Europe’s decline, Australia’s challenge

Speech delivered to the Annual General Meeting of the Business Council of Australia, Sydney, 26 October 2010

Ladies and gentlemen,

Thank you very much for the invitation to speak to you today.

I have been asked to address the current situation in Europe and its relevance for Australia.

That is, of course, not only a very broad topic. It is also a topic that is almost made for a carefree German optimist like me.

Seriously, there is no doubt in my mind that we are currently living through the Chinese curse of ‘interesting times’.

Seldom has there been so much uncertainty about the future.

Rarely has the model of Western society and capitalism been under attack on so many different fronts.

I am going to talk about these challenges in a minute.

But let me begin by quoting some really knowledgeable experts about the future. They had a sober look at the world and came to this blunt conclusion:

‘Our earth is degenerate in these latter days. There are signs that the world is speedily coming to an end. Bribery and corruption are common. … Every man wants to write a book and the end of the world is evidently approaching.’

Perhaps the language has already given it away but this quote is quite old. Indeed, it is very old.

It was found on an Assyrian tablet dating back thousands of years BC. And this makes it one of the oldest prophecies of doom on record.

Now, in a way the old Assyrians were right. After all, their culture has actually disappeared as predicted.

If it’s of any consolation to the Assyrians, they were not the only ones that had to go.

The ancient Egyptians, Greeks and Romans shared the same fate.

As did the Holy Roman Empire, the Mayas, Incas and Aztecs, the Ming dynasty in China, the Bourbon kings of France, the Hapsburg monarchy of Austria-Hungary, the British Empire and, more recently, the Soviet Union and its allies.

And these are just the best known examples of great powers that have gone under.

It is equally important to keep in mind that the disappearance of a socio-economic order does not leave behind a permanent vacuum. If you remember your physics classes, you know that vacuums are filled quickly if you puncture their outer skins.

So when the Assyrians believed that their own demise meant the end of the world, they were clearly wrong. They were simply replaced by something else.

To sum it up: There is no end of history. But history does not wait for you, either.

Forgive me for this brief excursion but I think it helps to frame my talk today. Because today we are witnessing such a historic decline in Europe.

It is not just the decline of a region. First and foremost is the decline of a social and economic model. And it is this aspect of Europe’s demise that makes it important for us in Australia to pay close attention to it.

Of course, Europe and Australia share a common history. I agree with Australian historian John Hirst who claims that Australia’s modern history in fact begins with ancient Rome and Athens.

And who wouldn’t agree with him when he says that ‘the expansion of Europe was the transforming force in human history of the last 500 years’?

Europe, the historic force for growth, once fuelled by Enlightenment values and driving towards progress, is slowing. Its engine is stuttering, the wheels are falling off the European social model. It looks like one of those empires in history on the verge of disappearing.

It would be tempting for Australians to watch the European difficulties from afar with a certain feeling of smugness. Just in the same way that Australians enjoy a good beating of the English on the cricket field or at the Commonwealth Games.

Looking at Europe’s various troubles, Australians could be forgiven for thinking that Europe is just paying the price for decades of wasted opportunities.

At a time when Hawke, Keating and Howard transformed Australia into one of the best performing economies on the planet through tough reforms, the Europeans showed a remarkable aversion to tackling their problems.

Consequently, that Australia is doing so much than Europe better these days is only fair.

Such an assessment would be understandable but very short-sighted. It is also dangerous.

It’s true that Europe has made many mistakes that have caused its current problems. However, Europe’s present could well be Australia’s future if we don’t learn the lessons from Europe’s slow and painful decline.

So let me focus on three areas where Europe has gone wrong and exemplify them with the experiences of three different countries.

The issues are public finances, demographic change, and the integration of migrants. The countries I am going to talk about are the United Kingdom, France and Germany.

I should say at the outset that you can take these case studies as ‘pars pro toto’. The issues are actually very similar across Europe.

