Austerity in “Old Europe”

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The current wave of fiscal austerity across Europe, should not have surprised anyone. While the insistence on social justice is warranted, excessive state debt is also a symptom of basic demographic shifts impacting society, economy and social security systems. A re-definition of “work life” seems to open up the chance of preserving social security systems.

by Michael Liebig


Conspiracy theorists will argue that the Europe’s political class is using the popular distraction of the soccer World Cup 2010 in South Africa to ram through harsh fiscal austerity measures. And they may even have a point in that. However, most people in Europe don’t reject austerity in principal; the average European dislikes both private and public debt – and inflation. What is being deeply resented however, is the way austerity policies are currently being implemented: mainly targeting the middle and lower classes. Popular opinion is rightly demanding that taxes for the super-rich should be raised and a financial transaction tax should be forcefully implemented. Opposite to neo-liberal assertions, higher taxation of great fortunes would help to stabilize state finances and would not harm investments in the real economy.

It should have been clear since Autumn 2008 that a major austerity drive is inevitable. The financial crisis, originating in the United States, did not lead to a global depression in the real economy because the state(s) stabilized the financial system and stimulated the contracting real economy by going massively into debt. The second – and more important – reason why a depression was averted was the self-supporting economic growth dynamic in Asia and Latin America. The recent concerted attack by Anglo-American financial speculators against Greece, the European Union’s southern belt states, and the euro currency system, merely accelerated the inescapable “exit” from debt-driven fiscal policies.

Demographics & Economy

The current debate about fiscal austerity in Europe, should be the occasion to dig a bit deeper into the underlying, long-term causes for ever rising levels of state debt. One key factor is demography: Europe’s population is aging and tendentially shrinking. Germany is a case in point: The fertility rate is 1.42[1]. And it should be noted here that the fertility rates in Southern Europe and most of Eastern Europe are even lower than Germany’s.

One doesn’t have to be an expert on demography to realize that demography is a fundamental factor for society and the economy. Two basic features of the interrelationship between demographics and the economy seem obvious:

First, an “old” society generates less economic growth than a “young” society. A society with a growing number of people above the age of 50:

  • consumes less basic consumer items (foodstuffs, clothing, furniture, cars, housing etc)
  • cannot rely on the domestic market, but needs exports for economic growth
  • faces tendentially a shortage of qualified labour with “state of the art” skills
  • has growing share of people with “obsolete” skills – both manual and intellectual – who swell the ranks of the unemployed

Secondly, the demography of an “old” society impacts social security systems. A society with a growing number of people above the age of 50:

  • needs more social transfer payments, particularly pensions
  • has higher health costs, because older people get more often seriously ill than younger
  • features an conflict of interests over the expenditures for the elderly and those for educating the younger generation

The Demographic Basis of Social Security Systems

The impact of demography on social security systems is a most serious issue. In Germany – and Europe generally – social security systems were not designed for an “old society”. Beginning with Bismarck’s social reforms in the 1880s, the German social security system was based on a “young” society with a high birth rate and a rather short life expectancy. Now we have a below-reproduction fertility rates and a life expectancy that is 30 years longer than in the beginning of the 20th century. The enormous increase in productivity – the economic output per working person – can alleviate the social-economic consequences of the growing demographic imbalance in society, but cannot eliminate them all together.

From the 1880s to 1960s, the basic demographic trend remained in balance: slightly decreasing fertility rates and moderately increasing life expectancy – in spite of the horrendous human losses during the two World Wars. During post-war prosperity of “Rheinish Capitalism” and “Social Market Economy,” the government of Konrad Adenauer significantly expanded the social security system in West Germany. That was not only possible because the birth rate of the 1950s and 1960s remained high. There was another and probably more important factor: The demographic “input” of 12 million Germans who were expelled from the formerly German territories East of the river Oder or other East European Countries and 3 million refugees from communist East Germany. These 15 million people were grinding poor, but skilled and ambitious – and they became a key catalyst for post-war economic expansion in West Germany.

Since the 1960s, the reproduction rate in Germany has steadily declined. That was partially offset by another demographic “input”: the import of foreign labor. During the 1960s, roughly 1 million low-skilled “guest workers” came from Southern Europe (mostly Italy, Spain, Portugal, Greece and Croatia) to West Germany. Today, they are assimilated, bi-lingual and mostly well-trained. The next wave of low-skilled guest workers came from Turkey. Roughly 2.2. million people of Turkish origin live in Germany, of which 1.7 million have Turkish citizenship. But the majority of the Turks in Germany has still no higher education and corresponding labor qualifications. Today, of Germany’s total population of 81 million, 7 million are migrants and 16 million have a “migrant background” (in the second or third generation).

The low productivity of immigrants from outside the EU – mainly due to low education levels – is the reason that this demographic input has not translated into a corresponding increase in economic performance. This is a severe problem, which however also represents a yet-untapped reserve potential that could be transformed into significant economic stimulus, albeit not in the short term.

