February 18, 2009
The following briefing note has been prepared by European Voice on behalf of the Moderator for Session 3, Lisbeth Kirk, at the 2009 European Business Summit. The summit – titled Dare and Care – will be held on 26th and 27th March 2009.
Please feel free to comment before and after the session about the topic below.
Director of Blogactiv.eu
In the midst of the current economic crisis, the catch-phrase for many governments is ‘cut-backs’. Fiscal stimulus packages may be aimed at reviving parts of the economy but public spending is taking a hit. But the short-term measures will be frustrated by longer-term realities: Europe’s population is dwindling. The effects will be huge for the labour market with dropping fertility rates while public spending will come under pressure from an ageing population in need of healthcare. The challenges for governments are tough but must be met if economies are to withstand the squeeze.
Main issues at the European Level
Various studies over the past decade have warned of a looming demographic crisis in Europe as a consequence of dropping fertility rates. A study by the International Monetary Fund in 2006 predicted that by 2050 the working age population (15-64-year-olds) in the EU will fall by 16% while the elderly population (over-65s) will increase by 77%. Some European countries will experience this graying of society more than others. A recent Eurostat report shows that the average age in Poland and Slovakia will increase by 15 years between now and 2060 while in Belgium, Denmark, Finland, Metropolitan France, Luxembourg, Sweden and the UK the increase will be by just five years.
One of the biggest impacts will be felt on the labour market. Efforts to reach employment targets set by the EU’s Lisbon Agenda are expected to see more women and older people entering or remaining in the workforce. But while the labour force is expected to increase by 2017, after this it will begin to decline. “After increasing by some 20 million between 2004 and 2017, employment will contract by almost 30 million by 2050, ie, a fall of nearly ten million over the entire projection period,” says a 2006 report by the Economic Policy Committee, which prepares meetings of EU finance ministers, and the European Commission.
Although Europe’s demographic changes pose an EU-wide economic challenge, countries must each implement their own responses. There is no simple solution to the problem.
A 2004 study by Rand Europe argues that replacement migration will not offset the consequences of Europe’s ageing society It says that while European governments can slow down the drop in fertility rates, there is no one-fix solution to the problem. Instead, each country needs to take into account its specific economic, social and political context in order to address the problem.
The relaxation of pro-natalist policies in former communist countries and in Spain saw a decline in fertility in those states. France, which has the highest birthrate across the EU, has “the most interventionist set of policies aimed at encouraging families to have children”.
But other influences are at play too, the study says. In Spain, for example, a declining birthrate in previous decades can be explained by high employment rates for people under the age of 30, high cost of housing and the tendency of young adults to live with their parents for longer.
France’s policy of giving more benefits on a higher number of births per family also has an impact.
A combination of policies aimed at creating an environment favorable to child-rearing – such as maternity leave, high-quality childcare and family-friendly work environments – succeeded in raising Swedish fertility levels in the 1980s.
At the level of the EU, measures are being introduced to offset the imminent changes in Europe’s demographics by, for example, attracting skilled migrants while increasing maternity leave and guarding against discrimination against the elderly.
At the same time, things are changing in the workplace for older people. A 2000 EU directive on equality in employment, occupation and training forbids discrimination on the basis of religion or belief, disability, age or sexual orientation. EU member states had until December 2006 to adopt the directive into their national law and groups representing older people say its effects are now being seen.
Challenges in the Short and long run
Europe’s ageing society poses a major threat to member states’ public finances, because of a combination of smaller revenues from a declining working-age population and higher costs for pensions, healthcare and long-term care for the elderly. This pressure on public expenditure could force governments to rely more on borrowing, threatening the sustainability of their finances.
Governments are reforming their pension schemes to try to reduce pressure on public finances. The Lisbon Agenda also seeks to delay the retirement age by five years, but so far no member state has applied this politically sensitive measure. AGE, the European Older People’s Platform, warns against forcing people to wait longer for state pensions but is in favour of enabling them to work longer if they wish. “Doing so means increasing training for older workers, combating age-based discrimination in the workforce, adapting working conditions to an ageing workforce and creating incentives to encourage older workers to remain in employment,” says an AGE report.
The European Commission has given member states a stark warning of the challenge they are facing. Presenting a report on the long-term sustainability of public finances in 2006, Joaquín Almunia, the economic and monetary affairs commissioner, said: “Unless most member states do something serious about defusing the pension time-bomb, it will go off in the hands of our children and grandchildren, presenting them with a burden that is simply not sustainable.”
The report said that without structural reforms and budget consolidation, the government debt/gross domestic product (GDP) ratio in the EU would reach 200% in 2050 (compared to around 66% now). The Commission pointed out that Cyprus, the Czech Republic, Greece, Hungary, Portugal and Slovenia are most at risk from the pension time-bomb, with another ten countries facing “medium risk”.
One of the Commission’s main aims has been to get member states to “run down public debt at a fast pace” before the full impact of ageing unfolds. Limited progress has been made on this, as the level of government debt to GDP in the EU fell from 70.8% in 2005 to 66.3% in 2007. Greece and Italy, the two countries with the largest debts, have both succeeded in reducing their debts, Greece from 107.5% to 94.5% and Italy from 106.6% to 104%. These improvements, however, are threatened by the recession that economists predict is likely to follow the current global financial crisis, as unemployment will mean lower tax revenues and higher social costs.
• What will be the impact on the standard of living of Europeans created by tomorrow’s demography on the continent?
• What is the likely impact of today’s economic crisis on the debt level of Member States, and therefore, their capability to fund pensions ansn healtlthcare for the elderly in future?
• How could a well managed immigration EU policy help European demography in the medium to long term?
• European Policy Centre (EPC) study: “How to grow old without going bust?”
• Berlin Institute for Population and Development: “The future of Europe’s demography”European Voice