Let us talk about public finances first and turn to the United Kingdom. Last week, as you would have heard, the British government presented its Comprehensive Spending Review. It was an emergency budget in all but name. And the fiscal situation in Britain is without doubt a disaster.

The Spending Review is the response of the new coalition government to Britain’s record deficit. It provides details of how Whitehall departments will reduce their budgets over the next four years. Over this period of time, the cuts are dramatic.

No government department – except for health and foreign aid! – is immune from the cuts. Altogether, about half a million public sector workers are to lose their jobs as a result of the spending review, including 42,000 defence jobs.

Just one example among the list of cuts are Britain’s newest aircraft carriers. They will still be delivered but they will not be carrying much because the number of aircraft had to be drastically reduced.

As Lord Tebbit, a former Secretary in Margaret Thatcher’s cabinet, complained in the London Daily Telegraph: ‘Aircraft carriers without aircraft are little more use than a pub with no beer’.

On the other hand, the British have little choice in cutting back spending, even if it hurts. And even if it affects something as important and prestigious as the Royal Navy. Public finances in Britain are in such a mess that decisive action has to be taken now.

Just a decade ago, Britain was thought to be in reasonably good shape. At the time, the UK budget was in surplus. Real public sector net debt had slightly fallen from its peak in the mid-1990s. Total managed expenditure had also fallen to a relatively healthy 37 percent of GDP, which was about seven percentage points lower than at the end of the Thatcher years.

So by and large, British public finances looked fine. Perhaps the British fiscal situation was not quite as good as Australia before the GFC, but it was certainly better than in most other European countries.

And surely, the British felt good about themselves. So good in fact that Chancellor Gordon Brown even claimed that he had personally abolished the business cycle. “No more boom and bust’, Brown promised.

In hindsight, this was the time the British made the biggest long-term mistakes about their finances. It is astonishing how a position of relative fiscal strength was reversed within the short space of a decade but the British have done it. How?

Well, to start with, perhaps the figures should not have been trusted in the first place. National debt may have looked small and manageable, but some areas had always been excluded from the official data.

In the fiscal year of 2000/2001, official debt stood at £381 billion. But taking into consideration unfunded public sector pensions of £434 billion and unfunded state pensions of £1.4 trillion, Britain’s real debt had already reached close to £2.3 trillion.

In other words, Britain’s debt did not stand at 31 percent of GDP as the British government claimed. It was a full two hundred points higher, namely 231 percent of GDP.

Unfortunately, the official debt figures were taken as an invitation to spend more and more and more. After all, the public was not too concerned about public debt. And so the government under Tony Blair and Gordon Brown kept spending on their pet projects.

For example, under the Labour government, about 800,000 extra jobs were created in the public sector. And by the way, the Conservative opposition under David Cameron did not oppose these measures. They were very much complicit in this policy.

Apart from increasing spending, the British government did nothing to address the issues in its two pension systems. In both state pensions and public sector pensions, liabilities ballooned. In nominal terms, they nearly tripled in a decade.

When the financial crisis hit Britain, public finances were in a sorry state. Today, the British government officially estimates its national debt to be £890 billion – or 63 percent of GDP. The actual figures are much higher, though.

Including pensions, both state and public sector, and further including public finance initiatives, Network Rail, and nuclear decommissioning liabilities, we are talking about a total of just under £5.3 trillion – or 376 percent of GDP. Should you also wish to include the debt of RBS/Lloyds, the figure goes up to 560 percent of GDP.

All of these calculations are based on recent research undertaken by the UK Taxpayers Alliance. But you do not have to believe them. You could equally take a report straight out of the British Office for National Statistics.

Earlier this year, they published a working paper under the seemingly harmless title Wider Measures of Public Sector Debt – A Broader Approach to the Public Sector Balance Sheet. A harmless title but an explosive content: Their data saw Britain’s national debt at more than three times British GDP.

To spell it out clearly: If it were a private company, the United Kingdom would be bankrupt.

