A Collapsing Europe?
[Update added below including graphs of the evolution of fertility and population growth in Germany and Italy since 1971]
I have certainly been critical (and I still am) of the belief in a recurrent Europe ready to take on as a growth leader in the global economy as the US slows. I have also generally been critical towards the idea of the goldilocks recovery as I fear that we will soon find out that there is not enough honey in the pot to go around. Finally, I have on the same note been much sceptical towards the continous hiking proces by the ECB and subsequent claim (by some) that the Euro would be a vessel of a re-balancing process and a crash of the dollar.
But I do not think I have ever uttered the word 'collapse' in my rather bearish economic analysis of Europe.
Yet, this is exactly the word used by Arnold King over at EconLog in a recent post also picked up upon by the Economist econ-blog Free Exchange. However, the long term prospects of the European economies are all about demographics a fact that has not escaped the Economist.
What does collapse mean? Zimbabwe is an example of collapse; I see that as very unlikely for Europe. Demographic crises are like rising sea levels: there's not much you can do about either one except accomodate yourself, but they won't kill you, because they're a slow moving threat. Europe's economies, particularly in the south, may stagnate as they struggle to care for the ballooning population of elderly with a shrinking pool of workers. But they are unlikely to actually contract, because America and Asia will still be introducing technological innovations that will allow them to produce more stuff with fewer people. Plus the introduction of China and India's billions to the global industrial labour force will make us all better off.
Now, this is interesting is it not. Demography matters but apparently there is not much we can do about it. In some sense I agree with the Economist here in so far as goes key European economies such as Italy and Germany. In these countries fertility levels have been so low for so long that the process of ageing and its consequences are pretty inevitable in the near future which in this case constitutes 15-25 years. Pronatal measures would take very long to have an viable effect and in any case these countries do not have the luxury to the kind of fiscal expansion which a pronatal scheme signifies. In effect, fiscal tightening is the road they are venturing at, at the moment. The Economist also generally mentions Southern Europe and indeed as we have seen fertility levels are very low in these regions but for the moment population growth is not in some countries at least. Here I am specifically speaking of Spain of course where a surge in immigration is helping to fuel the domestic and also the Eurozone economy.
In essence, demographics are much more complex than the 'slow moving' threat the Economist conceptualizes. One example is to think about population growth and the process of ageing and what this does to a country's growth path. Think also about immigration and how some countries might be able to postpone the effects of the ongoing demographic transition or more specifically slow the speed of the changing pyramid. And finally, think about how the Eurozone mark-up reacts and effects to how 12 countries with the same monetary policy framework move through the DT in quite different tempi.
So, will Europe collapse? Well, of course it won't but this really deviates from the real question since there are some countries within Europe which really face a daunting challenge posed by the changing demographics. Here I am especially thinking about Italy and Germany where particularly the former has a very wobbly future in the Eurozone I would argue.
In terms of demographic realities I Europe and more specifically Italy and Germany I thought that I would include some graphs which plot the development in fertility and population growth since 1971. Remember that the net migration rate is important here too and it shows up the in the figures. For example in 1990 where the population in Germany grew considerable 'above' trend as a result of the reunification as the wall in Berlin was torn down. Also in the figure of Italy we see the evidence of immigration at the very end of the figure. Of course the story told by the figures below are well known and as such it is how the figure looks as we venture along the next 30 years which is important. However, one consequence of this downtrend in fertility and pop growth coupled with a rising life expectancy is that these economies are set to age rapidly.