Charlemagne: Europe’s population implosion

Date: 19/07/03

Europe's population is shrinking and greying - with grim consequences

THE convention on Europe's future finally packed its bags last week in Brussels. At one of the many events to celebrate its achievements, Valery Giscard d'Estaing, an elderly former president of France who has been chairing it, was asked to address an organisation called Friends of Europe. With unintentional irony, the event was held in the dinosaurs' hall of the Natural History museum in Brussels. The image of a 77-year-old man standing in front of a diplodocus was uncomfortably apt. The dramatic change in Europe's demographic profile will weigh far more heavily on the continent's future than the institutional minutiae that have been preoccupying the conventioneers.

Fertility rates across Europe are now so low that the continent's population is likely to drop markedly over the next 50 years. The UN, whose past population predictions have been fairly accurate, predicts that the world's population will increase from just over 6 billion in 2000 to 8.9 billion by 2050. During the same period, however, the population of the 27 countries that should be members of the EU by 2007 is predicted to fall by 6%, from 482m to 454m. For countries with particularly low fertility rates, the decline is dramatic. By 2050 the number of Italians may have fallen from 57.5m in 2000 to around 45m; Spain's population may droop from 40m to 37m. Germany, which currently has a population of around 80m, could find itself with just 25m inhabitants by the end of this century, according to recent projections by Deutsche Bank, which adds: “Even assuming (no doubt unrealistically high) annual immigration of 250,000, Germany's population would decline to about 50m by 2100.”

Combine a shrinking population with rising life expectancy, and the economic and political consequences are alarming. In Europe there are currently 35 people of pensionable age for every 100 people of working age. By 2050, on present demographic trends, there will be 75 pensioners for every 100 workers; in Spain and Italy the ratio of pensioners to workers is projected to be one-to-one. Since pensions in Germany, France and Italy are paid out of current tax revenue, the obvious implication is that taxes will have to soar to fund the pretty generous pensions that Europeans have got used to. The cost is already stretching government finances. Deutsche Bank calculates that average earners in Germany are already paying around 29% of their wages into the state pension pot, while the figure in Italy is close to 33%.

Governments are in a bind. It is no accident that in the past year France, Austria, Italy and Germany have all experienced angry outbreaks of labour unrest, sparked by attempts to make their pension systems less generous. But the longer governments wait, the worse the problem. Pension obligations will only get more onerous; and as voters age it will become ever harder to persuade them to cut pensions back. A struggle for resources will emerge between generations. Pensioners will press for higher taxes to fund the pensions and health care they believe they have been promised. Younger workers will demand cuts in increasingly onerous taxes.

Tensions are also likely between countries in the European Union. Britain and the Netherlands, which have high levels of private-pension provision and whose populations are predicted to remain more or less stable, are better placed to cope with the pensions problem. But they might still be affected by the financial problems of other EU countries, which could force up interest rates across Europe and undermine the euro. The fact that Europe's population is shrinking and ageing will inevitably also affect the aspirations of some Europeans to create a superpower to rival the United States. A recent report from the French Institute of International Relations predicts that, by the middle of the century, the EU's GDP will be growing at just over 1% a year compared with more than 2% in North America and at least 2.5% in China. The EU, the report gloomily concludes, faces a “slow but inexorable 'exit from history' “.

But while the EU has a rich, old and shrinking population, countries on the Mediterranean's other side have poor, young, growing ones. The tide of immigrants, legal and illegal, crossing the sea is an obvious reaction. So shouldn't Europe be more liberal about immigration, to redress its population imbalance? An appealing idea. But the OECD calculates that immigration might have to be between five and ten times its current level just to neutralise the economic effects of ageing populations. Even today's inflow is causing political strains, with anti-immigration politicians like France's Jean-Marie Le Pen, Italy's Umberto Bossi and the Netherlands' late Pim Fortuyn popping up all over Europe.

A very European muddle-through

Persuading Europeans to have more children is the obvious alternative answer. Part of the problem may be what Italians call the “partial emancipation” of women, who are free to go out to work but are then still expected to bring up children, look after the grandparents and do the housework. Making family life easier or less expensive might help keep up the population. France, which has some of the most extensive state-funded child care in Europe, also has one of its highest birth rates. Sweden boosted its birth rate in the early 1990s by raising tax benefits for mothers. But the effect of that tailed off after a while. And as well as being costly and unpredictable, policies to encourage childbirth also make some Europeans uneasy, since they are associated with authoritarian government.

So Europe will probably try to muddle through its demographic problem. There will be some pension reform, a bit more immigration, more family-friendly policies, higher taxes, growing fiscal problems for many governments and slower economic growth. With luck the European Union will avoid or postpone a really huge economic crisis. But the political and economic renaissance of Europe that was predicted at the European convention is likely to be stillborn.

Commentary feature. Europe's population is shrinking and greying - with grim consequences.