by Katinka Barysch

Europeans live longer, work less and have fewer babies. On current trends, the EU will not have enough workers to pay for its growing number of pensioners. Economists and policymakers have moved beyond scratching their (greying) heads in despair. They focus on what can be done to alleviate and possibly reverse the trend. That is also what they did at last week’s Munich Economic Summit that brought together some of the world’s best people on the subject (http://www.munich-economic-summit.com/mes_2007/participants.htm).

The EU’s average fertility rate is now 1.5, well below the 2.1 needed to maintain the size of a population. In Germany and Italy, the fertility rate is closer to 1, which means that each generation is 60 per cent smaller than the previous one. Even more worrying but less well-known is the fact that population decline – just like population growth – is exponential. In Germany, the birth rate started to fall in the 1960, well before Italy, Spain and other EU countries. By the 1990s, Germany was running short of 20 or 30-something potential mothers. A country that has had low birth rates for decades ends up in a ‘fertility’ trap.

Another fact that is rarely taken into account is how demographics interact with economic geography. Young people and those with skills are the most likely to leave declining areas, and women are apparently more prone to moving than men. Germany’s eastern Laender are a frightening illustration of this trend. The number of young people has dwindled, leaving the over-60s to themselves in some places. And among the 10 per cent of the population that has left the eastern Laender, there were many more women than men. In some towns, there are 160 young men for 100 young women. The fact that those men left behind tend to be unqualified and unemployed gives women little incentive to return. Similar developments can already be observed in some parts of Central and Eastern Europe, as well as in the continent’s northern and southern fringes. Europe will not age homogenously. It will be a patchwork of booming regions and those that are inhabited by octogenarians and angry young men.

No-one is yet talking about demographic micro-management. But all EU countries do need to address the inevitable raise (in many cases doubling) of the old-age dependency ratio (the number of workers to pensioners). The list of possible solutions is by now well known: work longer and harder, accept more immigrants and have more babies. But each remedy has its limits, so Vladimir Špidla, the EU’s social affairs commissioner, talks about ‘mainstreaming’ demographic concerns into all policy areas, not only pension reforms, but also education, tax, labour market and infrastructure policies.

Population decline is a European problem – globally the population is growing by 200,000 a day, adding the equivalent of Switzerland every six weeks. Some of the fastest growth happens in the EU’s vicinity, especially in North Africa and the Middle East. Children and teenagers make up over half of the populations of Iraq and Somalia. Many of them will want to move to where jobs are better and life is more stable.

But immigration can only help to alleviate Europe’s pension pressures, it cannot solve the problem. Hans-Werner Sinn, head of the Ifo Institute that runs the Economic Summit, says that even if immigrants stayed young forever, the EU-15 would need more than 190 million immigrants to keep its dependency ratio constant until 2035.

Similarly, the retirement age would have to go up to 77 if governments were to rely on this step alone to fix the pension problem. Instead, they usually adopt reform packages that include a gradual raise in retirement ages, cuts in state pension payouts and adding fully-funded ‘pillars’ to the pension systems. There are some interesting and encouraging examples of reform, for example the ‘notional contribution’ systems implemented by Sweden, Poland and Latvia. These are pay-as-you-go systems that mimic fully-funded pensions because each worker’s contributions are added up in a notional account’. Since the pension pay-out depends on how much a worker has paid in, people have an incentive to retire later.

In most other European countries reforms have been overly cautious, which may have something to do with the growing voting power of Europe’s elderly. Not only is the number of over-50s rising steadily, they also tend to be more politically active. In the last US presidential election, for example, 70 per cent of those over 65 voted, but only a third of the 18-24 year-olds. Pension reform would have to happen now, before the baby boom generation retires. But there is little sign of this.

Meanwhile, family-friendly policies are becoming increasingly popular, across the political spectrum. Munich’s assembled economists were unanimous that higher birth rates cannot solve Europe’s pension problem in the short run. Even an immediate doubling of the birth rates would only have an impact on dependency ratios in 30 years or so. But in the long run, Europe will need more babies to mitigate the economic consequences of an ageing and shrinking workforce. Can and should governments get involved?

Economists have calculated that bringing up a child costs €150,000 to €300,000 and that each child contributes a net €140,000 to a country’s pension system. The parents bear the costs but the benefits also go to those pensioners that have not raised children themselves. Therefore, some economists suggest that people with children should pay less tax and get bigger pensions. Others argue that state-funded childcare institutions are a better and more immediate way of redistributing money to those with children. The fact that France offers day care for all children over three may have helped with its impressive fertility rates. But childcare facilities alone do not make a difference: Germany’s eastern Laender have many more nurseries but fewer babies than the western part of the country.

A quick fix will not work. France has had pro-family policies since the 1870s. In Scandinavia, support for women and children runs through all aspects of life. David Willetts, the Conservative Party’s Secretary of State for Education and Skills approvingly speaks of ‘state feminism’. Nor do values or religion explain birth rates. Fertility rates are lowest in traditionalist countries with rigid family structures, such as Italy, Greece or Spain, but also Japan, South Korea and Iran. They are highest in those places that allow women to combine work with bringing up children. France’s 35-hour week gives parents plenty of free time to look after their offspring. Flexible labour markets in the UK and the US offers part-time job and makes it easier for women to go back to work after a maternity break.

