Euro emigration: safety valve or debt drag?

Debt-laden eurozone countries are exporting again - only this time it’s their young workers, in an exodus some fear could intensify national debt problems longer term.

As countries on the eurozone periphery endure deep and prolonged recessions, high unemployment, severe tax hikes and state spending cuts, young people appear to be taking to planes, trains and boats again in search of work.

High levels of emigration from depressed economies have historically been emotive the world over but modern transport and communication links have changed the picture for many over recent decades. Free movement of labour within Europe has been a centrepiece of the continent’s economic integration.

[caption id=“attachment_493802” align=“alignleft” width=“380”]  Free movement of labour within Europe has been a centrepiece of the continent’s economic integration. Reuters[/caption]

What’s more, many view the sort of worker mobility seen within the United States as a model of what should happen between economically-diverse states in any single currency area.

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The problem for the eurozone right now is that the workforce may move, but national debts don’t. And the exit of the former weakens a country’s ability to solve the latter by putting a major drag on growth and tax revenues over time.

While emigration of the young unemployed can be a economic safety valve, relieving pressure on welfare benefit payments in the short term, any permanent ‘hollowing out’ of the workforce at a time when populations are aging could scupper efforts to reduce debt burdens, instead raising pension payments and dependency ratios.

“If the euro periphery economies, through severe austerity, are going to be economically depressed for a long period of time and their populations just walk away, how do they ever get back to fiscal sustainability?” said Citi economist Michael Saunders.

“I think the answer is they don’t,” he said, adding that some form of default or debt restructuring is the only likely solution to the euro sovereign debt crisis over time.

“Slashing entitlement programmes just puts you in a situation where your economy is ever weaker and more people leave,” said Saunders, emphasising that working populations now need to be rising, not falling. “Unless the swing from depression to boom is very quick, migration isn’t something that easily flows back.”

BRAIN DRAIN

Citi’s view on the upshot of the euro crisis may not be the market consensus and the migration angle is just one part of its gloomy prognosis.

But there is no shortage of big investors unnerved by the problem.

“It’s a real problem that, for example, young Portuguese unemployed leave in search of work but the debt remains just as large for everyone left behind,” said Yves Bonzon, chief investment officer at Swiss asset manager Pictet.

So what’s the scale of the problem to date?

Eurostat data shows that in the first half of 2012, working age populations - or those between 15 and 65 - dropped 0.1 percent year-on-year in Italy and Greece, 0.6 percent in Spain, 0.7 percent in Portugal and 0.9 percent in Ireland. Workforces in Ireland and Portugal have been contracting since 2008.

And the bulk of the new emigrants do appear to be the youngest workers. In the second quarter of 2012, for example, the 20- to 29-year-old segment of the population fell 8.8 percent year-on-year in Ireland, 4.3 percent in Spain and 3.5 percent in Portugal - bringing respective peak-to-trough declines for this age group to 25 percent, 17 percent and 18 percent.

Saunders at Citi reckoned these declines in populations in their 20s are “extraordinarily large”, well in excess of those seen in the eastern European countries that joined the European Union in 2004. The drop in Ireland’s 20- to 29-year age group in 2011, at 8 percent, exceeds that seen for this age group in any EU country in the last 40 years, he added.

But are the numbers as bad as they seem and do they necessarily herald future national default or restructuring?

If migrants return quickly is the problem solved? How much of the scale of the recent exit was merely a reversal of huge movements of young workers from eastern Europe post-2004? Spanish statistics, for example, show the biggest destinations for emigrants from Spain in 2011 were Romania and Morocco.

Eurostat, too, shows emigration of recent years only partly reverses the influx to these economies during the boom years. Ireland’s workforce increased 1.8 percent a year on average in the 19 years to 2009.

Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC in County Clare in Ireland, points out that total net migration flows into Ireland between 1996 and 2009 were about half a million and about 100,000 have left since then.

He also said migration of young adults in their 20s to areas of plentiful work was now very fast and flexible, unlike more traumatic and opened-ended historic episodes of high emigration.

What’s more, Roche Kelly reckons the issue of leaving debts behind argues strongly in favour of some debt mutualisation in the euro zone, rather than default or restructuring, not unlike the U.S. where most debts are held at a federal rather than state level.

“If you want a centralisation of the labour market, which is a definite goal of the euro area, you also have to have a parity of debt across borders,” he said.

Reuters