Charlemagne: As they don’t like it

Europe's demographic disaster is self-inflicted but not terminal

EUROPEAN leaders seem to agree with Shakespeare's character Jacques: all the world's their stage, and Europe's men and women must work out which part to play in the endless drama of international affairs. The touchstone of every oration about Europe's future is globalisation and how to respond. Britain, as tenant of the European Union's revolving chair, will host a well-choreographed summit next week on that very topic.

Obviously globalisation matters. And by and large Europeans are not adapting very well. Yet the biggest problem facing their continent (and their welfare states) is not the result of a new twist in the global plot. It would exist even if Europeans had the world stage to themselves. The problem is demography, the fact that the old continent is growing even older. Jacques's seven ages have got out of balance.

In the last half of the 20th century, Europeans enjoyed a few, short decades of benign age structure. Working-age adults--what Shakespeare called the lover, soldier, and justice stages--were numerous. And because they had fewer puking infants, and not many toothless oldies to look after, they enjoyed the fruits of an unusually light burden of dependency. This happy period is about to end.

Natural decrease has begun in Germany, Italy and Greece--and those populations would be falling, were it not for immigration. By 2050, on current trends, the largest segment in the EU's population will be Shakespeare's "sixth age", 65- to 69-year-olds. Half the population will be over 50; and the proportion over 65 will be as large as the under-15s, creeping like snail unwillingly to school. Such an age structure would be unprecedented.

All this reflects medical advances and greater personal choice on family size. Globalisation had nothing to do with it. It is true that global capital flows make it easier to support oldies by boosting returns to pension funds. If globalisation also makes countries reform and produce more, that will help too. But the European Commission says it would take an extra half percentage point of productivity growth over 20 years to meet the costs of ageing; over such a long period that is a tough target.

If you count migration as part of globalisation, then immigration by working adults could in theory maintain the size of the population and the share of workers in it. But to have any effect, immigrants would have to arrive in unfeasibly huge numbers. The British government worked out that, to maintain the current ratio of those aged 15-64 to those aged 65 or over (what wonks call the "support ratio" or "dependency ratio"), Britain would need a million immigrants a year for the next two decades.

So can nothing be done? Many Europeans fear so. As their continent ages, they think the whole place is doomed to "mere oblivion, sans teeth, sans eyes, sans taste, sans everything". Yet there are solutions and chinks of light.

The first thing to note is that the overall ratio figure is misleading. It was 4.25 in the EU in 2000 and will fall to 1.86 in 2050 (ie, there will be fewer than two people of working age to maintain each pensioner). This is unquestionably bad; in America, the ratio will remain over 3. But it is not uniformly disastrous. European countries come in three distinct categories, depending on how bad their dependency problem will get.

In the merely worrying group are France, Britain, the Netherlands and Norway. All have relatively high fertility rates; their support ratios remain well over 2 until beyond 2050. In the middle category--call it the dreadful--are Germany and most of the new EU members, like Hungary. There, the ratio will fall to between 1.5 and 2. The members from central Europe have a slightly different age profile from western European countries. They did not have the same big baby boom, so their populations are ageing more gently (and manageably); on the other hand, their birth rates are now very low, hence the future problems. In the third category--the catastrophic--are Mediterranean states such as Italy and Spain. They kept traditional family structures later than in northern Europe--and fertility rates then plunged. Their support ratio will sink below 1.5 by 2050.

In all this, believe it or not, there are crumbs of comfort. A ratio of 2.5 sounds awful. Yet some countries cope with that now. The nominal ratio of about 4 assumes people retire at the official age, usually 65. In practice, the actual retirement age almost everywhere is lower since people stop work early. That makes the real support ratio in some countries, like Britain, about 2.5 already. It will fall, of course, but this example shows it is possible to manage with little more than two people of working age for each pensioner.

Not doomed after all

As a new study by the OECD argues, demography is not destiny. Things like the retirement age, workforce participation and training, and the way pensions systems work are all determining how ageing affects a society. Most countries have not realised this. Many encourage early retirement or penalise those who work past the official age--making their dependency problem worse. Most have treated ageing largely as a matter of pension reform. But pension reform is not enough. In Mediterranean countries, fewer than half of those between 50 and 64 work. If they could increase the participation of 50-64-year-olds to Nordic levels, where two-thirds have jobs, they would see a big reduction in their future dependency problem.

The demographic facts increase the case for welfare reform, and may be more persuasive than just asserting that "we must adapt to globalisation". Still, some of globalisation's effects are distant, while looking after grandma is not. So EU governments have some explaining to do: they might try the gentle approach of Shakespeare's Duke who, when Jacques finishes, offers comforting words to an elderly retainer: "Good old man...Give me your hand and let me all your fortunes understand."

Commentary feature which says that Europe's demographic disaster is self-inflicted but not terminal.

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