It seems puzzling that today – in spite of the negative demographic trend and an unemployment rate of 8-9% – the share of working people in the age group 15-65 is higher than ever in modern German history. Both in absolute terms (roughly 40 million) and as percentage of the total population. This is mainly due to the fact that ever more women have a job – today 45% in the age group 15-65. While many women have to work to generate the necessary income for covering household costs, in particular for raising and educating the children, most women do want to work and refuse to be just housewives. In turn, womens‘ work, much higher educational levels and cultural shifts has further lowered the birth rate. France is the one country in the EU that has a public child care system, including pre-kindergarten child care, which makes women’s work and parenting compatible. And, not surprisingly, France is the only country in the EU that is demographically stable: The fertility rate is at 1.97.

When dealing with the demographic problems of “old Europe”, we should not forget that such problems exist in other parts of the world as well: Russia’s fertility rate is the same as Germany’s, but the life expectancy is shorter. Japan and South Korea have a fertility rate of 1.20. Due to its “one child only” policy, China’s fertility rate is well below reproduction level: 1.54, which compares to India’s 2.5. The United States is still demographically stable, but there too the population is rather rapidly aging with the retirement of the post-war “baby boomer” generation.

Re-Defining “Work Life” & Preserving Social Security

It seems obvious that the social security systems – as currently structured in Germany and the EU generally – won’t be able to cope with the double challenge of declining birth rates and rising longevity. The labor force – the age group 20-60 – cannot adequately sustain both the growing segment of the elderly and the young generation with its ever rising educational requirements. In 1960, 8% of the population were in the age group 65+, in 2010 it’s 17% and in 2020 it will be 19%. In 1960, 21% of the population were younger than 20, today it’s 15%, and in 2020 it will be 13%. At present in the EU, three active workers pay for one retiree, by 2030 only two will have to pay for one retiree.

The social security systems are structurally underfunded – the inpayments don’t cover the outpayments. Therefore, the social security systems have to be increasingly subsidized out of the state budget. In Germany, more then 50% of state expenditures go directly or indirectly into financing social security – and a growing share of these social transfer payments is financed by state borrowing. Now, the underlying problem of financing social security systems via public debt has been dramatically exacerbated by the public costs of the financial crisis.

If present trends continue, it seems inevitable that beyond the current round of austerity measures, pensions will be cut and medical services will be rationed. In Germany, the average income of households of the age group 50-70 is roughly 15% above median income. But, while 55% of that age group live in comfortable financial conditions, owning property or comparable financial assets, the other 45% live in austere, if not precarious conditions. Therefore, cutting pensions is not only socially a most sensitive issue, but it is also politically dangerous. Political parties fear that they will be punished by the elderly at the ballot box if they do lower pensions – after all, the elderly are the most arduous voters. Already, this year’s elections in Europe have resulted in political fragmentation at the expense of the big, traditional parties – both conservative and socialdemocratic. That was the case in Britain, Germany’s most populous state North Rhine-Westphalia, the Netherlands, Belgium and Slovakia. Fears of social security cuts played a mayor role in these elections (even though most voters want state debt to be reduced).

This political fragmentation points to deeper problem: The inability and unwillingness of the political class (and the media) to conduct a serious and a true-to-fact discourse with the population about fundamental societal issues. Typical for this sly evasiveness is the question of demography and its impact on social security systems. In Germany, the socialdemocratic-green government lifted the retirement age from 65 to 67 in 2004, but there was no serious debate about that measure. (The retirement will be raised in all of Europe as part of the ongoing austerity measures).

Raising the retirement age is a double-edged issue. The trade unions are certainly right when they protest the lifting of the retirement age for people doing hard manual and/or psychologically exhausting work. But beyond construction or assembly line workers, nurses, policemen etc., for most intellectually-vectored and/or administrative occupations the traditional “age limes” of 65 has become irrelevant – in particular if modern IT technologies (home office) are used in combination with part-time work.

The retirement age is not “naturally” determined, but a function of social, medical and technological conditions. At present, the de facto retirement age in the EU is 60 – 62 in Germany, 58 in France. This does no longer cohere with in the average physical and mental condition of people in the age group 50-75. Today, a growing section of the elderly is not “used up” physically and mentally after the traditional span of work life.

Therefore, the demographically induced constraints on social security systems open up new options for society. Longevity and technological progress permit a re-definition of “work life”. People up to the age of 70 (and beyond) can combine their invaluable professional (and social) experience and qualifications with learning new skills. There is no time limit for learning and (self-)education in human life. Older people – 65+ – can either stay in their jobs (maybe on a part-time basis), or they can work in social services, child care or care for sick and or care-dependent elderly, for example. Even though, two thirds of the Germans in the age group 50-70 do want to extend their work life beyond 65, a societal discourse on this fundamental issue is still missing.

The extension of work life is a great opportunity for redesigning the biographical structures and inter-generational relations. But is it also a necessity due to the demographically induced constraints of social security systems in “old Europe”. The worst option would be privatization of social security systems – making the elderly directly dependent on financial markets. The current debate on austerity policies ought to be far-sighted. Trying to stick to the status quo, will not assure social justice. The extension and re-definition of work life seems to be the best way of preserving social security systems – after all the foundation of social justice and a crucial civilizational achievement.

Endnote

[1]All statistical in this article are drawn from:

CIA World Fact Book, http://www.cia.gov/library/publications/the-world-factbook/rankorder/2127rank.html or Bundeszentrale für politische Bildung, http://www.bpb.de/themen/WM0Z6D,0,0,Zur_demografischen_Lage_der_Nation.html

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