(Chart 3: Current account for selected countries) A lack of fiscal discipline is not the only factor behind the relatively high interest burden facing Greece, Portugal, Spain and Italy. Public deficits rose in tandem with a fall in private saving. Countries lived beyond their means and accumulated current account deficits and substantial debt while their debt-servicing capacity weakened. The result is a deterioration in their creditworthiness. (Chart 4: Current account and fertility rate) The combination of large deficits and growing demographic problems is particularly challenging, as is the case for southern European countries where fertility rates are well below the replacement rate and lower than the average for advanced countries. The demographic challenge will be even greater ahead. In some of the countries the number of pensioners will be close to the number of economically active. The basis for economic growth is thus weakened. The burden of rising debt and pension payments will be heavier. Financial markets are already now demanding a high interest rate on loans to troubled countries. It takes a long time to reverse demographic trends. The ideals associated with fertility from the mythologies of Aphrodite and Venus might provide some impetus – not only in Mediterranean countries, but in most OECD countries. Financial incentives would probably be more effective, however. Norway, with favourable support schemes for families with children, has a relatively high birth rate. In other European countries, there is a risk that these hard times will exacerbate the demographic challenge.

At times during the 1970s and 1980s, when the so-called anglo-saxon model of relatively unbridled financial markets was not delivering particularly good results in terms of economic growth, there was some envy of what one might depict as the institutional model of corporate ownership, as evident in Germany and Japan for example. In this model much of the equity of major businesses is closely held by friendly groups of long-term investors including one’s bankers and associate companies. It has been argued that this arrangement provides the best environment for long-term growth and stability, in contrast to the situation where businesses are exposed fully to the cut and thrust of the stock markets, which are characterised as being populated by people seeking only short-term profit and ever alert to opportunities for takeovers, asset stripping and the like. But experience of the 1990s does not support that view. Germany and Japan have been the laggards of the decade. The true cost to Japan of the longstanding cosy relationships between banks, industrial corporations and government ministries has become apparent. And we watch in some amazement the reaction among some sections 1  BIS Review 135/1999  of the political and business communities in Germany to the Vodafone/Mannesmann takeover battle an almost unprecedented (for Germany) hostile bid, no more palatable for being from abroad - along with the government’s efforts to save the Holzmann construction group, not to mention the authorities’ stout defence of the largely state-owned domestic regional banking network there.