There are moments in politics and policy that change the course of history; when they can be summarised in three words, they are the best.
Mario Draghi’s statement back in 2012 that the European Central Bank will do “whatever it takes” to save the euro was such a moment: from then on, the speculators’ attack on weaker eurozone members’ sovereign debt stopped.
Another such moment came three years later, when in 2015 German chancellor Angela Merkel allowed one million refugees to enter Germany. “Wir schaffen das” (we can manage this), she said.
Her decision was widely criticised at the time, but it is very possible that it saved the German economy. What’s more, if eurozone countries previously blighted by the debt crisis of 2011-2012 truly want to afford to pay their debt, they should follow her example and allow more foreigners in.
A recent report by European credit ratings agency Scope shows that rapidly shrinking populations in most of the eurozone countries mean that the long-term risks to their creditworthiness “may be significantly greater than previously assumed.”
The challenges of ageing populations creep up gradually over time; therefore, it is impossible to say exactly how a shrinking demographic will affect the wealth of eurozone countries. However, Scope Ratings lists some of the main factors at work.
First, in the labour force productivity will likely shrink as the workforce gets older. This could have repercussions on revenues to governments in two ways: less tax collected, and more money spent on issues such as healthcare and pensions.
Banks’ profitability will shrink because there will be less demand for lending. With banks still playing a very important role in eurozone economies, this will have negative consequences across other industries.
Finally, government policies will be shaped by the “grey power,” with spending priorities skewed towards spending on welfare for the elderly, rather than productive investment.
This could make those countries’ creditworthiness even worse, because consumption spending is never seen as a good thing by lenders and investors.
United Nations’ forecasts quoted by Scope Ratings put the decline in the population of working age in Spain and Italy at about one third from the current level by 2060. For Germany, the decline is likely to be 20%.
As a consequence, the old age dependency (the number of working age people supporting those over 65 years of age) will rise sharply. If today for every person over 65 there are three people of working age contributing to the tax coffers, in 2060 this will have fallen, at best, to only two.
With fertility rates falling, receiving more immigrants is the only way many European Union member states can save themselves from poverty. European Commission forecasts put net migration inflows at one million people per year for the next half century.
However, as Scope Ratings points out, if developing countries grow and offer more opportunities at home, this figure could turn out to be too optimistic.
Population decline will affect countries such as Spain and Italy more than Germany, with Germany’s economy more open (so far, at least) to receiving migrants.
These two countries already have high debt, supported only by the ECB’s willingness to keep interest rates at exceptionally low levels, with real rates deeply negative.
Financial repression (negative real interest rates shrinking people’s savings) has been in place for a long time, but it is questionable whether an ageing population in the eurozone will be willing to put up with interest rates below inflation for much longer.
It is therefore crucial for EU countries to replenish their workforces. Leaving people willing and able to contribute to Europe’s economies out in the cold in the forests around the EU’s borders doesn’t look like a very smart thing to do, in that context.
Europeans should welcome the refugees — who are mostly young and therefore can learn new skills quickly — for both their sake, and ours. So come on, Europe: wir schaffen das.