Europe’s demographic conundrum

24th of August 2023
Europe’s demographic conundrum

A demographic time bomb is ticking down across Europe. Longer life expectancy and falling birth rates are projected to cause widespread labour shortages in the not too distant future, with dire outcomes for the region’s economies, reports Hartley Milner.

THRUST DEFIANTLY skywards, a protester’s placard evokes a bloody episode from France’s past. It depicts President Emmanuel Macron as the French monarch Louis XVI with the slogan “Devrions-nous lui couper la tête? Oui – peut-être” (Should we cut off his head? Yes – maybe).

There may be no actual gruesome intent in the effigy’s parading through the Parisian streets, but neither is there any confusing the symbolism, especially since its destination is Place de la Bastille, an icon of the French Revolution. It was here that many a hapless ‘enemy of the people’ was very publicly parted from their head, courtesy of Madame la Guillotine.

The square where the infamous Bastille prison once stood remains a rallying point for aggrieved citizens, and on this day it is hosting tens of thousands of marchers demonstrating against Macron’s hugely unpopular pension reforms. These will see the legal retirement age hiked from
62 to 64 by 2030 and people having to work for 43 years - up from 42 - to receive the full pension.

Waves of protests and strikes have taken place across the country following the president’s decision to use his constitutional powers to ram through the landmark pensions legislation earlier this year. The manoeuvre sidestepped France’s lower house of parliament where he no longer has a majority, triggering accusations he was “acting like an autocrat”.

Macron said the changes were necessary to save the French pension system from collapse and that he would not be deflected, despite putting his own head on the block (albeit in an electoral sense). “Stay the course. That’s my motto,” he said, shrugging off questions about his tumbling personal approval ratings.

And Macron has a point. The cost of French pensions in terms of public spending as a percentage of GDP is among the highest in the world, at 14 per cent. France is seen as something of a retirement utopia, having among the most generous benefits for its seniors, according to the Organisation for Economic Cooperation and Development (OECD). The downside is that due to its rapidly ageing population, where 26 per cent of people are over 60, the pension system is forecast to run an annual deficit of €13.5 billion by 2030.

Looming pensions crisis

France has lagged behind in confronting its looming pensions funding crisis compared to most of its European neighbours, many of which have already raised the retirement age to 65 or above. In the UK it is 66, in Italy 67 and in Germany it will be 67 by 2029.

Europe’s average pensions deficit is around 2.5 per cent of GDP and is projected to rise to four per cent over the next three decades. So ongoing action on pensions across the continent will be inevitable, UK economist John Gowers told ECJ. “As people are leading longer and healthier lives, they will have to work for longer to pay for their retirement,” he said.

“However, we cannot simply continue to perpetuate the qualifying age spiral. It would be a painful nettle to grasp, but people may have to accept paying higher contributions or taxes during their working lives in order to keep both public and private pension systems sustainable over the long term.”

Influx of economic migrants

Would that not stoke further unrest, especially among beleaguered millennials, who are already grousing about having to fund the retirement of asset-rich baby boomers? “Well, we haven’t seen resentment elsewhere on the same scale as in France, where the state pension is something of a sacred cow, so no, I don’t think so … not if the reasons for reform are clearly explained,” Gowers said.

Europe’s demographic conundrum is not solely about its ageing population. Over the past few decades, the continent has seen a toxic twinning of spiralling longevity with plummeting fertility rates, the number of live births per 1,000 women. It now has the oldest and one of the fastest declining populations. In 2022, the median age was 44.4 … 12 years older than the rest of the world. Worst scenarios show the population crashing from 748.9 million at present to 401.2 million by 2100.

In the European Union (EU), following two years of decline due to the Covid pandemic, the population started recovering and was estimated to be 451 million at the start of this year. The growth is largely attributed to the mass influx of economic migrants and refugees fleeing Russia’s invasion of Ukraine. Now, the latest report from Eurostat forecasts the EU’s population will continue to grow, peaking at 453 million in 2026, but then shrink by at least six per cent to 420 million by the end of the century.

Critically for labour supply markets, the EU statistics office also says the pool of people aged below 20 and those already of working age will fall sharply, while the number aged 65 or over will continue to trend upwards. The average fertility rate in 2022 was 1.49 per woman, which is significantly below the value of 2.1 required to maintain a stable population. No European country attained this threshold last year.

But the European Commission has a plan. The Commission has created a tool to free EU states from what it calls the ‘talent development trap’ caused by fewer workers and ageing populations. Specific support will be given to countries losing their graduates to the ‘brain drain’. The Talent Booster Mechanism was launched in January to “train, retain and attract the people, skills and competences” needed to confront the impacts of demographic transition. Actions include:

• Help for regions with “higher rates of departure” of their young people to adapt and invest in talent development;
• Technical support to help member states address the decline in their working-age population, lack of skills and to respond to local market needs;
• An initiative led by “shrinking” cities to trial solutions to the challenges of developing, retaining and attracting skilled workers;
• Programmes and investment to promote innovation and opportunities to create high-skill jobs.

Measures for women

So what should change look like on the ground? Gowers said: “It will take a broad mix of measures. Key among these must be greater inclusivity in the workplace. Many European countries need to do more to close their gender gap. We still see significant numbers of women working only part time, if at all.

In Italy, for example, more than 45 per cent of working-age women were economically inactive in 2022. Women still encounter too many barriers to entering work or returning to work, such as the ‘motherhood penalty’ where they are less likely to have the same opportunities following maternity leave as their male colleagues.

“Even in this enlightened age, women who have had children are still viewed in some regions of Europe as not being truly committed to their career or employer. So if we are to increase female representation in labour markets we will have to make employment far more welcoming. They will certainly come if we make childcare more readily available and affordable, improve their prospects for promotion and close the gender pay gap, and the pension gap when women temporarily leave work for caring reasons.”

Gowers also spotlighted barriers holding back people with disabilities from entering full-time work. He said employers would be happier to recruit workers with mobility challenges if they were given more help with issues such as adapting their premises and equipment, providing special aids, flexible working and travel to and from work, and for work. Across the EU, just 51 per cent of people with disabilities have a job compared to 75 per cent of able-bodied people, according to the European Commission.

More tolerant immigration

If the EU cannot regulate its own population, it will have to implement more tolerant immigration policies. Gowers said: “We are seeing increasing numbers of people with good educational backgrounds wanting to live and work in the region. The EU has legitimate security concerns around issues like illegal migration, terrorism and human trafficking.

However, rather than resenting migration as appears to be the case in some countries, the EU should more fully exploit the trend to meet the challenges of its declining working-age population and to stay competitive in the world. At the same time, it will, of course, need to toughen up its regulatory regimes.”

Could the rise of artificial intelligence (AI) be Europe’s saviour? “Automation has been replacing humans in repetitive and unskilled jobs for decades … and still we have labour shortages,” Gowers said. “Now, we have technologies like AI and machine learning that have the potential to replace humans altogether in swathes of more sophisticated roles hitherto beyond the capacity of machines. Some ‘experts’ say many millions of jobs will be replaced worldwide, others that these technologies will create millions of jobs. But it’s all just speculation.

“All I can say with any certainty is we should be careful what we wish for.”


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