Can Babies Save the Economy? The Growth Impact of Europe’s Shrinking Families

An IMF study reveals that declining fertility in Europe significantly hampers economic growth, contrary to conventional views. Using robust data and econometric methods, it finds that higher fertility positively impacts GDP per capita, urging urgent policy action.

Europe is quietly heading toward a demographic precipice one that risks undermining its long-term economic prosperity. A new working paper published by the International Monetary Fund (IMF) authored by economist Serhan Cevik, brings this looming crisis into sharp focus. Backed by data from reputable institutions such as the World Bank, the United Nations Department of Economic and Social Affairs, and the Quality of Government Institute, the study warns that the continent’s fertility rates have fallen so far below replacement levels that the economic consequences are no longer theoretical they are material and measurable. The average total fertility rate (TFR) in Europe is now just 1.46 births per woman, far below the 2.1 needed to sustain population levels. Combined with a rapidly aging society, this trend is accelerating labor shortages, reducing innovation, and weakening the foundations of public finance.

Challenging Conventional Wisdom on Fertility and Growth

Historically, many economists have argued that lower fertility could be economically beneficial. Fewer dependents, particularly children, allow for greater female labor force participation and reduced pressure on household finances. However, Cevik’s research challenges this assumption. He argues that earlier findings are plagued by a critical methodological flaw: endogeneity. Economic growth influences fertility decisions just as fertility influences economic growth. Wealthier families may choose to have fewer children, prioritizing quality over quantity, while slower economic growth can reduce family size due to financial uncertainty. This complex feedback loop clouds simple causal interpretations, often leading to misleading conclusions.

To untangle this relationship, Cevik employs an instrumental variable (IV) approach. Specifically, he uses the Comparative Abortion Index—developed from UN and Quality of Government data as a tool to isolate exogenous changes in fertility. The index, which measures the permissiveness of abortion laws on a scale from zero to one, serves as a proxy for fertility shifts that are not directly tied to income levels. The logic is clear: abortion policy affects reproductive behavior but not economic output directly, making it a suitable instrument for econometric analysis.

Rewriting the Narrative: Fertility as a Driver of Growth

The contrast in results between traditional models and Cevik’s IV approach is stark. In ordinary least squares (OLS) regressions, higher fertility appears to hinder GDP per capita growth consistent with conventional narratives. However, once fertility is instrumented using the abortion index, the direction and magnitude of the effect dramatically change. The new analysis finds that higher fertility actually has a significant positive impact on real GDP per capita. The magnitude of this effect is nearly double the OLS estimates, highlighting how earlier research may have underestimated the growth-enhancing potential of higher fertility due to reverse causality and other biases.

Beyond the headline result, the study includes a granular country-level analysis using a dynamic macrosimulation model for Lithuania—one of Europe’s most demographically stressed nations. The Baltic country has seen its fertility rate fall from 2.03 in 1990 to just 1.27 in 2023, and it is projected to plummet further to 0.88 by 2050. As a result, Lithuania’s population is expected to decline by nearly 40 percent from its 1990 level, while its old-age dependency ratio could triple by mid-century. The model estimates that, under a low-fertility scenario, Lithuania’s income per capita could be up to 17.6 percent lower by the year 2100 compared to a medium-fertility baseline. The implications are unambiguous: without intervention, fertility decline could drag down national prosperity for generations.

Policy Levers: Can Europe Reverse the Trend?

While the demographic data may seem dire, the paper offers a glimmer of hope. Fertility decline is not inevitable, and Cevik points to several effective policy measures. Family-friendly policies particularly those that reduce the cost of raising children, such as subsidized childcare, education support, and parental leave can meaningfully influence fertility decisions. Studies cited in the paper, including those by the United Nations Population Fund and other OECD research, show that such interventions have helped lift birth rates in some countries.

Additionally, labor market reforms are essential. Flexible work arrangements, including telecommuting and part-time work options, can better balance parenting responsibilities, making it easier for women to remain in the workforce without sacrificing family aspirations. Immigration, too, emerges as a key factor. When paired with strong integration policies, immigration can not only supplement the workforce but also raise fertility rates, especially in countries experiencing native population decline.

A Wake-Up Call for Policymakers

Europe’s economic model depends on a balanced demographic structure, and that balance is now faltering. The positive relationship between fertility and income growth uncovered by Cevik’s careful econometric work should jolt policymakers into reconsidering long-standing assumptions. While the path to reversing ultra-low fertility is neither quick nor easy, it is navigable with smart, targeted interventions. If governments fail to respond, they may find themselves presiding over aging, shrinking economies with dwindling tax bases and rising social costs. As the paper makes clear, demography may not be destiny but ignoring it certainly comes at a cost.