There is really not much reason for hope for the United Kingdom. Its debt figures are staggeringly high; servicing the debt consumes a rising proportion of the British budget; and all of this is happening at a time of historically low interest rates. How Britain is going to service its debt should interest rates return to their long-term average is anyone’s guess.

Well, let me take a guess: It will require some action by the Bank of England.

As I said at the beginning, Britain is just one example of the state of public finances in Europe. The problems for the Eurozone are well known and they are severe. We are usually only talking about the problems in Greece, Spain, Portugal, Italy and Ireland. But they are clearly not alone.

Out of the 16 eurozone member states, only five are still below the 60 per cent debt to GDP mark that the Growth and Stability Pact allows. They are Cyprus, Slovenia, Slovakia, Finland and Luxembourg. With all due respect, these are not quite the heavyweights of the eurozone.

This year, not a single eurozone country, not even Luxembourg, will manage to fulfil the 3 percent deficit criterion of the treaty. In other words, the Growth and Stability Pact is dead.

Given this situation, it is not surprising that European governments, led by Angela Merkel and Nicolas Sarkozy, have now decided not to press ahead with enforcing fiscal discipline through the Stability Pact. It’s not surprising, as I said, but that does not make it less scandalous.

But back to Britain. What makes Britain such an interesting case study is the fact that it shows where complacency about public finances can lead to. And how fast this can happen.

In Australia, we should clearly take notice. Australia’s public finances were the envy of the world after the federal government had turned from a net debtor to a net creditor. But ever since Kevin Rudd forgot that he was a ‘fiscal conservative’ and discovered the traditional Keynesian in himself, fiscal discipline has been lost.

Who still believes that Australia will return to a budget surplus within the next three years? And even if it does, would this be a surplus in name only since it is bolstered by unusually positive terms-of-trade?

If the UK experience has anything to teach us, it is that fiscal complacency is a sweet-smelling poison. It is pleasant for any government to spend money on its favourite projects without regard to the bottom line. But sooner rather than later, and as certain as night follows day, we will all be presented with the bill.

Europe’s fiscal position is dire. But it is made worse by the seismic shifts in its age structure. Adjusting European welfare states to population ageing, and in many cases population shrinking, will require enormous efforts. The task is so difficult that even minor steps on the way are extremely painful. Just look at France.

For the past half a year, President Sarkozy has been fighting for a reform of the French pension system. The changes he proposed are necessary. And they do not even go far enough.

The French can currently retire at 60, the full pension is available from 65. Sarkozy wants to lift both these ages by two years. So you could go into early retirement at the age of 62 or receive a full pension at 67.

These changes are hardly revolutionary. In fact, they are only replicating what has already been decided in other European countries, including Germany. However, even this minor change was more than the French wanted to accept.

But there is no doubt that an adjustment of the pension age is unavoidable. You only have to look at the figures. Earlier this year, the government-appointed Pensions Advisory Council revealed the shocking state of France’s pension system.

According to their report, the funding shortfall will be €40 billion by 2015. By the middle of the century, the deficit of France’s pension system could be anywhere between €72 billion and €114 billion, if it does not adapt to the ageing population.

Why are these figures so dramatic? Actually, there are two reasons.

The first reason is obvious: the French are getting older.

But there is a second reason: They are getting fewer. Below replacement level birth rates mean that the French working age population is shrinking. By 2020, France will have already lost 5.5 percent of its working age inhabitants. And this process will continue into the future for as long as birth rates do not go up or net migration closes the gap.

It is by no means a process limited to France. Most European countries face a shrinking not just of their populations but – more importantly – a shrinking of their working age population.

Germany, for example, will drop from 82 million inhabitants today to somewhere between 65 and 70 million. By then, there will be as many people in Germany over the age of 80 as there will be people under the age of 20.

But crucially, the German workforce will be a third smaller than it is today. This means that German GDP is likely to peak in 2020 and then go into a continuous decline.

