Monday, 20 February 2012
Where Greece goes today, the rest of Europe will follow.
As Greece receives another bailout, Europe is overflowing with theories explaining the crisis. The catastrophic implosion of the Greek economy is rooted in a dysfunctional political system, widespread corruption, and a bloated public sector. A weak work ethic, early retirement, and tax evasion are all included in the list of failings. Europeans are also anxious to point out that these afflictions are not found elsewhere in the continent. Greece is an outlier, and an exception.
There is a second statistic that neatly complements Steyn's upside-down family tree. Before the crisis, Greek pension expenditures accounted for about 20 percent of GDP. True, the system was extraordinarily generous, allowing public sector workers to retire unreasonably early.
Whatever the reason for the extraordinary number, in retrospect it is clear that it was unsustainable. To meet this pension payment, the Greek government had to borrow heavily for years, pushing their debt to GDP ratio well above 120 percent of GDP. Looking into the dim future, it is inconceivable that this pension system could have coped with the rapidly inverting Greek population pyramid.
Imagine for a moment what it will take for an economy to maintain a generous pension system where there are approximately 1.5 workers for every retiree. It might be possible if workers were incredibly productive and willing to transfer a huge proportion of their income to the government to fund pensions. However, that would require oppressive tax rates on income. To see why this is true, write down a few rough numbers and work out the tax rate one needed maintain a pension to average pension to income ratio of say 50 percent.
Adding healthcare costs, unemployment benefits, and disability payments, and it becomes obvious that a generous welfare system cannot be sustained with the rapidly inverting population pyramid. For Europe, this is extremely painful arithmetic. There is nothing unique about Greek demographics. Germany, Italy, and Spain all have broadly similar numbers.
Politicians, when pushed, invariably offer up two vaguely constructed solutions to the growing demographic crisis. First, Europe needs to increase the retirement age. There are two problems with that idea. To limit expenditures, the increase has to be the order of 10 to 12 years, rather than the 2 to 3 years currently under consideration. Again, this is simple arithmetic. There is a deeper, more profound problem. Labour productivity declines with age, and older workers will struggle to find employment. Increasing retirement age might reduce pension payments, but it is also likely to increase unemployment benefit expenditures.
The second solution is migration. It is not often acknowledged but inward migrant flows have staved off the pension crisis for at least a decade. During the initial stages of the crisis, only comparatively small inflows were needed to maintain the worker to retiree ratio. Going forward, the required numbers will increase dramatically. Imagine for a moment, that an anonymous European country wanted to increase their worker to retiree ratio from 1.5 to 3. It would require half the workforce to be migrants.
If Europe would open its doors to unrestricted migration, would the flows materialize? This may seem like a strange question today, especially when one considers global poverty levels. If there is one thing that Europeans have difficulty understanding, it is global economic developments. For example, Latin America is booming and catching up surprisingly quickly with European income levels. The same is true for Asia. Even in Africa, many economies are growing extremely quickly. Migrant workers might take a look at Europe and say "nah, I think I will stay where I am".
The prospects for Europe are extremely bleak. It is a continent in terminal decline. Its moment has passed. In 20 years from now Europe will be one huge retirement home because demographics are all about simple arithmetic. If a society fails to produce a sizeable cohort of children today, it will lack adults in the future.
It is therefore perhaps understandable that European politicians would rather produce a long list of marginal concerns to explain the Greek crisis. To analyze the true causes is to shine a light on the weaknesses of the whole continent. Where Greece goes today, the rest of the continent will follow.