(Source: here)
On 9 May 2024, John Springford, a research fellow at the Centre for European Reform in London, penned a much-needed truth bomb for Europeans about the economic outlook in light of Europe's rapidly ageing population (see here).
Springford shows that by 2040 the number of Europeans aged 65 or over will have increased by 25 million, while the number of working age Europeans will have declined by 20 million (see chart below). In other words, due to demographics alone the European economy will need to produce another 45 million workers from somewhere, just to maintain current levels of prosperity.
Gap between old and young set to rise sharply over the next two decades (Source: here)
How might Europe conjure up an additional 45 million workers? Springford says one option is to require more Europeans to work much harder for much longer, although this alone will not be sufficient. Springford demonstrates that Europe can – at best – reduce the shortfall of workers to 11 million by producing the work equivalent to an additional 34 million workers. However, producing this volume of additional work requires that all European countries achieve the same 82% working age employment rate as the Netherlands. Which will not be easy. The Netherlands happens to have the highest employment rate in Europe by some distance and, in reality, most European countries will never get close to matching Dutch-style labour market efficiency. Hence, the shortfall in workers is likely to be far greater than 11 million.
Next, Springford explores the possibility of encouraging greater intra-European migration (i.e. migration from Eastern Europe to Western Europe). Unfortunately, the efficiency gains from intra-European migration are now largely a thing of the past. The number of workers moving from East to West has been levelling off for several years as the income differentials between East and West have declined.
EU countries attract fewer foreigners from within EU due to lower wage differentials (Source: here)
Finally, workers can be invited from outside Europe. The good news is that there is an abundance of willing workers available in nearby regions, including Africa, the Middle East, and Central Asia. In fact, these people are so keen to work in Europe that many risk life and limb crossing pitiless deserts, war zones, and treacherous bodies of water, just to get here. They are also willing to work for very low wages.
The bad news is that Europeans are some of the most culturally inflexible people in the world (see here). They particularly don’t like brown people. If you don’t believe me, just pay attention to the European elections scheduled for 6-9 June 2024, which are likely to deliver significant gains for anti-immigration parties. Britain under the Tories, of course, have reminded daily of the kind of policies preferred by xenophobic politicians.
It is also possible to grasp the scale of the European xenophobia problem by comparing Europe's saturation of immigrants with that of other regions. Immigrants comprise only 6.1% of the total European population compared to 13.6% in the United States, about 40% in Singapore, and a whopping 88.4% for Qatar.
Immigrants of all kinds make massive life-time contributions to the economy (Source: here)
Smart people understand immigrants are a gold mine. Data from Oxford Economics, a highly credible think tank, shows that EU and non-EU immigrants to the United Kingdom make massive positive long-term contributions to the economy (see chart above). It follows that lower immigration could out a major dent in the public finances as indeed a recent study from the UK Office of Budget Responsibility found. OBR concluded that a recently announced cap on work visas to the UK will push up the government’s already large debt stock, meaning higher future taxes for in Britain.
Lower immigration pushes up government debt - and future taxes (Source: here)
The same is also true for other developed economies, including the United States. The reason is simple: Migrants are more likely to be younger and in work than the average person, so they make a larger contribution to tax revenues.
It is therefore difficult to escape the conclusion that unless Europeans become more far welcoming to immigrants, they will not only forego the substantial benefits immigrants bring when they enter, but also pay an extra price for problems that arise due to the resulting shortfall of workers and tax revenues.
The shortfall of labour will push up dependency ratios, meaning that the number of pensioners will rise relative to workers. A shrinking number of young workers will therefore have to pay more tax to support a growing number of retired people. Moreover, healthcare costs will steadily rise as the population ages, especially if longevity continues to increase.
The additional tax burden on young workers under scenarios of lower immigration will discourage many young from participating in the work force, which creates acute shortages of workers, especially in lower-paid but essential service jobs, such as nurses, bus drivers, cleaners, and carers. The declining particpation rate in the labour market will of course also increase the pressure on fiscal balances and depress growth rates.
Which way, then, will Europe turn? Will Europeans realise that more immigration is a good thing, or will they close the borders regardless and thereby doom themselves to stagnation?
The political environment across much of Europe today is suggestive of the latter. We need to look no futher than the virulent toxicity shown towards immigrants by nasty politicians like former British Home Secretary Suella Braverman (depicted rather accurately below).
Suella Braverman does not like immigrant workers (Source: here)
If Braverman-style anti-immigration sentiment continues, the outlook for European prosperity starts to look quite dire. The novelist Albert Brooks presents some scenarios in his humorous and thought-provoking book “2030” (see here). Brooks predicts that state bankruptcies will become common place as numerically superior older generations use their voting power to push through unsustainable increases in the retirement age and free health care.
In a particularly colourful scenario, Brooks predicts that inter-generational strife gradually replaces racial and cultural conflicts in Western economies. To bring his point across, he paints a picture of desperate, over-worked, and over-taxed young people turning to terrorism and blowing up cruise ships full of old people!
While Brooks’ take on the demographic future of Western economies is mainly comedic, there is actually nothing particularly funny about the outlook. It is more pertinent, in fact, to describe it as a tragedy unfolding in slow motion. After all, a viable solution to the demographic problem is entirely within reach. Opening Europe's borders to workers from poor countries is not only the simplest and most economical solution, it is also by far the most humane. Yet, like any proper tragic flaw, immigration seems to be the one thing xenophobic Europeans just cannot countenance. Europeans must therefore prepare to tighten their belts, because they will pay a high price for their racism.
The End
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