Europe’s Uncertain Future

 For a number of years, I have kept an eagle eye on demographics. Trends in demography often remind me of compound interest. Once they get going, they are virtually impossible to stop. With the drop in birth rates across the Western world, Europe could be in for some difficult times going forward.

With many people marrying later than in the past and women experiencing significant self-actualization in the workforce, it is no surprise that birth rates have declined. One powerful way that the trend could be altered quite a bit is with immigration. Allowing others to settle in your fair land eases demographic pressures significantly. Without it, virtually the entire continent of Europe’s native population will fall very sharply for the rest of this century.

The United States has often been described by political scientists as a “center-right” country. Europe’s political mix is a great deal more complicated and many countries (due to the relatively large number of political parties) rule with a coalition government comprised largely of center-right and center-left parties. My reading of what these coalitions seem to be favoring is a need to ease long term demographic realities with an increase in immigration.

This consensus is under pressure in several countries where some right-wing parties (a few extreme) are insisting on big cuts in immigration. They whip up bad feelings against immigrants and ignore that, over the long run, the economy will be stronger with more working-age immigration.

Today, most European countries have what we Americans refer to as “the provider state.” A few disparagingly refer to it as “the nanny state.” 

In the U.S., healthcare costs are a big worry for most Americans as is paying for college tuitions. In Europe, life is largely a less precarious existence as healthcare tends to be universal and college is often free or with very low fees (far fewer Europeans attend university than in the US, however). To cover costs for healthcare and education, Europeans may income taxes at significantly higher rates than Americans.

So, in the decades to come, much of Europe will face a huge problem. With no or few immigrants and a low native birthrate, the working population will grow much older. How can the provider state be maintained? Put simply, it cannot.

Right now, Eurostat, the official statistics agency of the European Union, projects that the EU will see a population drop from 447 million today to 419 by 2100. Eliminate immigration (admittedly extreme), and the population is projected to fall to 295 million by the turn of the next century.

The biggest declines would likely be in Germany, France and Italy where anti-immigration politicians are currently getting significant traction. 

As I type, some 21% of Europe’s population is 65+. Depending on the degree of limits on immigration that figure will soar to 32-36%. 

Taxes as a percentage of GDP tends to be high NOW in those three large European countries but will have to soar to keep the provider state relatively intact. 

Older people will often require care. Some are saying that, with fewer children, you need fewer teachers, so there will be job shifts over time from caring for children to assisting the elderly. 

Europeans, at present, want to have their cake and eat it too. Politicians have gotten a hostile reception when they try to raise retirement age or streamline transfer payments to the elderly.

Clearly, something will have to give. 

Why do I bring this up as an American citizen? We have a longer fuse than much of Europe has regarding dealing with elder programs (Social Security and Medicare/Medicaid). If we do not reform those programs soon, our problems will hit a wall much like Europe will before us.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Forecasting

 The late Sam Goldwyn was a major film producer in the golden age of Hollywood studios. He was famous for making very funny comments about a variety of topics. One of the most frequently quoted is: “Forecasts are difficult to make—particularly about the future.”

As witty as that comment seems to be, the great producer put his finger on a very serious topic. 

The standard definition that I have seen for the last 50 years goes something such as this: “Forecasting is the systematic process or creative estimates about future conditions, relying on historical and current data.”

Short term forecasts rely on historical patterns and current data and are used to forecast the stock market over the next week, outcomes of imminent elections and sporting events. It amazes me that media outlets such as CNBC and Bloomberg Business give airtime to “analysts” who provide remarkably short-term estimates covering only a week or a month. They are generally wrong. I am always willing to hear forecasts of a financial heavyweight looking out over a few years, but very near-term estimates are worth very little.

Long term forecasting is a VERY tricky business. Some look at past trends and do direct mathematical extrapolation which is generally not reliable. The more sophisticated players add qualitative issues to the mix and often provide several multiple futures. Others use the Delphi method which solicits opinions from a panel of experts and often publishes a consensus of the opinions and promises anonymity to participants. Such averages have a rather weak batting average. 

Whenever I have looked at long term projections I have noticed they do not consider external shocks which forecasting models cannot see. Such Black Swans, popularized by Nassim Taleb in several books, upset the applecart of almost all projections.

Today, in finance, many people have put their savings in index funds. They do not try to pick individual winners among securities. The whole market is purchased. Your never do better or worse than the total market performance.  And, fees are extremely low which over a lifetime make a huge difference to long term performance.

Another huge factor in my view that limits long term forecasting is that the rate of change in today’s world is much faster than in the 20th century.  Look at the media business where many MR readers have spent their careers. It was clear that advertiser supported cable channels were going to grow but streaming video caught many of us alleged futurists flat footed. I remember spending quarter after quarter breaking down the balance sheets and income statements of Netflix and wondering how and when they were going to become very profitable. Google’s You Tube has become something of a stealth bomber taking up more usage than futurists could have seen a decade ago.

With the emergence of Artificial Intelligence (AI), change will be more sweeping than we have seen in the past. Yet my feeling is that the growth may not be as quick as some people are now forecasting. It will, however, come and it will be huge.

Okay, I just made a forecast using the Delphi method. Check back in 5 years and see if I was correct!

I started this post with a Sam Goldwyn quote about forecasting. Here is a great one to end with— “Ninety percent of the art of living consists of getting along with people you cannot stand.”

If you would like to contact Don Cole directly, you may reach him at www.mediarealism.blogspot.com or leave a message on the blog.