Lessons of the European Debt Crisis for China: A Law and Economics Perspective

Abstract

Since 2009, European countries such as Portugal, Italy, Greece and Spain (the PIGS) have suffered sovereign debt crisis. In this paper, we try to find the reason of debt crisis by statistics analysis and case study. We use panel data for 13 European countries in 2001-2013 and find that when a country’s expenditure on social protection increases 1%, the ratio of debt to GDP increases 5.47%. As the PIGS rely heavily on public pensions and have very limited private pensions, they thus confront a public pension payment crisis, which was one of the important reasons for the public fiscal crisis. In comparison, other European countries such as the Netherlands, Switzerland and the UK (the NSU) have multi-pillar pension systems, especially their private pensions are sufficient, so their public fiscal systems are more adequate, sustainable, and healthy. China is currently facing enormous pressure from the one child policy and the arrival of a peak ageing level; to avoid the PIGS’ pension crisis and public debt crisis, China must learn from the pension system experience of the NSU to avert possible pension, debt, and financial crises.