The European process of dealing with its ageing and shrinking society has only just begun. And yet, as the French example shows, the Europeans are not ready for it. Instead, they are fighting the measures tooth and nail.

Perhaps this is a good opportunity to look at Australia’s strange population debate. There is one similarity, of course: Australians are ageing as fast as the Europeans. According to Treasury projections, by 2050 Australian men will have a life expectancy of 87.7 years and Australian women 90.5 years.

But there are three major differences between Europe and Australia:

First, fertility in Australia is currently approaching replacement level.

Second, immigration is strong. And I should stress that in Australia we are talking about immigration into the workforce and not into the welfare state, as is often the case in Europe.

And third, Australia is a much younger country than Europe. Our median age is 37 years – and not 43 or 44 years as in Germany or Italy.

The way I see it, this is a fantastic opportunity for Australia. Because all factors taken together will ensure that Australia will remain a relatively young country with a growing workforce of well qualified people well into the 21st century.

Where European countries will be suffering from an acute lack of skilled labour and the fiscal pressures of their rapidly ageing societies, Australia has the unique chance of avoiding most of these difficulties.

But are there celebrations in our streets that we are not like Europe? Are our politicians rejoicing that Australia is so attractive that it will just keep growing? Are we prepared to embrace the opportunities that population growth brings?

To the three questions the answer is, of course, no, no and no.

Listening to Australian debates about population growth, especially in the last embarrassing election campaign, you get the impression that population growth is some kind of cancer on society. Something that needs to be stopped because we have run out land, out of water and out of food.

To all these doomsayers let me reply: No, we have not run out of land, water or food, either. We have only run out of ideas, imagination and courage. We have become complacent because we are taking our prosperity for granted.

It is a sad indictment on Australia today that we have become so smug about our recent economic performance that we now regard further growth as a nuisance only.

If growth means having to build more roads, more schools, and more houses, there are too many politicians and commentators who argue that this is a price not worth paying.

This is complacency dressing up as sustainability.

But we only need to look at Europe to see what the real alternative to Australia’s population growth is.

It is not securing our comfortable status quo.

It is uncomfortable decline.

Australia needs people who are not ashamed to make the case for growth. And if our politicians are no longer able or willing to do so, then we need to do it for them.

Australia has the potential to grow further and to become much more prosperous still. But we have to want it, too. And we should not shy away from fighting for it.

At the Centre for Independent Studies, we are now making this case for growth in our reports, in our newspaper articles and on radio and TV on a daily basis. But all too often, we are fighting a lonely fight.

We need your help and support in this, and let me just say how grateful I am to the Business Council for letting me speak to you today.

I am convinced that a big Australia is our biggest hope. It is our biggest chance. It should be our biggest ambition to make it work.

Big Australia also means keeping migration at current levels. But just adding numbers to Australia’s population is not sufficient. We will have to ensure that those people coming to Australia are properly integrated into Australian society.

Again, a look at Europe is a useful in this respect because it shows us which developments we must avoid.

You all heard it when Germany’s Chancellor Angela Merkel declared a few days ago that multiculturalism had ‘failed and failed utterly’.

People were shocked to hear such a blunt statement from a German chancellor. Let me assure you that it had nothing to do with xenophobia or racism.

What Angela Merkel was referring to was the disaster that happens when you invite migrants into your country and then forget to make them a part of it.

The German case is the perfect example of failed integration. In the ‘economic miracle’ years of West Germany’s post-war reconstruction, the government recruited millions of migrants as so-called ‘guest workers’ to fill the jobs for which no Germans could be found. It was also expected that, like good guests, these workers would eventually return home.

Left and Right in Germany were equally naive about the people they let into the country. The German Left welcomed the newcomers with open arms but they did not actually take any interest in them. They assumed the migrants would automatically enrich Germany with their cultures, spices and habits.

