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ANALYSIS

Ageing, fertility rates - tough choices for Europe

London, July 31, 2013

By Alan Wheatley, Global Economics Correspondent
Slowly but unsurely, Europe is facing up to population trends that will sap long-run economic growth and force nations to choose between cutting pensions and welfare benefits or paying higher taxes to maintain them.
 
Some countries are getting an early taste of difficulties that await Europe as the continent's baby boomers retire and, because of flagging fertility rates, the average age of those left in the labour force rises.
 
In France, trade unions are planning protests against modest plans to rein in the country's pension funding gap of 14 billion euros and rising.
 
Spain, pressed by the European Commission, is drawing up reforms to tackle underfunding in its pension system that forced the government to dip into the social security reserve fund last year.
 
"There's a recognition that something needs to be done, and it's just a question of the pace at which they move," said Edward Hugh, an economist and demographer in Barcelona.
 
Spain's pension plight is partly cyclical: more than 3 million workers have lost their jobs since the onset of recession and have stopped paying into the pensions system.
 
Emigration is making the funding crunch worse. More than half a million foreign workers - lured to Spain during the boom years - have left since the start of 2010, while young Spaniards are moving abroad in droves in search of jobs.
 
Spain, Portugal and Ireland all lost about 2 percent of their working-age adults between 2010 and the first quarter of 2013, said Marchel Alexandrovich, an economist with Jefferies, an investment bank, in London.
 
In the medium term, he said, this raises the question of who pays for pensions and age-related health care costs in countries that are educating their youngsters only to see many of them emigrate and pay taxes elsewhere.
 
"Without some corresponding system of fiscal transfers (i.e. US-style federal taxes), this is not a sustainable arrangement," Alexandrovich said in a note.
 
VICIOUS CIRCLES
 
Spain is also paying the price of a low fertility rate for the past 25 years - a trend compounded by the recession - which is reducing the number of entrants to the workforce.
 
The risk is that low fertility, high emigration and a rapidly ageing labour force form a vicious economic circle.
 
"So even when the recession ends, the damage to some euro area economies will be more permanent than may be commonly recognised," Alexandrovich said.
 
With fewer workers having to pay for more retirees, Spaniards who are braced for lower pensions will tend to save rather than spend, holding back the recovery and thus further eroding the tax base, Hugh fears.
 
"Since they're not going to get the kind of economic recovery they're expecting, and since young people are leaving, they're going to have to do even more pension reforms than they imagine," Hugh said.
 
Countries across Europe are feeling the demographic pinch.
 
Bulgaria's population has shrunk by 582,000 people in the past 10 years to 7.3 million. In 1985 it was almost 9 million. The Baltic states have also witnessed extensive emigration.
 
NOT ENOUGH BABIES
 
Many countries fall well short of the total fertility rate (TFR) of 2.1 children that women need to bear to hold the population constant in the absence of net migration.
 
The TFR in Hungary, Poland, Romania and Slovakia fell by more than 30 percent between 1990 and 2011. Hungary had a TFR of just 1.2 live births per woman in 2011, with Poland and Romania at 1.3 - considered by demographers to be the danger level.
 
Germany is already experiencing the fallout of a fertility rate that has been far below replacement level for 30 years.
 
Across the 28-member European Union, Germany has the smallest proportion of people in the 0-14 age bracket, the joint-highest proportion of pensioners (with Italy) and the highest median age, according to the European Commission.
 
Germany's domestic labour force fell by 70,000 in the past year. Immigration is coming to the rescue for now - foreigners accounted for all the employment growth in 2012, Alexandrovich said - but the country's growth prospects are darkening.
 
The Organisation for Economic Cooperation and Development reckons Germany's potential growth will fall to less than 1 percent a year after 2020, from an already low 1.5 percent today, due to population ageing.
 
By 2050 France and Britain, with much more favourable demographic profiles, are projected to have bigger economies than Germany, whose population is set to shrink to just over 70 million from nearly 82 million now.
 
The danger of intergenerational conflict as fewer workers have to provide for more pensioners is a future risk, but adverse demographics are already affecting parts of the economy.
 
Car sales in Germany are falling in part because an ageing population drives less, exacerbating industry-wide overcapacity, according to Douglas Roberts, an economist with Standard Life in Edinburgh.
 
"As with changing pension conditions, restructuring of a major industry such as autos will be difficult and meet major resistance both from unions and governments," he said.
 
More broadly, a shrinking workforce will make it harder to meet future pensions - as Detroit has discovered - and to service the increased public and private debt that Europe has racked up in recent decades, especially since the recession.
 
The Commission's central projection is that EU employment will fall by 5 million, or 2.5 percent, between 2010 and 2030.
 
Rich economies will lose more than 1 percentage point of annual growth in the decade 2012-2021, mainly due to the ageing of their workforces, a 2012 Bank of Spain research paper found.
 
Not everyone is confident that Europe will rise to the challenge and make its welfare states affordable.
 
"Age-related spending plus slow-to-negative growth in labour forces will keep driving most developed nations toward bankruptcy until they reform their governments and financial sectors," wrote Leigh Skene with Lombard Street Research, a London consultancy. - Reuters



Tags: France | Europe | population | ageing |

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