When US Secretary of Defense Donald Rumsfeld spoke recently of "Old Europe," he was right, but not in the way he intended. Europe is indeed old, and growing older. Across the continent children are increasingly scarce. Fertility rates (the number of children per woman in the population) have fallen to 1.2 percent in Germany and Italy. The rate is even lower in Spain -- in fact, the lowest in Europe. Spain is still a young society, but a society without children is doomed.
The fertility rate for the US, by contrast, is 2.4, and it is 2.1 for the UK. These differences are extraordinary, particularly in view of the far less generous maternity leave policies that apply in the US and the UK relative to continental Europe. France stands out on the continent with a fertility rate of 1.8, which is most likely the result of years of generous tax policies towards large families.
Migration is also an important explanation for these differences. Higher fertility rates in the US, the UK and France reflect the large number of immigrant families in each country. Fertility rates among immigrants are typically higher than in native European or North American families. But increasing the number of immigrant workers will not necessarily raise fertility rates. Germany, for example, has a large population of guest workers, but few settle there with their families; most leave their children in their homeland.
An aging population contributes to Europe's poor economic performance. The old do not work, and a smaller and smaller share of the population (the disappearing young) is taxed to support them. In turn, the high tax rates needed to support the old discourage the young from working, creating a vicious cycle: ever increasing tax rates on a disappearing labor force, lower growth rates, and fewer resources available to support those that retire at 60 and live into their 90s.
The effects of this are partly offset by the fact that, with fewer children, more women enter the labor force. But then these women also retire (often at an even younger age than men) adding to the "unsupported" army of retirees. Compare this with the US, where participation by women in the labor force also is increasing, despite America's higher fertility rate. Indeed, female participation in the work force is higher in the US than in the EU (70 percent versus 60 percent).
The saving rates among Europe's old people indicate that they are worried about the dwindling number of workers who can be taxed to support them. Consider Germany. Any economic textbook will tell you (the famous "life-cycle" model) that the young save for their retirement, while the old spend what they accumulate. But in Germany, the data seem to suggest a puzzling fact: the old save until their final days. It is the young who spend. Even more remarkable is not the level of savings among the old, but how it changes over time. Recent German surveys have detected a small increase in their savings rate.
Why should old people save? The most plausible reason is that many now realize that they will live far longer than they anticipated -- often spending one-third of their lives in retirement -- but that the state may no longer deliver on its promises. Default is unlikely, although not impossible, on pension benefits. But it is more likely on the provision of health services, by far the most important service for old people. When you understand that you are likely to live into your late 80s or beyond, and you also understand that the quality of public health services is deteriorating, you save more to take care of yourself.
So why do Europeans have fewer and fewer children? Indeed, non-working time even for those who hold jobs is increasing, offering ample opportunity to rear children. Working hours in Europe as a whole fell from 1,713 hours per year in 1980 to about 1,576 today, with Germans putting in the least number of hours at work. One explanation often mentioned points to a lack of support, such as public childcare, for mothers raising children. But, then, why is the US birth rate higher than in many countries in Europe that have much larger public support for childbearing mothers?
High housing costs and imperfection in lending markets are the more likely explanation behind Europe's falling fertility rates. It is easier for a young couple to borrow and buy a house in the US than in Europe. Rental markets are also more flexible in the US. So another dangerously vicious circle seems to be operating: high taxes discourage work, and because fewer jobs are created, fertility is discouraged. But with fewer children, higher tax rates are needed to support the growing army of the old.
Gunther Grass famously titled one of his novels Headbirths, or the Germans are Dying Out. Little could he know how true his fantasy would just three decades later.
Alberto Alesina is professor of economics at Harvard University. Francesco Giavazzi is professor of economics at Bocconi University in Milan.
Copyright: Project Syndicate
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