The eurozone may have little choice but to encourage higher levels of immigration if it is to avoid decades of very low economic growth that will leave it with high levels of debt, according to a paper published on Friday by two Irish economists.
Kieran McQuinn at the Economic and Social Research Institute and Karl Whelan at University College Dublin warn that the region faces both debt and growth crises.
They estimate that without economic reforms, and with the eurozone’s working age population continuing its post-2010 decline, annual economic growth will average just 0.6% over the coming decade, even if unemployment rates and investment spending return to their precrisis levels by 2020.
It gets worse — in subsequent decades, the eurozone economy would grow even more slowly, and by only 0.3% between 2044 and 2060.
"The euro area is facing a growth crisis as much as it is facing a debt crisis, with the latter perhaps more a symptom of the former," the two economists write.
But even with long-delayed and politically contentious reforms, the currency area’s growth prospects will remain weak.
The two economists find that seven eurozone countries would benefit from reforms to their labour markets that would reduce average unemployment rates to 6%.
They also take account of pension changes that raise the proportion of older workers staying in the labour force, and regulatory reforms that leave product, labour, taxation and education policies looking more like those of the UK, a European nation with high levels of total factor productivity, or output per unit of labour and capital.
The eurozone does not exactly have a stellar record when it comes to pushing through such changes. But even assuming they do, the economists estimate that the eurozone’s annual growth rate would rise to just 1.5% from 0.6% over the coming decade.
"While there are many positive structural reforms worth undertaking, the idea that these reforms can have a transformative effect on euro-area growth rates in either the short or longer run appears to be largely wishful thinking," the two economists write.
So what is the alternative to long-term stagnation? The two economists argue that the immediate launch of a large-scale investment programme, funded by the eurozone as a whole, would help raise productivity and reduce unemployment. But they say that "political constraints are likely to rule out such a programme for the foreseeable future", which is a diplomatic way of saying that Germany will not agree to it.
There is another possible way out for the currency area. The two economists find that a doubling of the rate of immigration would boost the growth rate to 0.8% from 0.6% over the coming decade, but have a more positive effect over the longer term. Instead of growing by just 0.3% between 2044 and 2060, the economy would grow by 0.7%. In the very unlikely scenario that all economic reforms were enacted and immigration boosted, the eurozone economy would grow by 1.8% annually over the coming decade.
"A return to higher rates of inward migration ... could be politically difficult but may be necessary if governments wish to keep the supply of labour growing and economic growth rates from collapsing," the two economists write.
Source: The Wall Street Journal