The German Right showed an equal disinterest in them, since it was still believed they would only be a passing apparition.

Both views were wrong. The migrants did not automatically become a part of German society, as the Left thought. Nor did they leave the country after a few years, as the Right had assumed.

All of this should have been clear at the very latest when people started talking, entirely seriously, about ‘third generation (!) guest workers’.

By then, many of the ‘guest’ ‘workers’ were neither: They were no longer guests because they were there to stay. And they were no longer workers, either, since many of them had become welfare dependent.

That is because among migrant groups in Germany problems of poor language skills, a very basic education, and high welfare dependency are perpetuating themselves from generation to generation.

In Berlin, three-quarters of all Turkish migrants lack any school qualifications, and nearly half of the unemployed are of Turkish origin. Almost 40 per cent of all Berlin-based Turks get most of their income via welfare payments.

When German politicians now say multiculturalism has failed, they only have themselves to blame.

We should learn our lessons from the German multiculturalism failure. Australia is, of course, a nation of migrants. The vast majority of migrant groups have integrated very well into Australian society.

Unlike in many European countries, the integration of newcomers in Australia has predominantly worked through workforce participation, not through dependence on the welfare state.

But is this likely to continue into the future? There are big changes happening in the composition of Australia’s newest arrivals.

A few decades ago, migration into Australia was mainly British or European. This has, of course, changed as more and more migrants come to these shores from Asian and Muslim backgrounds.

But as the European examples show, some groups are easier to integrate into Western society than others. The immigration debate in Germany, the Netherlands, Sweden and Britain is first and foremost a debate about Islam.

The problems in integrating migrants are concentrated within some sections of Muslim migrants, and Australia would be naive to ignore them.

The fabric of Australian society is still woven of its European heritage, Western values, and the inheritance of the Enlightenment. The integration of non-Western newcomers into this fabric is one of the most important and most difficult tasks for Australia in the future.

Let’s be clear about it: The naive idea of multiculturalism as practised in many European countries has not worked, but it has contributed to the segregation we can now see in many major European cities.

Every country needs clear ideas about its basic rights, values and language. And migrants need to integrate and improve through education and work.

The integration of migrants is crucial for Australia’s economy. We do not only need migrants to fill job vacancies. We need migrants that are making an effort to become part of mainstream Australia.

This mainstream Australia I am talking about will, can and should be a colourful place with people from many different backgrounds.

It will most certainly be a multi-ethnic Australia – just as Australia is a multi-ethnic country already. But it would not be multi-cultural. Because there is only one culture as laid down in our laws and expressed through our common language.

Living together requires a minimum of common ground. Of course you can still speak your native language at home, and you have a choice which religion (if any) you want to practice.

But you should not have a choice whether you want to subscribe to Australian laws or follow Sharia law instead.

In our debates, we are all too often confusing ‘multi-ethnic’ with ‘multi-cultural’. We do so at our peril.

I began my talk with a brief excursion about socio-economic systems in history that have disappeared. As we are looking at Europe today, I am afraid that this is what we are seeing.

Europe has become a continent with governments that are too big, economies that are over-regulated, and countries that are crippled by debt.

Europe is a continent that faces the challenge of dramatic population ageing and shrinking.

Europe is a continent that has failed to integrate its migrants.

Each of these three problems – debt, demography and disintegration – would be enough to cause serious trouble in the coming decades. Combined, they make the task of restoring Europe to its former glory impossible.

Europe, as we knew it, is a continent that is undoing itself. It may well share the fate of the old Assyrians or the ancient Romans.

When we are looking at Australia today, we can be pleased that we have so far avoided many of Europe’s problems.

Our debt still looks manageable.

Our demography is still healthy.

Our society is still united.

But make the wrong choices about the size of government now, ignore the challenge of population ageing, gloss over temporary problems with public deficits, neglect the integration of newcomers, and just a few decades later, Australia could end up like Europe – under different stars, but with the same destiny.

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