History teaches us that empires do not collapse overnight. They disintegrate gradually as existential risks remain unaddressed by societal leaders.
Europe is not an empire, but the EU can be described as a superstate. It is characterised by some binding structures like freedom of movement and a common monetary policy for a large part of the member states. But it suffers from a dysfunctional and unsustainable system of governance dictated by national interests.
Still, Europe’s main existential risk is worsening demographic challenges, most of which remain unaddressed.
Improvements in healthcare mean that across Europe, people live longer but have fewer children. Of course, some rich countries like the US and Canada face similar challenges but seem to cope better than most European member states. Ironically, one of the EU’s big merits – the freedom of movement – intensifies the demographic risks of the poorer member states.
Young people from the poorer eastern countries, but also from Italy, Spain and Greece, prefer to migrate to the more affluent states where they can earn better wages in a more stable currency.
The sovereign debt crises of the past decade have shown that converging interest rates can never ensure a sustainable currency union or an integrated banking system.
Wage bargaining, regulation and fiscal policy need to converge to stop the imbalances between countries. But the slow-burning issue of deteriorating demographics arguably poses a more significant risk for the survival of the Union.
Both illegal and legal migration in Europe, including Britain, is being mismanaged. Even though Europe receives more migrants than it loses, the United Nations projects that its population will fall by around five per cent by 2050. What is even more worrying is the fact that the European population is ageing faster than the Americans.
The UN projects that in 2050, the median European will be 47 years old, nine years older than at the turn of the century, and four years older than the median American. In 2015, there was about one person older than 65 for every four people in Europe (an old-age dependency of 25 per cent). By 2050, the ratio will be one to two. In America, it will be one to three. Countries like Italy and Spain will have an even worse dependency ratio.
Both illegal and legal migration in Europe, including Britain, is being mismanaged
Southern European countries not only have lower fertility rates but also suffer from a brain drain as young people see no future in their country and prefer to seek greener pastures in other wealthy countries.
The demographic challenge becomes a productivity nightmare in countries with low labour participation. Older Italians, for instance, stop working well before they reach pensionable age. A shortage of affordable childcare means many women never return to work after becoming mothers. By the age of 50, just over half are in work in neighbouring Italy.
Stefano Scarpetta of the OECD, a Paris-based think-tank, calculates that in 2050 there will be more Italians over the age of 50 who are out of the labour force than there are workers of all ages. The new Italian government has come up with some strange ideas for addressing the fertility problem. One government minister proposed a €15,000 bonus for couples who get married in church. He later clarified that all those who get married would benefit.
Investors give importance to demographic challenges before they decide where to locate their economic ventures. The dynamics that lead to low productivity worry them. They would rather locate to other parts of the globe like Asia and South America, even if production costs are also increasing in these areas.
Eastern European countries are suffering more than most. About 2.5 million Romanian nationals of working age have migrated to other EU member states and Britain. This is equivalent to a fifth of the indigenous population. Many of these countries were motivated by the dream of free movement when they decided to join the EU. Now they are losing working-age people to Europe’s north and west. Croatia lost five per cent of its population in the three years after it joined the EU in 2013.
A radical reform to family support policies, pensions reform, labour market rationalisation and rethinking of education strategies are the essential but politically difficult areas that need to be urgently addressed.
An analysis of the European Bank of Reconstruction and Development goes further. It concludes that cutting corruption and strengthening institutions in less-well-run countries in Eastern Europe could convince potential emigrants to stay home and help vitalise their countries’ economies.