Europe Short Read

Is it too late for Europe to solve its population problem?

For a country to sustain its population the fertility rate must be at least 2.1. That is to say, each female member of the population must have on average 2.1 children. Today the European Union’s rate sits at only 1.6, with the highest fertility rate being in France at 1.9. Together with rising life expectancy, these statistics help explain Europe’s most pressing issue: an ageing population.

A report from the EU in 2018 highlighted the severity of the situation. Between 2016 and 2070 the population of the EU is projected to rise by almost 2%, while the working age population will decline by over 12%. This will dramatically increase the old-age dependency ratio, calculated by dividing the number of people of working age by the number eligible for the state pension; this ratio is predicted to go from 3.3 to only 2. That means, for every 1 person drawing a state pension there are only 2 working people paying taxes to fund it.

A rise in the old-age dependency ratio is a serious problem. It increases the financial burden on the working population, as more and more public finances are diverted towards providing health and social care as well as state pensions, all of which costs a significant amount and must be provided for by a shrinking number of taxpayers. This problem is especially pronounced as a result of longer life expectancies throughout Europe, as governments will have to provide for people for longer. Furthermore, a study on the future of ageing populations from Oxford noted that life expectancy in the UK was rising faster than healthy life expectancy for people measured at 65 and 85, suggesting there will be an increase in health conditions among the elderly which require constant care. All of this will mean that there will be a significant financial burden on those who are of working age.

However, increased public spending on welfare might well seem a minor problem in comparison to the stagnation that may hit countries whose demographics shift. There are a couple of main reasons for this stagnation: a shrinking supply of labour and falling productivity. An ageing population in many places leads to a shrinking workforce where demand for labour outstrips supply. This has been seen in Japan where there are 125 jobs for every 100 jobseekers. Similarly, European countries such as Spain and Italy are predicted to lose more than a quarter of their workforce by 2050. If demand for labour does outstrip supply, it will be hard to maintain growth, a problem familiar to the Japanese.

It will be especially hard for economies to keep on growing if labour productivity doesn’t increase. In many European economies, particularly in southern Europe, this seems unlikely. Countries such as Spain and Italy are historically unproductive and an ageing population will only compound the problem rather than improve it. Higher taxes to pay for public spending will disincentivise workers while an ageing workforce may be less physically able to complete tasks resulting in lower overall productivity.

Admittedly, the prospect of slow growth and rising public spending may not appear to be the most important economic issues of our time, but there is real cause for concern. A study by the IMF showed that the costs of an ageing population will dwarf that of the financial crisis of 2008/2009. Of course, it is not fair to say that all of Europe will be equally affected, but parts of it will be severely hit. Italy and Germany have the second and third oldest populations in the world respectively and all but one of the top ten oldest countries are in Europe. However, some countries such as Britain and France are likely to be spared the worst consequences of ageing populations for now as a result of higher birth rates.

What can be done to help prevent these consequences? Multiple strategies have been proposed to deal with the problem. A particular focus has been on pension reform as state pensions account for significant portions of many European fiscal budgets. Italy for example, has increased its retirement age and increased the number of years one has to contribute to be eligible in the hope that this will keep people working for longer and lessen the burden on the state through taxation. There is an increasing focus on keeping older workers in work: anti-age discrimination laws from more than twenty years ago are now being supported by schemes to keep older people in work, such as the European Social Fund Aid Scheme in Cyprus which covers part of the salary for any Cypriots over the age of 50 who are hired full time. Many countries have also increased the use of private pensions, with many mandating their use; again, this lessens the burden on the state to provide for those who have retired.

Another strategy that has been used is natalism, in essence promoting reproduction. Natalist policies in essence try to incentivise reproduction, either by offering incentives to have children or imposing penalties for not. This, in the long term, will help combat the effects of shifting demographics as it will in the future increase the working population. For example in Sweden, parents are offered generous parental leave with 16 paid-leave months to share between the two parents while half the cost is covered by the state. In Hungary, Viktor Orbán has introduced tax breaks for mothers who have more than three children in the hope that this will encourage families to have more children. France even goes so far as to provide medals for those who have four or more children! All of these states view an increased birth rate as essential for halting the decline in labour supply and productivity that currently threatens Europe.

An ageing population is a major threat to European economies, but it is one that is being addressed, albeit slowly. What remains to be seen is whether European countries end up following Japan into economic stagnation or whether they can escape the trap of increased public spending and a shrinking work force through the implementation of innovative policy. Europe is aware of the problem and gradually shifting focus –  but will it be too late?

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