Germany is almost an example of how not to do it. Education takes too long, often up to 20 years, which forces many women to delay having kids until their 30s. Women now tend to be better educated than men. But they struggle to find matching partners since many high-earning men prefer traditional stay-at-home wives. Over 40 per cent of German women expect that having a baby would be the end of their professional career. They have a point: schools close at mid-day and private child care is expensive. Part-time jobs are rare and often come without perks and social security. The expectations towards women that juggle work and kids are crushing, says Regine Stachelhaus, who admits that she only managed to bring up her son and run Hewlett Packard in Germany because her musician husband did not work regular hours.

Incidentally, Frau Stachelhaus was the only female speaker at this two-day conference. I counted fewer than ten women among the 150-odd participants. I would have though that women have a lot to contribute to debates about having babies, juggling work and families and caring for the elderly.

Katinka Barysch is chief economist at the Centre for European Reform.

The Tories and human trafficking: Don’t play politics
by Hugo Brady

The British Conservative party kicked off the New Year saying they wanted to sign Britain up to a 2005 European convention that grants rights to the victims of human trafficking. Odd that the Conservatives should suddenly develop such a concern for humanity: only a few months before they wanted to scrap UK legislation giving effect to a related European convention on human rights for all British citizens.

Both conventions are products of the Council of Europe, a 46-country assembly that promotes democracy and human rights in Europe but does not have the EU’s legal and institutional muscle. The human trafficking convention calls for better national laws to prosecute the criminal gangs that engage in this modern form of slavery, and to protect the victims. So how come Britain is not already signed up? The reason is a clause in the convention requiring signatory countries to let the victims of trafficking stay in the country for 30 days, to recover from their ordeal and decide whether they will help police prosecute offenders.

British officials worry that some immigrants will falsely claim to be the victims of traffickers (the same way some file bogus asylum claims) so they can stay in the country. They worry this will create an immigration pull factor towards Britain. The Conservatives say such fears are exaggerated. Hardly a typical Conservative stance: illegal immigration is a subject of great concern amongst core Tory voters. The Tories want their support for the convention to help convince mainstream UK voters that they are the ‘nasty party’ no longer nor against international co-operation in principle.

The Conservative party should resist any temptation to play politics with this issue. Human trafficking is a savage form of modern slavery that generates massive profits for international criminal gangs. In Europe alone, over 100,000 victims are trafficked each year, mostly to where thriving markets in sexual exploitation exist in Austria, Belgium, Britain, France, Germany, Greece, Italy, the Netherlands and Spain. Gangs deceive, pressure or abduct their victims (mainly young girls) in their home countries and sell them on to be sexually exploited or, at best, used as slave labour abroad. The most unfortunate are raped, tortured or demeaned by various methods of disorientation such as being passed between several ‘owners’ to break their resistance to prostitution. And business is depressingly good. Human trafficking is the fastest growing criminal activity on the planet. A recent estimate from the UN Office on Drugs and Crime estimates that traffickers make annual profits of $7-$10 billion worldwide.

If the Tories are really serious about cracking down on this crime, they should support the more substantial work of the EU as it develops its crime-fighting role (which they oppose on instinct). In 2005, for example, Europol – the EU’s police office – helped to smash the biggest ever people-smuggling ring in the UK, led by ‘untouchable’ gang leaders Ramazan Zorlu and Ali Riza Gun. This gang smuggled tens of thousands of Turks and Iraqis into the UK. In 2006, a year later, phone tap evidence secured by Eurojust, the EU’s unit of prosecutors, from Belgium, Italy, the Netherlands and Austria, helped to put Zorla, Gun and the other big gang leader behind bars for a very long time. The Conservatives concern about the victims of trafficking is laudable. But they should have the courage and honesty to acknowledge where the real progress is made: in the EU.

Hugo Brady is a research fellow at the Centre for European Reform.

by Philip Whyte

When the EU expanded its membership in 2004, the UK was one of only three EU countries – Ireland and Sweden were the others – fully to open its borders to migrants from the ten new member states. The decision resulted in an unexpectedly large influx of migrants from central and eastern Europe. Ever since, the debate in the host countries has focused on the domestic impact of this wave of immigration. But it is time the debate moved on. For there is strong evidence that few of these migrants have any intention of settling permanently.

The host countries’ initial focus on migratory inflows is entirely understandable. When the EU enlarged its membership in 2004, the British government projected that the annual inflow of central and eastern Europeans to the UK would average between 5,000 and 13,000 through to 2010. It was being too modest. British statistics on migration are a mess, but most estimates suggest that official projections were out by a factor of twenty. Close to a million central and eastern Europeans are thought to have migrated to the UK since 2004.

The conservatism of the government’s initial projections was not unreasonable. By and large, Europeans are a sedentary bunch: they are disinclined to move within their own countries, let alone across national borders (with all the attendant difficulties of adapting to new languages and cultures). Previous enlargements – including the Iberian one in 1986 – had not provoked a dramatic increase in migration across national borders. So why expect the admission of the former Communist-bloc countries to produce different effects?

