I wrote a post the other day that caused something of a stir. In it I argued that migration of the young & skilled from southern European countries could mean that those left behind face a very bleak future. Several people took issue with this, arguing that the migrants would send back enough money to support their parents and regenerate the economy. This to my mind ignores current demographic reality, and perhaps more importantly, the particular structural problems in the Eurozone. And some people seemed unclear about my argument. So in this post, I shall explain the reasoning behind my bleak assessment of the future for the Eurozone periphery.
I am emphatically NOT arguing that there is anything intrinsically wrong with young, skilled people leaving in search of a better life elsewhere. Migration benefits both the migrants and the receiving countries. Immigration is a GOOD thing for countries that have ageing populations and skills shortages - as most Western countries do. Germany, for example, would unquestionably benefit from inflows of skilled young people from the Southern European countries. And it would be quite wrong in my view to prevent young people faced with high unemployment in their home country from going elsewhere to find work. Nor would it be right to prevent skilled people facing falling wages in their home country from going to countries where the pay is better. But where people can freely move to other countries, as is the case in the European Union, the sort of "Internal devaluation" that forces down wages in search of "competitiveness" inevitably causes migration when the same jobs in Greece and Germany pay vastly different wages. Unfortunately it is this sort of "internal devaluation" that has been forced on the Eurozone periphery because their membership of the Euro prevents them from devaluing their currencies vis-a-vis their main trading partners, which is the usual means by which countries restore competitiveness.
Traditionally, young migrants send money back to their parents. This is because the traditional social contract is that children are cared for by their parents when they are young, and in turn are then responsible for supporting their parents in their old age. But in the West, with pension and healthcare systems that support the old, the explicit contract between children and parents is weakened. Children are a direct cost to their parents, but children's financial support of parents in their old age now comes largely through payment of taxes, and the old expect to provide for their own retirements by saving and paying taxes during their working lives. I think this is at least partly the cause of the falling birth rate. And I think it severely weakens the ties between older and younger generations. Older generations hold on to wealth rather than redistributing it to the young, because they need that wealth to support them in their old age. Meanwhile the young don't see the need to support the old directly - and the old don't expect to be supported directly - because the old have much more wealth and are extensively supported by the state. This last is the most poisonous as far as young migrants supporting the elderly back home is concerned. I don't have evidence to support this but I think that young migrants are much more likely to send money home when there is little state pension or healthcare provision in their country of origin. If they believe that the state will support their parents, they may not send money home.
In the Eurozone, therefore, we would expect to see migration of young skilled people from areas of high youth unemployment and falling wages. And indeed this does appear to be happening. The problem is that the people left behind are older, less able and lower skilled, which makes these countries less attractive to businesses. After all, why would a business choose to locate itself somewhere where the local workforce is ageing and poorly skilled? So businesses would go elsewhere too. That would cause GDP to shrink further. The population's need for state support would actually increase as it ages and gets sicker, but tax revenue would fall as working people and businesses leave. That adds up to long-term decline and a growing burden on the state's finances. Young people sending money back would mitigate this to some extent but it wouldn't compensate fully for falling GDP: I really don't see how inflows of money from young people to enable their parents to survive could possibly prop up aggregate demand enough to make the country attractive to business. And old people and long-term disabled don't generally pay taxes. So where will the taxes come from to support the welfare systems that these people depend on?
That's bad enough. But there is one final ingredient in this poisonous mixture. Most of these states are already highly indebted. With a growing burden on their healthcare and pension systems and falling tax take due to GDP decline, their debts can only get worse. The fiscal compact gives primacy to debt service over maintaining public services. As I see it, therefore, these states will eventually be forced to dismantle their welfare systems - the pensions and healthcare required by their ageing populations - to avoid debt default. Eventually, I suppose, the old and the unskilled will also leave - if they can, and if any country will receive them. For although the European Union is in theory committed to the free movement of people, I wonder how real that commitment would turn out to be in the face of large-scale migration of pensioners and benefit claimants from the Eurozone periphery. I suspect that free movement of people might turn out to be another of those European laws that are binding in good times but illusory in bad.
Therefore as Krugman said, the combination of labour mobility with internal devaluation and lack of fiscal union in the Eurozone is potentially lethal. There is no possibility of recovery for countries caught in the deadly embrace of high public debt and youth migration. For them, "internal devaluation" actually means creeping desertification.
The movement of people (and its consequences) - Coppola Comment
The triumph of Peter Kenen, the revenge of Robert Mundell - Paul Krugman
No country for young men....or young women either - Crooked Timber
Ubi solitudinem faciunt, pacem appellant - Jonathan Portes (NIESR)