Y’know, we’ve all been talking about Europe’s fiscal challenges quite a bit, myself included. The deficits. The retirement ages. The entitlements. And all during what may be shaping up to be a pretty good Formula 1 season…
But I digress. We’ve all seen the charts:
But this excellent post over at Edward Harrison’s Credit Writedowns blog written by Edward Hugh from A Fistful of Euros (I love that name. Where’s Sergio Leone when you need him?) really hits at the bigger issue at work:
The backdrop to the whole debt issue is the underlying problem of rapidly rising elderly-dependency ratios (and increasing population median ages) across the developed economy world. Normally this means the imminent arrival of a wave of heavily underaccounted-for-liabilities which will produce a massive pressure on the underlying structural (rather than cyclical) deficits in the worst affected economies. The strange thing is that this development had in principle been long foreseen, and indeed formed part of the underlying raison d’être for drawing the 3% deficit/60% debt Maastricht line-in-the-sand. The other part was, of course, an attempt to stop spendthrift governments being spendthrift. As is now abundantly clear, in neither case can the Maastricht package be said to have worked, but the unfortunate historical accident is that we have come to realise this in the midst of the worst global economic crisis in over half a century (indeed arguably the second worst one ever, and – disturbingly – it is still far from being over).
And here’s some compelling data which tells the story. It’s from the CIA Factbook. Let’s take population growth rate. Here’s a snapshot of the top 20 countries in this category. You’ll see I pulled up Greece as an example. It came in 188th:
France ranked 152nd while Germany ranked 210th and its growth rate is actually negative. So Sarkozy has it really easy: put Germany’s money where his mouth is while there are fewer Germans to yell at him for doing so.
Let’s look at birth rate. Here, Greece came in 206th:
France? They were 162nd while Germany was 220th. I should point out the CIA tracks this data for 233 countries. So to be ranked so close to the bottom consistently in these categories is of some consequence.
Last but not least, here’s a look at death rates:
Yes a lot of the names are the same, but the fact is birth rates among the top 20 are about double of the death rate the top 20. That means net-net, population is growing.
Which brings me to this chart:
A flat-lining labor force will happen in most of the developed world given its demographic characteristics, it’s just a matter of time. The question is do we measure it in years or decades. My guess is years. Eventually the confluence of declining birth rates, rising average median ages and declining population growth rates (in total, including immigration) will take its toll.
So total debt may not be the metric we need to watch. It may be debt per capita. My sense is this will only increase and continue doing so until the OECD countries collectively wake up and realize unfunded liabilities, bloated entitlements and other government transfer schemes won’t work. Not because there won’t be enough money, but there won’t be enough people to earn money.
But we have countries led by people who only grew up with government expansion post-World War II. They don’t know any better. The older folks? Well they kind of pushed us in that direction as a reaction to the Great Depression. Policy in the US became about establishing safety nets and transfer mechanisms. And it worked…
Until now… those programs were all based on two premises: an expanding population and marginal increases in labor would produce expanding GDP. I don’t think they ever envisioned a world where you’d see slack in a labor market. But because of technological advances, we’re here. Productivity can still increase even though we’ve had a persistently soft labor market.
But meanwhile, those unfunded obligations keep increasing because compounded interest doesn’t care a wit about population growth.
Restructuring is needed, to put it mildly…