The Strategist

The Aging Population as A Big Threat to the Eurozone

06/05/2015 - 17:31

Things are improving in the euro area a bit: an increase of 0.4% in I quarter (1.6% annualized) was the highest figure in the last two years; unemployment fell to 11.1%, its lowest level in three years; inflation went up again. But even if economic statistics continue to improve, the euro zone expect a comprehensive crisis in the near future.

Photo by garryknight
Photo by garryknight
The economic slowdown and the depletion of public finances that have been developing in the past few years will accelerate due to poor demographics – and not small Mediterranean countries, but the locomotive of the euro zone - Germany – will be hit hardest.

The economic impact of aging populations is initially positive, but ultimately leads to extremely negative consequences. Emerged after World War II, the numerous generation of baby boomers has contributed largely to the rapid growth, constantly replenishing the workforce for forty years.

However, the baby boomers are starting to retire, thus being replaced by representatives of small generations born in a period of low birth rate. Unless we have significant increase in productivity and a sharp increase in the retirement age, economic growth will start to slow down due to the reduction of the number of employees. The influx of young immigrants can only alleviate the crisis, as the number of local residents is still much greater than of arriving foreigners.

According to the latest forecast made by the European Commission for the period from 2013 to 2030, the working-age population of the Eurozone reduced by 6%. The sharpest decline, according to experts, will take place in Germany, where the number of people able to work is going to collapse by 13%.

The UK, which is not part of the euro zone, will record an increase of 2% in contrast to the fall down to 1% in France. The fact is that France and Britain, unlike Germany in recent years, got the sharp rise of the birth rate (just over two children per woman), what led to the natural growth of the population.

The working population is declining whilst the army of pensioners is increasing, and so does the dependency ratio (the ratio of those 65 and older, citizens aged 20 to 64 years). In the euro area as a whole this ratio will rise from 32% in 2013 to 45% in 2030.

Especially sharp demographic changes are expected in Germany, where the number of pensioners will increase by 5 million people (an increase of 30%), and the population of working age will decrease by more than 6 million people. All of this will raise the dependency ratio from 34% to 52% in 2030 - the highest rate in Europe, with the exception of Latvia.

These unfavorable demographic changes will not lead to an automatic deceleration of growth in the Eurozone. In principle, the rise in labor productivity can compensate the decrease in the working population, which will have decreased Germany's GDP to the middle of the 2020s by approximately 0.7% per year, according to a forecast made by the European Commission.

Making older people work longer, and introduce of late pensions are the most obvious answer to the aging of the population, for example, Italy made this step in 2011, sharply raising the retirement age. This could potentially increase the inflow into the labor market of people who are older than 50 and 60 years.

But even after adopting the unpopular reforms, the euro area will be hard to maintain growth at the appropriate level within the next 15 years, and hence solve the problem of the enormous debt burden in both the public and private sectors.

The fact, that the aging population is particularly strong in Germany, appears most disturbing to experts because of the country’s weight in the monetary union. The strength of the German economy has helped to withstand the recent crisis in the Eurozone. However, the demographics can greatly weaken the largest economy in Europe.


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