The Real European Debt Crisis

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demographic problemsThere have been numerous stories about the Euro-crisis, a possible Greek default and the PIIGs. However, there is another looming crisis on the horizon for Europe, unless something changes drastically.

One of the biggest factors behind growth is; demographics, demographics, demographics. Despite Japan having 10x the GDP per capita of China; China is now the second largest economy of the world due to their massive population of 1.3 billion people. India is also becoming a super power due to the massive growth rate of the population. India had the world’s largest economy, with a 29% share of world GDP in 1700 , when India numbered 180 million people and represented 20% of the world’s population. These are just a few statics to show how important expanding populations are for economic growth and prosperity.

However, Europe looks like it is in serious trouble.

The concern about the PIIGs is putting a veil on the real crisis that is spurring up in the European nations. There is realization of the low fertility rate that is prevalent in Europe, but not a lot of studies highlight the consequence of this problem and the result of increasing aging population on the European economy. The careless government spending is not the only reason for the meltdown of the European economy; it has a lot to do with the changing demographics of the nation and the need to pay for health care and retirement benefits. This will lead to an exploding debt and decreased economic growth.

The problem is that European countries still abide by the 19th century policies and have for decades maintained an economic system which supports and facilitates the satisfaction of the needs of the senior citizens with high focus on provision of health, retirement and old-age welfare. The debt crisis is merely a proxy for the crisis of the aging population. It is estimated that over the next 40 years, one-third of the total European population will be well over the age of 60 years. This demographic problem is similar to that prevalent in countries like Japan. Japan with its low birthrate and China with its one-child policy are now facing a critical issue of increased population gap between the young and the old (Japan is already facing the problem, China will face it in coming years).

The young generation entering the workforce is just not enough to replace those who are and will be retiring in the coming years. Similarly, in years to come, Europe will face a problem bigger than the debt crisis, of complete change in the social and economic needs of the population due to the changing demographics and furthermore, there will be a need for change in governmental policies to contain this problem which will soon be irreversible if no proper measure is taken now.

Almost all economists will tell you that countries require a birthrate of an average of 2.1 for replacement of the existing population, but the fact is, even the statistically leading countries of Europe like Ireland and France have stagnant birthrates of ~2, and most of this is due to the large birth-rate of second generation immigrants, which will be discussed below.

This reality paints a very worrisome picture as it illustrates that the emerging or present population of Europe is unable to effectively replace the present, currently employed, generation of today. This realization leads to the discussion of European countries requiring foreign workers to fill in the opening in the skilled and unskilled sectors of the economy created due the prevalent inability of the younger generation to replace the older generation. Germany touted as having the strongest economy in Europe has one of the lowest birthrates in the world of 1.36 children per women, only slightly below Japan’s 1.37 rate. Russia which is part of the prestigious BRICSs (not a typo, you can see my article here- has a birthrate of only 1.30. The US census forecasts that Russia’s population of 140 million will decrease 20% to 111 million by 2050.

Without getting too political, Europe has a huge immigrant population. However, their attempt (or lack thereof) to integrate them has been nothing short of a complete disaster. The cause for the lack of integration not only lies in the fact that these foreigners live separately limiting interaction within their cultural circle, but the European government can also be held responsible. Over the past few decades, while the major leading countries of the world molded their policies and outlook to partake in the process of globalization, the government of Europe has done very little. The government has paid little or no attention to the necessary changes required for the promotion of diversification, creation of more inclusive labor market, and enforcement of anti-discriminatory legislation. Discrimination or dislike for the foreigners is so prevalent that the right wing anti-immigration parties which were once considered the fringe, are now gaining a huge percentage of the vote.

While the Europeans politicians neglect the necessary change in outlook of society towards foreigners and overlook the required culturally-integrative approach towards a more inclusive labor market, the dependency of the nation on these foreigners are increasing. In order for the European economy to sustain and not come tumbling down, foreigners are required to fill in the increasing labor gap and moreover, the incomes and the tax revenue of these immigrants are necessary to support the economy which is burdened with pension and healthcare facilities provided to the senior citizens of Europe. If Europe does not act very soon, then the euro zone will end up looking like Japan today, except with a lot more ethnic conflict between Muslims and Christians.

How does America square compare to this? Despite the temporary huge surge of baby boomers retiring, the US census estimates that the population is expected to grow at a moderate place over the coming decades. America’s population is expected to grow from ~310 million today to ~420 million in 2050. America in 2050 will have the third largest population in the world and the 2nd largest economy. Currently, America’s birthrate is 2.06, only slightly below the replacement rate of 2.1. Although, America does not do a great job of integrating immigrants, it pales in comparison to the ethnic tension all over Western and even Eastern Europe.

If America can get its budget deficit under control, it will be in good shape in the coming decades; however, the same cannot be said of Europe where drastic change is required immediately.


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