Monday, January 30, 2012

European Implosion

An article in today's Wall Street Journal addresses the economic problems Europe is facing, noting rightly the role demographics plays in this regard. Citing a study by the World Bank, the article points to the labor market in Europe as an area of concern:
As for the bad news, the first source of trouble is the labor market. European workers aren't nearly as productive as they ought to be, especially in the South. Labor participation is low, and those who are employed are working less than they used to. In the 1970s, the French worked the longest hours among advanced economies. By 2000, they worked a month and a half less than Americans each year.
The European model of labor is often touted as superior to that in the States. Hours are shorter, vacations are longer, job security is stronger, and benefits are more extensive. The short term costs for this are generally accepted as unavoidable. Aside from strictly monetary expenses, the chief cost is a higher unemployment rate, with a much higher permanent level of unemployment. But some of the longer term costs are often ignored, particularly the gradual declines in productivity brought on by the "de-incentivation" of the labor market.

And this, coupled with the demographics of the EU, sets up a dangerous future for the economies therein. Europe--long on the leading edge of industrialization--is aging faster than the rest of the world. And given the structures of guarantees for the population, the most immediate consequence will be increased public debt:
Europe's demographics also aren't on the side of growth. Populations across the developed world are graying, but Europe's low productivity growth means that its future labor shortfall will be especially acute. It doesn't help that Europeans draw social security benefits earlier and more easily than their developed-world peers. Pension commitments will strain national budgets even if Angela Merkel gets her way on handcuffing euro-zone public debt.
The future of the Social Security system in the United States is a point of debate, as it appears to be headed into an Ouroboros scenario, but the United States at least has some time to address the problem (not a lot of time, to be sure, but some). Many EU nations are just about out of time in this regard. A greater percentage of European workers are in their prime earning years (45-54), so in the moment the problem seems contained. But this will quickly reverse itself, as these workers move into retirement, leaving a younger, smaller labor force who--due to age--will not be earning at the same rate (an issue that proponents of automatic salary increases based on years of service fail to take into account). And as the WSJ article notes, highly educated Europeans are already quick to leave the EU for the United States, a trend that will be exacerbated by these changes.

To put this another way, total earned income in the EU is set to decrease, even as the total costs for servicing public programs are set to increase. Thus, the impending shortfalls can only be made up by borrowing, increasing taxes, or decreasing benefits for the new entrants into the workforce. The latter two solutions will, themselves, likely result in even lower productivity in the long term, making the problem even worse.

On top of all of this, there are the very real and very current problems in Spain, Italy, and of course Greece. The EU is currently trying to find solutions to prevent the collapse of the economies in these nations, but selective austerity measures can only do so much. And again, capable members of the workforce will quickly look elsewhere, even as the aging population requires more productivity and income to pay for the entitlements they were promised.

It's not a pretty picture. And to think that just a few years ago many European leaders were lecturing the United States on how to "fix" its problems, that even today progressives and liberals in the United States look to Europe as an example of how things should be done.

Cheers, all.


  1. It is rather puzzling to me how people point to Europe as some kind of model considering what is happening there today.
    A minor quibble with regards to demographics. Google "spengler". He writes for Asia times and PJ Media about economics and he wrote several articles about demographics in the world. Europe in bad shape, but other places are equally bad. China is going to have severe problems. Japan is already declining, but even places like Iran and turkey are going to suffer significant demographic problems in the near future.

  2. Thanks for the info, Dm. And yes, I know Europe isn't alone. But their entrenched welfare models are--I think--more of a problem. Change won't come easily.

  3. I agree. And the demographic shifts indicate that things are going to get worse, which means even greater changes are needed. But at least Europe is already developed. When you have a country that is underdeveloped going through a similar process of aging...