HOW TO COPE WITH DEMOGRAPHIC CHANGE IN EUROPE.

16/05/2008
Francesc Raventós Economist

Most politicians, economist and demographers are extremely concerned about the ageing population in Europe. They are afraid that by the year, let's say, 2.050, the overall size of the European population will have undergone a significant decrease
and that its economy and the welfare system will not able to offer a high standard of living to its citizens.

If we compare with the rest of the world, Europe has already declined in terms of share in the world's demography, which has fallen from 12, 5 % in 1960 to 7, 2 % now.
On current projections it will fall to just 5% by 2.050.

One of the facts that sustain this pessimistic approach is based on the fall in the fertility rate average below the replacement rate of 2,1 birth per woman, defined as necessary to maintain a stable population. The average fertility rate in the European Union of 27 countries, stood at 1,5 children per woman in 2.005, compared with 2,7 in 1965. In Spain is only 1,3 one of the lowest rates in Europe. Demographers are divided as to whether this current low fertility rate is only temporary or more enduring.

The evolution of the dependency ratio shows clearly that when a population becomes older, a decreasing working population - aged from 16 to 65 years - will need to support the cost of a higher non-working population. It's very clear that in the long term this situation is unsustainable.

The opinion of the more optimistic is that total dependency ratios in 2.050 will look more like those in the 1.960s, before the "baby boom" generation, but they don't give any compelling evidence of this statement. It seems it is only wishful thinking.

Another fact related to the declining population is the rise in the number of families without children, or families with only one child.

What are governments doing to deal with the threatening problem of an aging population? One common action of many of them is to promote "pro-natality" policies, that's to say, to offer services and incentives to families and especially to women to encourage them to have more children. The problem is that according to experiences in different countries the improvement of fertility rate appears only in the first years and its increase is anyway very limited, in spite of the heavy resources invested in these programmes.

Another common measure that governments usually take is to turn to immigration. Immigration generally means young people and families with a high fertility rate, but this is also a solution that has its limitations. The level of immigration to compensate for the low domestic fertility rate should be so high, that society would not be disposed to accept such an immigration increase. Anyway over time, immigration tends to adapt its fertility rate to the levels of the indigenous population.

Therefore, what should do governments to cope with this tough situation?

Population growth is normally regarded as essential for economic growth. Contemporary economists stress the importance of the age structure evolution to assess the developing potential of a country. Europe's ageing population structure will have an adverse impact on the European economy, in spite of the measures that governments could adopt to increase the birth rate and immigration to offset the ageing population. One most probable conclusion, although a very pessimistic one, is that the European standard of living will not be affordable in the future, unless huge changes are introduced.

If the above mentioned measures are not enough to avoid the current trend toward an ageing population, and the declining of our standard of living, what kind of measures should be considered?

Diverse are the steps that should be taken. To start with, it is necessary to define a new economic model more oriented to a global market economy, a model that should offer high quality competitive products and services; we should reconsider also, how the labour market or productivity are performing; the Welfare System should be overhauled, etc. etc. Of course, to transform the present economic model to a more global and competitive one, requires, among other things, a serious effort to ensure the overall qualification of the population trough education, promote creativity and R&D and a general consensus from society about the measures that should be taken too. Today I will only refer to the labour market and productivity.

Governments should give more importance to the full potential of the labour market, since it is inefficient in most European countries. For instance, simply meeting the EU's "Lisbon target" of a 70 % employment rate of the potential working population would substantially reduce the dependency rate. In Spain the employment rate is currently at
only 62 %. If all EU countries could reach the proposed goal, the economic problem due to an aging population will be offset.

An unpopular but necessary step is to raise gradually the legal retirement age, in order to increase the number of people in work aged over 65. This proposal is logical if we bear in mind that life expectancy is greater and the population is healthier.

Furthermore, we should make efforts to increase productivity, because the workforce European countries starts to shrink, their economies will become increasingly reliant on advances in productivity.

Therefore Europe faces more a labour market challenge than a demographic crisis. Proposals to evolve to a new economic model will not be easily applied. Real difficulties and resistance to change must be taken into consideration and incentives that favour change and compensations for losers should be approved. In Europe most people that have experienced the huge economic and social improvements after World War II, now take for granted all the benefits attained.

To sum up, the challenge for those countries with an ageing population is to evolve into a competitive economic model adapted to a global world economy, improving at the same time the labour market and productivity. It is an absolute must if we want to maintain or improve our standard of living. We should commit all society: governments, employers, trade unions, etc. in all European countries to a common Project for the Future of Europe and each of their countries.


NOTE: (1) See working paper: Growing old gracefully: How to ease population ageing in Europe. Alasdair Murray. Centre for European Reform.