Throughout the recent Eurozone crisis, it has been taken for granted that Germany calls the shots in Europe. The reason for this is that it has by some distance the largest economy – some 40% larger than the economies of the UK and France, the next biggest countries by GDP.
The German economy is big for two reasons. First, there are a lot of people working in Germany: there are around 49 million people aged 20-64, compared to around 38 million in the UK and 37 million in France. Second, as you may have heard, Germany is pretty efficient. Economic output per person aged 20-64 is around $71,000 per year, compared to just $65,000 in the UK and $66,000 in France. That doesn’t make the Germans the most productive people in Europe – Sweden and the Netherlands both produce over $75,000 per year per working age person, but they are much smaller countries.
But something is happening in Germany that might fundamentally alter the dynamics of the European Union: the population is shrinking. While all developed countries are seeing a rise in the proportion of older people in their populations as life expectancies rise, Germany also has falling birth rates. As the chart below shows, birth rates in France and the UK are expected to remain fairly flat over the next 35 years. But in Germany, the birth rate is projected to tail off dramatically, meaning that as young people age they are not replaced. The result of this is that the working age population will shrink significantly in absolute terms (while it stays roughly the same size in France and grows in the UK).
This means that even if Germany retains its productivity advantage over Britain and France, the size of their economies will converge. In fact, if relative productivity remains constant, the UK economy will be larger than the German economy sometime in the early 2040s and France (probably) sometime in the 2050s.
It’s difficult to project what will happen in Europe over the next year, let alone the next 30 years. But, assuming the European Union survives in something like its present form – and assuming the UK remains intact and a part of it – the balance of power in the EU may well shift towards our side of the channel. Something to bear in mind for the upcoming referendum: stay in the EU, wait for 30 years, then we (or our children) will be running the show. What could possibly go wrong?