10-22. What are the economic implications of a rising old-

age dependency ratio? As we noted in this chapter, the members of the EU have made remarkable progress in creating a common market and in promoting peace and prosperity throughout the 28-nation community. The EU, unfortunately, has hit a rough patch subsequent to the Global Recession of 2008–2009, facing some of the most vexing and contentious issues that have arisen in its six decades of existence. Some of its problems are structural in nature, others are political.

The EU faces a demographic challenge. As we noted in Chapter 1’s closing case, the population of many EU countries is shrinking and aging, elevating their old-age dependency ratios (the ratio of people of retirement age to people of working age). Because many members also have extensive social safety networks, these demographic changes suggest that taxes need to be raised on younger workers to support retired workers, retired workers need to suffer a contraction of their standards of living, or countries need to encourage immigration.

All three of these options are normally politically unpopular, and any officeholder campaigning in support of them has a high probability of becoming an ex-officeholder.

As famously stated by Luxembourg’s Prime Minister, Jean Claude Juncker, “We all know what to do, we just don’t know how to get re-elected after we have done it.” A fourth alternative, of course, is to encourage higher birth rates through tax breaks and public subsidies. However, such incentives are usually small relative to the costs of raising a child and have not proven to be successful. Sweden is a notable exception. In Sweden’s case, parents of a new child receive generous parental leaves, but the program is structured to encourage both the father and the mother to use the leave. As a result, Sweden’s fertility rate is 1.94 children born per woman, in comparison to Germany’s 1.41 and Italy’s 1.40.