Even if one were inclined to see the post–WW II path of Western European as an undisputed success story and assumed that recent economic problems could be addressed fairly rapidly by suitable reforms, there is one inescapable factor that will determine the future of Europe’s most affl uent western and central parts and poorer eastern regions: a shrinking and aging population. After many generations of very slow demographic transition (Gillis, Tilly, and Levine 1992), Western Europe’s total fertility rates slid below replacement level (2.1 children per mother) by the mid- 1970s. A generation later, by the mid-1990s, the total fertility level of EU-12 was below 1.5; the new members did nothing to lift it: by 2005 the average fertility of EU-25 was 1.5 (Eurostat 2005b). Europe’s population implosion (Douglass 2005) now appears unstoppable.
Naturally, the reliability of long-term population projections declines as the projection’s fi nal date advances, and a new trend of increased fertility cannot be categorically excluded. However, it is unlikely that it would last very long. The last notable regional rebound lifted the Nordic countries from an average of about 1.7 in 1985 to almost 2.0 by 1990, but by the end of the decade fertility was back to the mid-1980s level. More important, it is unlikely that a meaningful rebound can even begin once the rate had slipped below 1.5. That is the main argument advanced by Lutz, Skirbekk, and Testa (2005).
Once the total fertility rate reaches very low levels, three self-reinforcing mechanisms can take over and result in a downward spiral of future births that may be impossible to reverse. First, delayed childbirths and decades of low fertility shrink the base of the population pyramid and produce sequentially fewer and fewer children.
Second, as fertility plummets, its norms will be even lower during subsequent generations, and even the perception of ideal family size (the number of children wished for under ideal conditions) shifts below the replacement level (already the case in Germany and Austria). Third, low fertilities, aging population, and shrinking labor force lead to cuts in social benefits, higher taxes, and lower expected income, working against higher fertility.
The economic consequences of population aging have been examined in considerable detail, and none of them can be contemplated with equanimity (Bosworth and Burtless 1998; England 2002; McMorrow 2004). Many of them are self-evident.
Older populations reduce the tax base, and hence they lower average per capita state revenues and increase the average tax burden. Falling numbers of employed people push up the average dependence (pensioners/workers). Europe’s already high pensioner/worker ratios (Britain being the only exception among the continent’s largest economies) mean that old-age dependence ratios will typically double by 2050 (Bongaarts 2004). And in some countries most of this rise will happen during 98 Chapter 3 the next generation; for example, in 2001, Germany had 44 retirees (60+ years old) per 100 persons of working age, but the Federal Statistical Office (2003) predicts that the rate will jump to 71 by 2030.
As most countries finance the current retirement costs of their workers by current contributions from the existing labor force (pay-as-you-go arrangement), increasing retiree/worker ratios will bankrupt the entire system unless current contributions are sharply raised, pensions substantially cut, or both. Older workers may be more knowledgeable, but they still tend to be less productive because of physical or mental restrictions, higher disease morbidity, and a greater tendency toward workplace injuries and hence more frequent absenteeism. Higher dependence ratios and a higher share of very old people (>80 years old)—for example, every eighth person in Germany will be that old by 2050—will put unprecedented stresses on the cost and delivery of health care.
