Europe can’t save itself

As much as I fixate on entitlement spending and America’s economic future, at least I can console myself that whatever problems exist in the USA, they pale in comparison to the train wreck of Europe. The fiscal strain of an aging population is much worse on the Continent where the economic growth and birth rate are too low while the unemployment and tax rates are too high. Robert Samuelson surveys the landscape in “The End of Europe”:

A few countries (Britain, Ireland, the Netherlands) have acted, and there are differences between Eastern and Western Europe. But in general Europe is immobilized by its problems. This is the classic dilemma of democracy: Too many people benefit from the status quo to change it; but the status quo isn't sustainable. [n.b. AARP - ed.] Even modest efforts in France and Germany to curb social benefits have triggered backlashes. Many Europeans -- maybe most -- live in a state of delusion. Believing things should continue as before, they see almost any change as menacing. In reality, the new E.U. constitution wasn't radical; neither adoption nor rejection would much alter everyday life. But it symbolized change and thereby became a lightning rod for many sources of discontent (over immigration in Holland, poor economic growth in France).

Some economists have suggested that generous retirement programs encourage workers to retire early, which places a burden on young workers, who then put off having children due to the financial strain of a family. The depressed birth rate has set up a demographic crisis; see “Europe’s population implosion” in the Economist:

Combine a shrinking population with rising life expectancy, and the economic and political consequences are alarming. In Europe there are currently 35 people of pensionable age for every 100 people of working age. By 2050, on present demographic trends, there will be 75 pensioners for every 100 workers; in Spain and Italy the ratio of pensioners to workers is projected to be one-to-one. Since pensions in Germany, France and Italy are paid out of current tax revenue, the obvious implication is that taxes will have to soar to fund the pretty generous pensions that Europeans have got used to. The cost is already stretching government finances. Deutsche Bank calculates that average earners in Germany are already paying around 29% of their wages into the state pension pot, while the figure in Italy is close to 33%.

Governments are in a bind. It is no accident that in the past year France, Austria, Italy and Germany have all experienced angry outbreaks of labour unrest, sparked by attempts to make their pension systems less generous. But the longer governments wait, the worse the problem. Pension obligations will only get more onerous; and as voters age it will become ever harder to persuade them to cut pensions back. A struggle for resources will emerge between generations. Pensioners will press for higher taxes to fund the pensions and health care they believe they have been promised. Younger workers will demand cuts in increasingly onerous taxes.

Or these younger workers will immigrate to America for the economic opportunity coupled with a lower tax rate. Of course a tide of young, skilled, European workers would only deepen Europe’s problems while alleviating ours.