Europe's fundamental long-term deficit isn't measured in euros; it's measured in babies

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Mother feeds her children in Germany, June 14 2011.

Article Highlights

  • Euro zone registers 30 percent fewer births than in 1960

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  • How will Europe manage its entitlements system with decreasing birth rate?

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  • How can Europe's pay-as-you-go welfare state survive its demographic crisis?

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This post is part of an ongoing series preparing for the AEI/CNN/Heritage National Security & Foreign Policy GOP presidential debate on November 22nd.

Last week’s Eurozone pact—which was intended to forestall contagion of the Greek debt crisis to Portugal, Spain, and Italy (and Belgium? and France?)—has temporarily revived market confidence in the euro, as well as European bonds and equities. But even regarded in the best possible light, the agreement was nothing more than a topical palliative for pains emanating from a deep underlying systemic distress. For at the end of the day, Europe’s current debt crises are a consequence of a region-wide crisis of the welfare state, whose vast promised benefits voters demand, yet are unwilling to finance through self-taxation.

No plausible amount of self-imposed budget austerity, furthermore, is likely to save these existing arrangements for the future, for Europe’s welfare states are being fatally undone by her public in another arena: the crèche. “Sustainability” is the term of the decade among Europe’s cognoscenti: and European birth trends have made the continent’s magnificent edifices of entitlement arithmetically unsustainable.

The chart below illustrates the problem.

Half a century ago, the 17 countries that currently comprise the Euro zone were bearing about 5 million children each year. In a pay-as-you-go welfare state, those babies are now men and women in the prime of their working lives, supporting the health and pension benefits of older (and smaller) cohorts that preceded them. (Today there are about 2.2 Western Europeans in their late 40s for each in his or her late 70s.)

Over the intervening decades, though, Europe’s birth totals have plunged—and although the Euro zone’s population is much larger now than it was in 1960, the region today registers 30 percent fewer births. Over that period, Europe’s childbearing patterns shifted into sustained sub-replacement fertility, and by 2009, the Euro zone was on a trajectory which, if continued, would portend a shrinking of each subsequent generation by about a quarter (absent compensatory immigration).

In practice, this portends a very different population structure for Western Europe a generation hence, as the chart below underscores.

Unlike today, when people in their late 40s far outnumber those 30 years older, the projected ratio for 2040 would be just 1.1 to 1—and by 2040 people in their early 70s would outnumber every other age group within the region! (Those projections, incidentally, envision plenty of intervening immigration, without which Europe’s population structure would look even more forbidding for pay-as-you-go social welfare policies.)

So, how does Europe manage to finance anything like the scope and scale of its existing entitlement policies in the future in the face of these impending demographic trends? The elegant version of the answer is: it might manage to do so, if its public were willing to accept permanent budget and debt crises, slower and unpredictable economic growth, and radically diminished benefits for the pension-age population who will account, on current paths, for an increasing share of the European electorate. The simplest version of the answer is: it can’t.

Fortunately, there are in theory feasible fixes for these daunting dilemmas. Europe has been blessed with a health explosion over the past two generations, and though they have generally been working less and less, older European are healthier, better educated, and more potentially productive than any who have ever strode the continent before them. “Unlocking the value of health” in Europe (as my colleague Hans Groth and I argued in our 2007 monograph) offers tremendous possibilities for growth in Europe over the decades immediately ahead.

By the same token, with new and very different approaches to education, pension, and health policies, it is not hard to imagine how Europe’s prosperity could be enhanced and its fiscal balances stabilized in the years to come. But all of this would require a wholesale revisiting of the ways that Europeans and their governments work today—and it is very difficult to imagine how the pay-as-you-go welfare state could survive such reconsiderations in any sustainable manner.

A prosperous and economically sustainable future can be attained by Europe’s healthy, aging population—even with a progressively unfolding baby bust. But no one said that getting there would be easy.

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI

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