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Answer to question 7 Continued.
Technically, under the Maastricht Treaty no state can expect another state to 'bail it out' whether of its general financial problems or of its pension problems. Most continental states face greatly increasing deficits on their pensions; for example the OECD has estimated that Italy will probably need to raise taxes or pension contributions by around 10% of national income, meaning about 15% of wages, within the next 20 years; in other words its state pension fund is technically bankrupt. Germany and France's systems are barely in any better shape. The UK's state pension fund is by contrast solvent, with prospective contributions roughly equalling pension commitments. On top of these pension problems continental countries have severe general public finance difficulties. Tax rates are already very high (typically close to 50% of their national incomes goes in taxation against our 39%) and yet they have deficits of close to 3% of their national incomes (we have a near balance) because the pressures for spending are so great- all this on top of large existing public debt, which in several cases exceeds or is close to 100% of their national incomes.

So the question is whether members of the Single Currency can in practice allow another member to go bankrupt, or to renege on some important set of creditors such as pensioners. Informal agreements can be reached to help that member out because of the effects on the other members- such agreements, because informal and voluntary, do not violate the Maastricht Treaty which merely says a country cannot be compelled to bail another out. For example if a euro country goes broke, other euro countries' debts will seem more risky to the financial markets and so will require higher interest rates to be paid. Then there are your own firms who are supplying that country. And then there is all the general chaos that a country bankruptcy would cause. And finally there is the political pressure that can be applied within the euro-club. For all these reasons the Maastricht technical commitment to 'no bail-out' seems far from robust. The UK could easily find itself as a euro member being pressurised to contribute taxpayers' money to help sort out other countries' financial problems.
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(question 8)
© Patrick Minford 2002