Thursday, July 05, 2012

Germany's Big Weakness

Germany is Europe's biggest economy right now, and during the coming two to three years or so its growth prospects looks better than the other big three European economies ( Britain, Italy and France) so it will in the short term not only remain the biggest but they are likely to see its relative superiority increase than see it decrease.

However, in the long term, Germany seems almost certain to be surpassed by Britain and France. The reason for that is that Germans haven't had enough babies, and there are no signs that they are getting better at that. Last, year, only 663,000 babies were born, a new all time low, and abnormally low for a country that currently has 81.8 million people. By comparison, France with 65.4 million people had 827,000 babies and though I have been unable to find 2011 statistics for Britain, 807,000 babies were born there in 2010.

In the short term, this has no effect on economic growth because infants and toddlers aren't employed. But in about 20 to 25 years or so (depending on how long they will study) they will as young adults be part of the labor force and as the large number of Germans born in the 1950s and 1960s retire in the coming decades, this means that Germany will get a much smaller labor force than Britain and France.

And as the number of women in child bearing age in Germany is set to decline significantly in coming years, the birth rate will likely decline further even if German women don't become less inclined to have children. Indeed, even if they become more inclined to have children and the fertility rate (the number of births in relation to the number of women in child bearing age, usually defined as 15-45) increases that will simply prevent a further decline in births unless it is really dramatic.  By contrast, Britain and France are set to little or no reduction in the number of women in child bearing age.

Theoretically, Germany could compensate for this by increasing immigration, and that might indeed to some extent happen, but it has traditionally been less welcoming to immigrants than Britain and France and furthermore the Eastern European countries that in recent years been important sources of immigration for Germany are seeing demographic implosions that are even worse than Germany's. It is therefore difficult to see how immigration will prevent Germany's relative decline compared to Britain and France.