Baby bust could hit periphery

While the impact of declining populations will be felt across the developed world, the nations of the periphery are particularly vulnerable, given that they also struggle with high levels of unemployment and debt-to-GDP ratios of above 100%..

The CIA World Factbook 2015 gives Greece the very lowest birth rate of the periphery countries, with 1.42 births per woman, placing it 210 out of the 224 nations surveyed. Meanwhile Italy, Spain and Portugal come close behind, at 1.43, 1.49 and 1.52.

A declining population is not necessarily bad. In fact, benefits for the workers in such a society often include higher wages, cheaper housing, and greater wealth for the few children born in an environment in which they often do not have to share their inheritance with cousins or siblings.

However, at the macro level, cracks appear. In modern welfare states, the cost of meeting social security obligations — in particular paying state pensions and old age healthcare — will inevitably fall on the few children born in such societies.

In previous generations this was not a problem as the “baby boomers” born after the Second World War were a larger cohort than their parents.

However, to take the example of Portugal, in 1960 the fertility rate stood at three children per woman, falling to 2.1 by 1982. Standing at 1.43 as of 2015, this cohort of children born to Portuguese mothers will at some stage have to face the costs related to Portuguese pensioners and health care, in addition to the other fiscal costs associated with a modern nation.

If this was in of itself not a surmountable challenge, Portugal has a debt-to-GDP ratio of 129%, with some estimates using non-official measures, such as including the debts from publicly owned companies placing it as high as 166%.

Italy, Greece and Spain all face similar challenges, with debt-to-GDP ratios of over 100%, with Greece facing an eye-watering 179% ratio as of 2015, according to the European Commission.

The challenge of meeting the social security obligations is made worse by the periphery’s high levels of youth unemployment. While the unemployment rates have declined in the last twelve months, they still hover at between 39.3% in the case of Italy and 48% for Greece.

For sovereigns with strong economies and low levels of unemployment, mass immigration can work to alleviate shortages of workers and relieve the pressure on state budgets.

For example, Germany has a youth unemployment rate of 7% while Norway’s is 9.4%.

In 2013 the European Commission said that the population of Germany would decline to 70.8m in 2060. As the industrial heartland of Europe, it is inevitable that Germany will continue to encourage migrants to move in search of work, as without mass migration its numerous industries will face shortages in its manufacturing industries.

This is not a viable strategy for the periphery. While Portugal, Italy, Spain and Portugal all enjoy solid tourism and agricultural industries, the shortage of jobs for southern Europe’s young and unemployed can not be alleviated by immigration if there are no jobs to provide the taxes for its pensioners and citizens.

In the coming decades advances in automation, and nascent industries such as 3D printing may create mass redundancies, with manufacturing particularly vulnerable to technological advances that enable factories to reduce the number of workers on their payrolls.

Sovereigns that are better prepared for such changes include the likes of Sweden, Finland and Denmark, which are pioneers in everything from mobile gaming to fintech and which have moderately sized populations. The combined populations of the Nordic nations (Iceland, Sweden, Denmark, Finland  and Norway) is 26.6m, standing at less than a quarter the circa 126m people living in the periphery.

Indeed, in the case of Norway its sovereign wealth fund, valued at circa $873bn as of June 2015, should give it plenty of room for any financial downturns in the coming decades. Furthermore, while the Nordic nations have below replacement fertility rates, their birth rates are substantially higher than the periphery’s. For example, Norway’s rate stands at 1.86.

The periphery has little in the way of future proof industry, few natural resources and faces a much greater population decline, so will face a much steeper hill to climb than the Nordics.

The Nordic nations with higher fertility rates have invested a considerable amount of public money into the business of birth, allowing women who choose to take time off work to have children to receive financial compensation, for example. But this is expensive.

Russia has also tried to boost fertility with government programmes. Hitting a low of 1.29 in 2005, fertility rates have creeped up year-on-year, hitting 1.78 in 2015 despite the ongoing difficulties faced by Russia due to a combination of falling oil prices and Western sanctions.

Population decline is a particularly sensitive matter for Russia, given that its 146m people occupy the largest country on earth, making it the fourth most sparsely populated nation on the planet.

Government schemes have included maternity payments of over $10,000 to mothers that have more than one child, prizes such as refrigerators and cars for large families and even unconventional methods such as organising a concert to encourage larger families that included a performance from R’n’B group Boyz II Men.

While Russia carries out programmes to increase its fertility rates, its measures are modest when compared to the Nordic nations and hence may be easier to implement. 

One-off payments for large families, for example, may incentivise an increase in the fertility rate, while not resulting in a long-term payment for the taxpayer.

While such measures are politically contentious in western Europe, the alternatives for the periphery are even bleaker. While population decline is an unpopular topic, the consequences for Europe will only become more serious, with the periphery on the front line.