliance on monetary rewards and smaller distributional effects.
The organization of public schools has a large impact on achievements. Mere increases in spending, in particular in the form of smaller classes, seem to be an inefficient way of raising achievements. In contrast, substantial improvements can be obtained if one fosters competition, both among students to get into the good schools and among schools to attract the good students. The available evidence suggests that while raising performance, such policies would not be particularly “unfair” or “non-egalitarian” relative to current practices.
Mergers and Competition Policy in Europe
Merger activity is gathering pace in Europe. 2005 has seen large-value mergers or acquisitions such as Italy’s Unicredito of Germany’s HVB in the banking industry and France’s Pernod Ricard of the UK’s Allied Domecq in the food and drink sector. The pace of activity in utilities has been especially hectic and France’s Suez has acquired Belgium’s Electrabel, France Telecom has bought Spain’s Amena and Telefónica (Spain) has launched a bid for O2 (UK). Within Spain, Gas Natural has also announced its intention to take over Endesa in the largest operation of the year. At the same time, private equity firms (mostly British and American) are buying up firms, in particular conglomerates, with a view to restructure them and sell them for a profit. Not so long ago, mergers were basically an Anglo-Saxon phenomenon. However, the end of the millennium merger wave was driven, at least in terms of cross-border operations that have been gaining weight in the total, by activity in the EU-15.
This reflects the long-term effects of market integration in Europe. But broader trends in the world economy are also important – the revolution in information technology, the widening of markets, the strength of corporate profits and the availability of cheap credit. Globalization, especially in the form of competition from emerging economies like China and India, has induced restructuring and redeployment to increase productivity, and mergers are an integral part of these processes.
Mergers raise a host of public policy issues. It is not clear that mergers create value for shareholders and consumers. A consolidation wave poses a threat to competition, which is the main driver of economic efficiency and productivity growth. The preservation of competition in different markets is of utmost importance. Domestic mergers are in general more threatening to competition than cross-border ones. It may be agreed that globalization lessens the need for merger control, but it is important to establish that European merger control is up to the task of ensuring that the merger wave is good not only for investment bankers but also for consumers. A related issue is that many European governments have a protectionist instinct and view with suspicion foreign takeovers of their national champions or of firms that are considered to be in strategic sectors. Banking and utilities are often viewed as examples of such sectors. France and Italy tend to protect their firms, as shown by, for example, the discussion over whether French Danone could be taken over by PepsiCo, and the obstacles put by the former governor of the Bank of Italy to the foreign takeover of Antonveneta and BNL. France has issued a list of strategic sectors where national interests are to be protected. Despite this, the trend towards cross-border mergers seems robust. The public policy question is whether ownership matters and whether Europe needs either national or European champions.
Globalization is associated with technological change, with decreases in trade and transport costs of goods, capital, people and information, and with liberalization and market integration that simultaneously enlarge the market and increase competitive pressure. In many sectors, the number of firms will have to be reduced in an integrated or enlarged market to reap economies of scale. At the same time, a sufficient level of competition is needed for innovation, and the timely termination of bad projects drives productivity growth. Furthermore, domestic competition is a key to international success and competitiveness, whereas fostering national champions may be self-defeating. The policy challenge is how to allow the needed restructuring and potential increase in firm size in some sectors, while at the same time protecting competition.
The EEAG’s first conclusion is that a vigorous competition policy is needed, but care must be taken not to try to enforce low concentration in natural oligopoly industries where only a limited number of firms can survive. Furthermore, merger control should take into account the need of a larger firm size in several industries and the potential dynamic efficiencies (for example innovation) generated by mergers. The second conclusion is that artificial obstacles to hostile and cross border mergers should be removed in Europe. Hostile takeovers are a sign of health of the market for corporate control. Cross-border mergers should proceed without regulatory obstacles as they may keep in check the increase in domestic concentration. It is acknowledged in this chapter, that ownership is not neutral, in particular, in some industries like banking where relationships are important, but on balance this is insufficient justification for protectionism. European as well as national competition policy must play a major role in keeping markets open.
The third conclusion is that care must be taken in not promoting European champions that end up being effectively protected from closure. Can the independence of competition policy be maintained given the politics of the Commission? States can lobby Commissioners and other Directorates than the one for competition (like Industry or Energy) to further national policies. Such lobbying would be hard to resist if it is done simultaneously by more than one large EU member state. An independent institutional body might protect competition policy from these industrial policy pressures. The fourth and final conclusion is that the 2004 reform of the merger control procedure in the EU was a step in the right direction, increasing checks and balances for merging parties and the role of economic analysis. However, the guarantees for the parties and the quality of analysis and decision-making, as well as the protection against the lobbying pressures of national governments and firms, could still be improved. One example of an independent institutional body would be an administrative panel, which is located within the Commission and recommends or even decides on merger cases. Another possibility would be a European Competition Agency.
