By Reuven Brenner
Consider first the demographic issues surrounding Greece and Europe, and see how they are linked to potential solutions.
In a world where political institutions would be stable within a country, and sufficiently similar across countries, capital should flow from the older to the younger generations, be it within a country or across borders. Whether private entities or governments make the promises to pay, the fulfillment of promises depend on returns from the thus-financed investments. Then, either directly, or, indirectly, through taxes, these returns, paid back by future generations would then support the retired generations in their rainy days, be it health or age-related.
But what if there are no future generations? Or diminishing number of them?
Once people decide to have fewer kids, fertility falls below replacement level and prospects of immigration stays slim (think Japan, Spain, Italy, Greece, other parts of Europe), investment in these societies should diminish. Towns get depopulated, roads go to rack and ruin, trade and communication slow down, many specialists disappear. It happened when Ancient Rome lost an estimated 50% of its population, or more recently in Ireland, after first getting a 10% increase in population due to migration, then rapidly losing much of it.
Debts that do not take into account depopulation would unlikely be re-paid in full. No monetary policy, no fiscal policy, no financial engineering, no bail-outs may reverse the trends. If there is depopulation, there must be deleveraging - because there is less future income to become leveraged for.
Ireland gives a small glimpse of the above before our eyes, and it illuminates both problems and opportunities facing Greece and the European Community.
It turns out that "the miracle" of this Celtic tiger was achieved mainly with Eastern European Cubs. Before the financial crisis, Ireland attracted some 400,000 young entrepreneurial immigrants, expanding its own population by 10%, a large percentage from Eastern Europe after the fall of communism. As these "cubs" headed back to their countries during this crisis, Ireland faced tough choices.
But first Ireland, along with Britain and Sweden, allowed unrestricted migration from the 10 European nations that joined the European Union in 2004. Shortly after that, more than 130,000 Poles were living in Ireland, with an average of 10,000 more Eastern Europeans arriving every month. Young Poles emigrating to Ireland were quoted as saying, "If you have ambition in Poland, you come to Ireland."
Before those years, Ireland slashed public spending in areas such as education, agricultural spending, roads, and housing - and it abolished agencies such as the National Social Services Board, the Health Education Bureau, and regional development organizations. By 1993, government non-interest spending had declined to 41% of gross national product (GNP), down from a high of 55% of GNP in 1985 - the type of policies Greece is now expected to do.
Ireland also significantly lowered corporate tax rates to 12.5%, at a time when the lowest tax rates in Europe averaged 30% and the US rate was at 35%. In 1987, income tax rates were also reduced, and are now standing at 20% for the first $50,000 and 41% at higher levels.
That is not the policy the EU and International Monetary Fund (IMF) recommend for Greece, not because it would not be good for Greece but because the rest of Europe does not want either heightened competition, nor are either the bureaucracies at the IMF or in Brussels interested in showing that they might not be needed.
It would be a serious mistake to infer though that the above fiscal changes turned local Irishmen into driven, innovative entrepreneurs and scientists. According to official statistics about Irish formal education, even in 2001 the Irish were, at best, mediocre. Compared to other states in the Organization for Economic Cooperation and Development that year, Ireland ranked 15th out of 30 in the number of people age 25-64 holding degrees; 14th out of 27 for research degrees, and 11th out of 17 for primary degrees.
It is the large-scale immigration to Ireland starting in 1995 that turned the country around, allowing Ireland to be ranked third among European nations in early stage entrepreneurial activity. Nothing unusual about this: at all times, everywhere, what I have called "the vital few" make things click. Push them out, and the places fall way behind.
The exceptional performance of the British and Swedish economies in the years leading up to the financial crisis also reflected the inflow of ambitious young talent from Eastern European countries. While France and Germany banned people from the European Union's "junior members" until they gained full-member status, Ireland, the UK and Sweden welcomed them in their "accession" status. Since 2004, 500,000 workers from Eastern Europe have registered with the British Home Office. According to a report issued in 2007, 98% of the UK migrants were employed, 80% were younger than 35, and none were eligible for the dole until they had worked at least a year.
For the UK such immigration flows represented a significant addition of talent, since, according to recent documents, the country's labor force has a pronounced deficit of skills. A recent government-commissioned study by Lord Sandy Leitch reported that a third of UK adults lack basic high-school levels of general aptitude, half lack any proficiency in numbers, and a seventh is functionally illiterate (numbers not dissimilar to Canada's, as noted in previous columns). The research showed that through their relaxed immigration policies, the UK and Sweden had been prescient in going after the "cream of the crop.
The financial crisis combined with the large outflow of skilled immigrants heading back to their countries of origin broke the trend and, with declining population, the real estate bust became graver in Ireland than many other places. Still, Ireland now is gradually recovering. It stayed with the euro and did not devalue.
Now back to Greece. If Greece implemented the type of policies Ireland did, it would likely attract a range of skilled people from around the world - from Europe in particular. However, losing their skilled people is the last thing the rest of Europe would want to see. At the moment, skill-wise, Greece seems to be in a situation not much different from Ireland before the influx. Except tourism, the place has no industry to speak off.
Because of the universality of English, Ireland perhaps was an easier place to attract skilled people. But Greece's nice weather may compensate for that. Briefly: once the Greeks would find the will to drastically change their policies along the Irish lines, re-allocate misplaced capital and attract massive inflows of talent and entrepreneurs - until gradually it would produce them locally too - there would be a point to buy time and engineer a financial rescue. Notice, though, that Ireland got a 10% increase in its population, which in Greek terms would mean an influx of some 1 million within few years.
Would Chinese and Indian youngsters come? Would skilled people from other places come? Perhaps.
But the rest of Europe has been constantly criticizing Ireland for its fiscal policies, its low corporate tax in particular. Would they now allow someone else to follow in that path? Unlikely. It could have a domino effect, pulling out the carpets from under much of Europe's traditional bureaucratic structure. This bureaucracy - and others in Europe - have not much incentive to disclose they understand the solutions since their compensation depends on blindness - pretended or not.
Briefly, there are solutions to Greece, though not those pursued today. The suggested financial engineering types offer no long-term solution, as none of them takes into account that unless the policies encourage an influx of skilled, entrepreneurial people from around the world, aging and gradually depopulated Greece would become little more than a Disneyland for adults - though environmentalists - and Turkey too, for different reasons - might say that there is nothing wrong with that.
As to Turkey, its interest in having a weak Greece has little to do with past animosities, but with recent large gas discoveries around Cyprus and Greek Islands, which quickly led to Greece rapidly renew pacts with Israel, both backing Cyprus. For good measure, Russia quickly backed them too, sending submarines in to the now valuable waters, warning Turkey. Now who knows - deus ex machina - revenues for the eventual transportation of the discovered natural resources may serve as Greek collateral, and the crisis would end - without requiring influx of human resources.