I had forgotten how slow dial-up modems are. Does anybody really still use them? The internet in its current form is painfully slow on dial-up. That cable modem at home has really spoiled me, although I usually think it's still too slow. The transatlantic latency is one of the problems. If I'm lucky, I get ping times of around 90 ms to the east coast. If I ever feel sufficiently nerdy, I'll calculate the theoretical minimum latency for transatlantic connections.

As I mentioned in my previous blog about Rome, the Pope went to speak to the Italian parliament for the first time since the Italian state was founded. The problem is that the Popes used to rule much of Italy, and the founding of the unitary state of Italy in the 19th century took away the last bit of Papal sovereignty over what are now Italian lands. The relationship between the Popes and Italy has thus been strained with many Italians being suspicious of Papal ambitions despite the Roman Catholicism that remains widespread in the country. The Pope spoke on many issues, but one thing that struck me were his comments exhorting Italians to have more children. The birth rate in Italy is now substantially below replacement rate, with Italian women giving birth to just 1.2 children on average. To keep the population stable, the birth rate has to be just a smidgen over 2 children per woman.

This is not a problem unique to Italy. Most of the countries in the developed world are faced with declining birth rates too. The most spectacular case is of course Japan, where the population has already peaked and is projected to decline by 2050 to the same level it was in 1950. Within Europe, the worst demographics are in Italy, Spain and Germany, but virtually all countries on the European continent share in this. Aside from the social implications of a declining population, the economic consequences are far-reaching too. The economy can be expected to grow roughly in line with the population. If the population increases at a 1% per annum pace, then the economy should grow at the same pace on average. More people need to buy more food,. consume more services, buy more houses. Of course, this is a huge oversimplification. The first requirement is that you need to have an economic structure that can actually provide this kind of growth.

This is the first time in history that the human race has voluntarily limited its own growth. As prosperity expands around the globe, we can fully expect the currently underdeveloped economies to join this trend too. Sometime in the next century or two, the world population will stabilize or perhaps even start to decline. But the reality of this new trend will first be faced in Japan and Western Europe. The demographics of the United States are pointing slower growth were it not for immigration. Since this is a new situation, there is no precedent for finding an economic structure that can provide sufficient prosperity for the entire population. Until now, the increasing numbers of young people have subsidized the old. This is no longer sustainable since there simply aren't enough young people anymore.

To maintain positive economic growth in an environment of declining population, the shortfall will have to be made up by increased productivity. Adding more value per hour worked will have to counteract the demographic headwind. The answer lies in technology, and the more technology-friendly and innovation-friendly an economy is, the better it will fare.

But there is one big catch: the transition from an expanding population to a constant or even shrinking one is going to be tough. I alluded to the problem above: there aren't enough young people to subsidize the old. And the old have not saved enough money to provide for their own retirement. The state pension systems work on a pay-as-you-go basis. This means that the current tax payers are paying the retirement benefits of the current pensioners. This works fine with an expanding population, but with demographics it's no longer affordable. So what you need a funded pension system, in which the people save for their own retirement. But moving to a funded pension system is expensive and takes a long time. It's expensive because you still have to pay for current pensioners and at the same time you have to build your own pension. So it's a double pension payment. Even in countries that have a fairly well-established funded pensions systems, such as Great Britain and the Netherlands, the pensioners still depend on the extra money that comes from the state's pay-as-you-go system. In other countries, such as Germany, France and Italy, the problem is far worse because funded pensions are rare there.

There are a few options for fixing this. The intergenerational transfer payments have to be revised. You can simply tell the current tax payers that they?re out of the luck and need to pay more. Raising taxes is not the most popular of things to do as Schröder is finding out. Alternatively, you could tell the pensioners that they're going to get less money. That may not be overly popular either. Raising the retirement age will mitigate the problem as well. A combination of all three is most likely.

There is another option, and that is immigration. In fact, for Europe, it's probably the only option out of its demographic trap. Europe needs more young people to pay for its pensioners and start building a funded pension system, because paying for all of that with the currently available resources is going to be prohibitively expensive. So Europe desperately need more immigrants. And that's not going to be easy given the experience with the last big wave of immigrants from North Africa and Turkey. As I have written on this blog on previous occasions, they tend to be poorly integrated into society, and often are in fact openly hostile to the liberal democratic host-society. The past experience with immigration in Europe is indeed a bad one given the problems that the immigrants have caused.

Even that is not the whole part of the story. The overregulated and overtaxed European economies have not been able to sustain any endogenous growth. The rigid labor markets have led to sky-high unemployment. And of course, immigrants get blamed for these problems as well, which would exist even in the absence of any immigration. In many countries undifferentiated immigrant-bashing has become politically advantageous. It neatly deflects from the real problems underlying the economy and puts the blame on a clearly identifiable group. This will only go away if the European economies can liberate themselves from the state-controlled past in order to generate economic growth. But that is going to be hard to do with the large costs of the intergenerational wealth transfers hanging over them. And the problem will get worse the longer they wait. So Europe needs immigrants to solve its demographically induced economic problems, but it can't do that until it escapes from its self-inflicted economic straitjacket.