But the UK under-estimated the strength of the ‘push’ and ‘pull’ factors at play. Low income per heads, allied to housing shortages and high rates of joblessness (particularly among the young), encouraged many central and eastern Europeans of prime working age to seek their fortunes abroad. And by a happy coincidence, the EU countries that had thrown their borders open to them were enjoying buoyant economic growth and had numerous job vacancies to be filled. Migration was lubricated by low-cost airlines and Skype.

The scale of the influx did not go unnoticed in the host countries. Nor was it universally welcomed. Elements of the UK’s notoriously noisy press spoke of being ‘flooded’ and went out of their way to cast the new entrants as ‘benefit tourists’ – a scurrilous charge, given their exceptionally high rates of employment. Nevertheless, government policy was forced to adapt to this new context. When Bulgaria and Romania were admitted to the EU in 2007, the UK did not feel politically able fully to open its borders to nationals of these countries.

The irony, however, is that government policy has hardened at precisely the moment when the factors that drove migration to the UK in 2004-07 are going into reverse. The over-leveraged UK economy faces a nasty economic downturn and rising joblessness. Sterling has weakened markedly against most European currencies (reducing the relative wage that migrants earn in the UK). Meanwhile, unemployment in central and eastern Europe has been falling while incomes have risen. Against this backdrop, half of the 1 million central and eastern Europeans who came to the UK have returned to their home countries.

In other words, few migrants from the new member states have been escaping their home countries to settle in the wealthier EU member states. Instead, most have been using host countries as revolving doors through which they can enter and exit. Their aim is not to build a new life abroad, but a better one at home. The debate and policy response in the host countries needs to adjust to this reality – particularly as migratory flows will become more evenly distributed across the EU as restrictions on labour movement are gradually relaxed.

Philip Whyte is a senior research fellow at the Centre for European Reform.

by Hugo Brady

Over the last decade, EU countries have experienced a rapid rise in both legal and illegal migration, mostly from Turkey, Morocco, Albania, Algeria and Serbia. Each spring and summer, Mediterranean member-states struggle to cope as migrants perish attempting to reach Europe from North Africa in unseaworthy and over-crowded boats. The deaths of 300 people, who drowned while trying to reach Italy from Libya, marked a particularly grim beginning to this year’s ‘smuggling season’.

Unsurprisingly, then, migration has supplanted terrorism and crime as the top priority for European interior ministers. Ministers think that collective EU action is essential if migration is to be managed better. That includes making European border management more effective and technologically advanced; integrating migration issues – visas, border controls, the resettlement of refugees and the return of illegal immigrants – into EU foreign policy; and helping Europe to fill the 50 million skilled vacancies that Europe’s retiring baby boomers will leave behind by 2060.

European policies to tackle these challenges are in their infancy, such as the Union's rather weak scheme to attract more skilled workers with an EU working visa or 'blue card'. One reason for this is that ministers have to work around major knowledge gaps about the specific foreign labour needs of the single market and about the movement of migrants into and around the EU, a free movement area. Governments have little idea where migrants go next after entering the UK from Pakistan, Spain from Ecuador or Poland from Brazil. For example, how many move to other EU countries; how many go back home; and how many are granted residency? Similarly, policy-makers are not yet certain about how good the EU’s border controls are. How many visas to the EU’s passport-free area result in illegal overstays or how many travellers are allowed in, refused at the border or returned home? Officials say they need to properly understand such movements before they can agree serious migration policies.

In many cases, such data is available but the patterns have not yet been analysed to draw concrete conclusions. The European Commission, which might be expected to have such information readily to hand, is over-burdened. Its directorate-general dealing with migration issues also has a plethora of other responsibilities, ranging from commercial law to terrorism. To overcome this lack of analytical capability, Commission officials often emphasise technological solutions such as biometric databases for visas and law enforcement. But these have tended to be subject to long development delays and will not, in any case, cut out the need to synthesise vast amounts of information.

One idea to help address such knowledge gaps would be to create national ‘immigration profiles’. The idea – already floated by the Commission – would be to maintain a precise and detailed picture of migration and border management in each member-state at any given moment. The Commission would also be able to ascertain the foreign labour needs of each member-state, by identifying skill shortages by sector and occupation, though member-states would still control the issuance of work visas. Similar profiles of non-EU countries could help identify the skills composition of different migrant communities and to provide analysis to EU policy-makers negotiating with migrants’ home governments on visa facilitation, border controls and the return of illegal immigrants. The member-states think that the EU speaking with one voice in such negotiations would be a significant improvement on national efforts.

The compilation of national immigration profiles is not a panacea for solving all of Europe's migration challenges. But if implemented effectively, the profiles could help to ensure that future migration policies are properly evidence-based and, therefore, more effective. However, if the Commission wants the job of providing such analysis, it will need to create a separate department for migration or to boost the resources of its current directorate-general for justice, liberty and security.

Hugo Brady is a research fellow at the Centre for European Reform.