Prescription to attract a better class of politician

Published in Financial Times: 27 May 2010

Sir, Your editorial, “How to cure the euro’s ills” (May 25) argues for “sovereigns’responsibility for their sovereign mistakes”. The problem is that a sovereign state is not a person and only people can be induced to be responsible, not states. No responsible behaviour can be expected from the politicians unless they have some “skin in the game”.

Having attacked bankers’compensation during the financial crisis, perhaps it is time we fundamentally rethink how European politicians are compensated. Most politicians are paid a salary regardless of performance and his/her main objective is to be re-elected. In order to get re-elected the trick is to buy votes by handing out social and other benefits with borrowed money. Why this is called “democracy” is puzzling; it is not really democratic as the people who have to repay this debt (our children) are not voting. As a result we are saddled with the biggest Ponzi scheme in history: the European social model.

I propose that every politician who gets elected should put up half his wealth plus half of any other income earned as collateral against borrowing initiated during their tenure. As government debt has a maturity of 10 years and more, this would make sure that revenues from book sales after leaving office would also be a source of collateral against government debt. At the same time, compensation for politicians would be increased dramatically, but contingent on performance measures. These measures could be targets in debt/gross domestic product ratios or other measures of economic responsibility. In order to avoid short-term gaming any bonuses earned would be subject to claw-back provisions and would be stored in a bonus bank to be paid out long after the politician leaves office.

As a result we would attract a different type of politician all together: no more power hungry lawyers who are largely ignorant about economics and finance, but the type of people who run private equity firms. Managers who are risk takers and are comfortable working in highly levered companies have a solid understanding of business decisions. The public will become less cynical aboutthe current political class, which seems to bear no financial consequences for the mess they have made.

Theo Vermaelen, Professor of Finance, Insead, Fontainebleau, France

Gervasio

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