Economic View: Wanted, fertile Europeans

Donald Rumsfeld got it only half right. The distinction is not between old and new Europe; it is between old and even older Europe.

Europe's demographic woes are back in the news for several reasons. A week ago the IMF produced a paper suggesting that European governments, far from running deficits, ought to be producing surpluses of around 2 per cent of GDP for the next 15 years to fund public pensions. Italy, which has the most serious problem, has just unwrapped a plan to reform its pension system and increase the retirement age to 65. Germany's government is trying to win support for its plans to increase the retirement age to 67 and cut benefits by 10 per cent in real terms. And David Willetts, shadow minister for pensions, has just produced a paper ("Old Europe? Demographic Change and Pension Reform") arguing that we have a problem even here in Britain. And he ponders whether we should start to think of ways of encouraging larger families.

This thought - that the core of Europe's problem is our reluctance to have more children rather than the pressures on our pensions - will I think come to dominate the debate. The pension problem does have solutions, albeit painful ones: higher taxation, lower public pensions and later retirement. As a result, growth in living standards throughout Europe is going to be much slower in the future than it has been in the past.

But, at a cost, the pension deficit can be filled. The baby problem is harder. Families have become smaller throughout the developed world, and that trend is now spreading to most of the developing world too. Within Europe, the collapse in family size has gone furthest in Spain and Italy - where women are projected to have on average the equivalent of only 1.2 babies - and in eastern Europe. Here in the UK the projections are slightly higher, for around 1.6 babies (see first graph). In Europe, only France and Sweden have total fertility rates that approach the replacement rate of 2.1 babies.

In his paper, Mr Willetts shows how Europe's population is likely to plunge, falling below the US in about 25 years' time and cutting Europe's share of world output to some 10 per cent by 2050. (Some UN projections are shown in the other graph.) The fall in the number of people of working age is so dramatic that even if retirements are pushed back, the size of the workforce may still decline.

We can increase immigration. But it would be difficult to absorb the necessary numbers to make a difference, and to attract immigrants with sufficient skills.

And we can choose to have larger families. So what's stopping us? The collapse in fertility is a huge puzzle. Is the decline the result of more women working? To some extent this may be true, but the fall in fertility has been most dramatic in eastern and southern Europe, where male/female roles are most traditional.

Why is France different from Britain? Five years ago we had the same fertility rates; they have gone up, while we have come down. High property prices? Starter homes are a sight cheaper in Italy or Spain than they are in Paris or indeed London.

And, surely the greatest puzzle of all, why are Europeans different from Americans? The bigger country/greater space argument does not wash. In the 1970s, US fertility rates were actually a little lower than British ones. But they have gradually risen from a low point in 1975, while our fertility rates moved sideways until about five years ago, when they started to fall.

Until we understand why this is happening, it is hard to suggest solutions. There is, perhaps, a general point to be made that low birth rates do suggest some sort of lack of confidence in the future. Economic or political disruption can be catastrophic. In eastern Europe, rates fell after the end of communism. By contrast, the recovery in the US may have something to do with the general rise in self-confidence after the end of the Vietnam war.

None of this explains Italy or Spain. I was at a conference near Siena over the weekend at which this was one of the subjects discussed. But the Italians there did not really have any very good explanations. They spoke about the cost of housing in the prosperous north, the fact that men did not leave home on average until about 30, the desire for material objects and so on. But Italy is a prosperous country by any standards and until about 10 years ago experienced very rapid growth. Given this puzzle, can anything - should anything - be done?

Of course, no one would suggest that people should bring more children into the world if they were not wanted. Nor is there any evidence that only children are disadvantaged - if anything, the reverse is true. On the other hand, there is a little evidence that people have fewer children than they would ideally like and this may have something to do with money. In France and Sweden, it seems that tax breaks for larger families do have an influence.

If people really are having smaller families than they would ideally like, there are other things governments can do. They could take basic responsibilities such as schooling and policing more seriously. Frank Field, the Labour MP, has some thoughtful practical suggestions on the need to build a more civic, and more civil, society. Tipping the rights/responsibility balance towards rights might help people feel more secure about their future.

Finally, I think we also have to ask some tough questions about the whole European social welfare model. If it really is superior to the US one in guaranteeing family security, why does Europe have birth rates that are so much lower?