Oct 8, 2011
Greek rescue – if only
By Reuven Brenner
Consider first the demographic issues surrounding Greece and Europe, and see how they are linked to potential solutions.
In a world where political institutions would be stable within a country, and sufficiently similar across countries, capital should flow from the older to the younger generations, be it within a country or across borders. Whether private entities or governments make the promises to pay, the fulfillment of promises depend on returns from the thus-financed investments. Then, either directly, or, indirectly, through taxes, these returns, paid back by future generations would then support the retired generations in their rainy days, be it health or age-related.
But what if there are no future generations? Or diminishing number of them?
Once people decide to have fewer kids, fertility falls below replacement level and prospects of immigration stays slim (think Japan, Spain, Italy, Greece, other parts of Europe), investment in these societies should diminish. Towns get depopulated, roads go to rack and ruin, trade and communication slow down, many specialists disappear. It happened when Ancient Rome lost an estimated 50% of its population, or more recently in Ireland, after first getting a 10% increase in population due to migration, then rapidly losing much of it.
Debts that do not take into account depopulation would unlikely be re-paid in full. No monetary policy, no fiscal policy, no financial engineering, no bail-outs may reverse the trends. If there is depopulation, there must be deleveraging – because there is less future income to become leveraged for.
Ireland gives a small glimpse of the above before our eyes, and it illuminates both problems and opportunities facing Greece and the European Community.
It turns out that “the miracle” of this Celtic tiger was achieved mainly with Eastern European Cubs. Before the financial crisis, Ireland attracted some 400,000 young entrepreneurial immigrants, expanding its own population by 10%, a large percentage from Eastern Europe after the fall of communism. As these “cubs” headed back to their countries during this crisis, Ireland faced tough choices.
But first Ireland, along with Britain and Sweden, allowed unrestricted migration from the 10 European nations that joined the European Union in 2004. Shortly after that, more than 130,000 Poles were living in Ireland, with an average of 10,000 more Eastern Europeans arriving every month. Young Poles emigrating to Ireland were quoted as saying, “If you have ambition in Poland, you come to Ireland.”