The latest economic news coming from Europe is worrying (The Economist, "That sinking feeling again"). The growth of the three largest economies stagnated or fell in the April-June Quarter of this year. France, more or less stagnated, Italy's economy fell into outright recession, and most surprising of all Germany's economy contracted as well by 0.6%. This last particular statistic is the one that has spooked investors the most.
Through the Euro crisis Germany has always been expected to be Europe's economic safe zone; the work-horse that held up the union; a model to look up to for the beleaguered and financially damaged countries of Spain, Portugal and Greece among others. It's not surprising to see investor's worry in light since if even the most fiscally disciplined European economy is in trouble, what hope is there that this slight downturn will not continue in the long-term.
So what happened ?
Well one possible reason, according to the same Economist article quoted earlier, could be the mild winter this year. A mild winter could have meant a lot of construction activity could take place in the preceding quarter instead of the usual April-June one. But I think that explanation is slightly myopic.
Apart from the fall in the GDP, one must realize there is another point that makes the situation more worrying: The Union is perilously close to deflation. Inflation only rose by 0.4% in the last quarter instead of the widely accepted 2% that is considered to be a comfortable level for stable growth.
While the European central bank debates whether or not to start quantitative easing, and perhaps other monetary and fiscal measures, I feel there is a more subtle and long-term fault line that is threatening the future of the Euro. And it is not an easy topic to solve. It is the falling population of Europe.
A falling population leads to reduced demand and ultimately deflation and all the problems that come with it (Krugman,Paul, "Why is Inflation Bad"). Just look at Japan for the last two decades. Continuously falling prices means consumer spending decreases(in hopes that prices will fall further), debt burden becomes higher (the value of the money you have to pay off becomes stronger) and on the supply side wages fall.
So is Europe in line to suffer as Japan has been for the past two decades? I believe so, unless the countries of the Union do one thing differently to Japan: open their countries to Immigration.
For countries with falling populations like Europe and Japan (with birth rates of 1.59 and 1.39 per woman, respectively) Immigration is the best way out.
Japan has always resisted allowing large-scale immigration because of cultural factors such as the need to remain ethnically pure (French, Howard "Insular Japan Needs, but Resists Immigration" ). This I believe has led to their two decade economic disintegration which will continue as long as they refuse to budge on this issue.
First let me discuss the merits of Immigration according to economic theory. Then I will discuss the massive obstacles that block it.
The benefits to immigration are large. Large scale Immigration sustained for long periods of time leads to a younger population. Young people in developing countries who are not satisfied with the job markets in their own countries are the one's who are usually the one's who want to enter developed countries. Once you have sustained immigration of this young cohort, one important benefit you get is of not having such a massive strain on the social security, pension and healthcare sector as the proportion of young individuals (who are the main providers of social security) to that of the old population ( who are the main receivers) improves. i.e. The state has an opportunity to improve it's finances.
But most important of all, Immigrants have the potential to provide economic growth to host countries. Data shows that 40% of the Fortune 500 companies in the US were started by immigrants.(The New American Economy Report) ). Another report by the OECD, shows that immigrants have generally spent more time in University than their native born peers(The Economist, "Degrees of Mobility" ). More education has the potential of spreading new ideas, creating more potential for a vibrant, innovative economy to take hold. A vibrant economy means large job creation potential, which leads to increased demand throughout the economy.
Now, as can be expected there is a lot of push-back from the citizens of countries which are popular with hopeful immigrants. The United States, probably the most popular destination among immigrants is a good example. A hotly contested debate has killed off much needed immigration reforms. In the United Kingdom, a number of Draconian immigration rules has come into effect.(The Economist, "The Tories' Barmiest Policy") . The most common complaint has been that Immigrants take away job from locals. Data shows this to not consistently be true. In the United States and Europe for example, there is a shortage of skilled workers which can be taken up by skilled immigrants (e.g.. Indian doctors, and computer specialists). This is replacement and not substitution.
When a country's Immigration policy is lax, you will see not only high-skilled immigrant workers who are usually from more relatively effluent economic background in their native country, turning up, turning up, but also low-skilled, poor immigrants, who will shack up in slums together in a desperate search for a better life. It is toward these low skilled immigrants from poorer backgrounds at whom the majority of the anger of the native born citizens of a country is aimed at. In theory stringent immigration policy is meant to allow high-skilled and rich immigrants to remain and kick out low skilled workers. But in reality, as is the case with such kind of well meant, stifling??laws, potential high-skilled immigrant workers don't go unscathed by this wrath. In the US for example the yearly cap of work visa's has been limited to 85,000, and every year the requests for these work visa's is oversubscribed. Demand is not being met by sufficient supply. Leading to a shortage of skilled workers in the USA. The rules in Europe are getting equally stringent (Bransten, Jeremy"EU: Netherlands Leading Trend To More Stringent Immigration Rules " )
And even low-skilled workers don't necessarily turn out to be just cheaper substitutes. A recent case from the state of Alabama highlights this fact. (give example of tomato pluckers in Alabama.(Guarino, Mark "Anti-illegal immigration bill stokes backlash in Alabama fields" ). The US state of Alabama and Arizona enacted stringent anti-immigration laws in 2011 with the express aim of combating illegal immigration. One of the rules allowed the police to check for documentation during routine traffic stops. This led to a mass exodus of immigrants and Alabama's farmers said they would suffer because they would have to hire American laborers to help out on the farms, who, the farmers said would demand hire wages and were also unreliable ). A it turns out, they were not only reliable, but also unwilling to work. This meant a huge shortage of farm laborers which in turn meant fruit that could not be plucked and which eventually rotted.(Neiwert, David "Alabama Harvests The Bitter Fruit Of Its Harsh New Immigration Laws: Tomatoes Dying On The Vine" ).
Also, a study by the Center for Business & Economic Research at the University of Alabama estimated that the new rules would lead to 70,000 to 140,000 unemployed and that this growth in the number of unemployed would lead to $ 1.2-$5.8 billion in lost revenue.and an additional $57 million to $264 million in lost state and income tax collections.(Serrano, Alfonso "Why Undocumented Workers Are Good for the Economy"). Perhaps in light of these losses, the anti-immigration bill was mostly gutted in 2013 through a lawsuit.
What the Alabama example shows is that sometimes even low-skilled laborers fill empty positions where the pay is too low for the likes of the native born population. But it probably is a better alternative to the one that the Immigrant has back home. Just goes to show that Immigrants whether legal or not help to keep the economic machine running. Low-skilled Immigration occurs probably because immigrants find there is opportunity as well as a need for them in a growing economy. If an economy suddenly spluttered you would see an automatic decline in the number of immigrants. No-body wants to enter a fiercely competitive job market and struggle. There is no need and point in bringing in too much regulation. The mechanism of demand and supply will automatically sort out a majority of issues.
Temporary steps to improve growth are one's like improving quantitative easing (as in the United States) or increasing the sales tax (as in Japan) but these can never remove long-term fault line continues to stare the politicians in the face: The declining population of the West, especially Europe. The only concrete solution is the easing of Immigration policy. Bold politicians are needed to confront the angry backlash that may come from left groups and a large proportion of their local voters, and go on to carry out the required Immigration reform. But such politicians, at least according to the economist (The Economist, "That sinking feeling again") are lacking.
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