In the Spanish case, the pension system reforms introduced in recent years have addressed this challenge by, among other measures, putting back the retirement age, introducing a sustainability factor linking the initial pension to the increase in life expectancy and setting in place a new mechanism making the annual rise in pensions conditional upon the system’s revenue and expenditure being balanced, with ceilings and floors duly in place. On the estimates available, in benign macroeconomic scenarios, these reforms would be successful in countering the effect of the expected increase in the so called dependency ratio, the ratio of the population aged over 65 to the working-age population, on pension spending and, therefore, would contribute to restoring the system’s long-term sustainability. 4/9  But, without further increases in the system’s revenue the adjustment mechanism would operate chiefly through reductions in average pensions relative to the average wage, i.e. via a reduction in the public pension replacement rate, thus, raising the issue of the “social sustainability” of the adjustment mechanism. Beyond specific proposals, what remains crucial is that any reform strategy should be transparent, increases the link between intertemporal contributions and benefits of the system and is anchored in an adjustment mechanism that guarantees its financial balance. In this context, a medium-term fiscal programme is needed to complete successfully the fiscal consolidation process. This programme should detail the legislative initiatives needed to achieve the targets and include a prudent medium-term macroeconomic and fiscal revenues forecast.
What we observed before the crisis, and what we became painfully aware of when it erupted was, however, that public and private agents in some countries did not change their behaviour, that financial markets did not play any disciplining role and that the loose application of the Stability and Growth Pact and the Broad Economic Policy Guidelines rendered them ineffective as stabilisation devices. The Pact and the Guidelines were not strong enough to prevent the accumulation of a series of imbalances. We also discovered two other gaps during the crisis: too little attention had been paid to how financial markets work within a monetary union and no crisis management mechanism was available. To be stable, the European building needed operational repairs. The stability principles, as conceived in Maastricht, were insufficient and a new culture of stability had to take over. The ECB acted on several occasions to curb the so-called “tail risks” – the risk of the monetary union breaking up – and to gain the time needed for others’ actions to bear fruit. It is worth noting, however, that monetary action can hardly go beyond this as the cracks detected in the building were not of a monetary nature. At the Member State level, fiscal consolidation policies and structural reforms were needed and are being implemented to better accommodate domestic behaviour to the patterns of stability required within a Monetary Union. As for euro area governance, a deep process of reform has been undertaken.