Europe is heading into an inevitable recession. But even before the current energy crisis or the pandemic-induced economic slowdown, the eurozone economy was already struggling to grow.
“The eurozone’s trend growth rate is heavily constrained by its demographics,” HSBC economist James Pomeroy said.
The demographic projections of the European Commission reveal that the European Union is “turning increasingly gray.” The aging of the European population brings challenges for potential economic growth and for fiscal sustainability.
According to the EC’s Aging Report, the working-age population–those between 20 and 64 years old–will decrease to 217 million by 2070 from 265 million in 2019. Low fertility rates and a higher life expectancy mean there will be fewer young people and more retirees.
The EU faces a challenging future with less workers and more dependents.
A shrinking working population weighs on growth in gross domestic product, Ed Parker, Fitch Ratings’ global head of sovereign research, said. “The less workers you have, the less units of output you can produce,” he said. However, another factor connected to total output is labor productivity–how much each worker produces–which is driven by human capital, and the amount of capital equipment or technology available to each worker, Mr. Parker said. “So demographics are important, but aren’t all that drives GDP growth.”
HSBC’s Mr. Pomeroy said that policy needs to raise output per person. “Investment in technology, education and such can help to raise productive potential, even if there are fewer workers, consumers or taxpayers,” he said.
The second challenge is for the sustainability of public finances. “An aging population puts pressure on public expenditure,” Fitch’s Mr. Parker said. Citizens are living longer and that increases government’s spending through public pensions, healthcare, and long-term social care.
“The impact of aging-related costs of public finances could lead to downward pressure on sovereign credit ratings over the medium to long term in the absence of reform,” Eugene Chiam, director of Fitch Ratings, said in a report analyzing aging costs in 33 advanced economies. Fitch forecasts that on average, aging costs will rise by 2.4% of GDP annually by 2045 and 3.6% by 2070 without reform. Meanwhile, the public-debt-to-GDP ratio is projected to rise by 46% of GDP by 2045 and 140% of GDP by 2070.
Recent reforms to public pension systems have improved these projection paths in several countries, Mr. Parker said. “Even small changes to retirement ages or the qualifications systems, accumulated over time, can help and reduce the estimated costs of aging,” he said. Changes to the retirement age are unpopular, but “the later it is done, the more difficult it is,” Mr. Parker said. If changes are delayed, the costs rise and those affected become a larger share of the voting population, he said.
Changes in life expectancy should also be taken into consideration when setting policy on retirement age, said Jeroen Spijker, researcher at the Center for Demographic Studies (CED) in Barcelona, Spain. According to the Aging Report, life expectancy at birth for men in the EU is expected to increase from 78.7 years in 2019 to 86.1 in 2070. For women, life expectancy at birth is projected to rise from 84.2 years in 2019 to 90.3 in 2070.
“The concept should be redefined, the retirement age should be fluid,” he said. Dr. Spijker also said that people who want to continue working and feel healthy should have incentives to do it.
According to Inaki Permanyer, Catalan Institution for Research and Advanced Studies research professor at the CED, it is also important to differentiate between chronological age and biological age, as people are now much healthier at 65 than they used to be.
“What marks the difference is functionality, not age,” said Sacramento Pinazo, social psychology professor at the University of Valencia in Spain. She said it is urgent to put senior talent into value, making sure it continues to find opportunities in the job market.
In her view, public policies should focus on keeping older people active and healthy, in order to postpone dependency. She argues for increasing public investment in research, awareness campaigns, non-pharmacological treatments and training for professionals who specialize in social care.
“You can’t reverse aging, but you can invest in improving the quality of life of older persons,” she said.
Another important investment should be in prevention and health promotion. Dr. Pinazo said 70% of illnesses can be prevented because they are related to lifestyle. It is much cheaper to invest in prevention than paying for the treatment once the illness is already present, she said.
However, the so-called Gray Tsunami, a metaphor describing the aging population, is a challenge that requires investments not only in older people, but also in younger generations. Apart from higher life expectancy, declining fertility rates are the other factor leading to a shrinking European population.
“We tend to talk about the older generations, but this demographic change affects the entire population pyramid,” Dr. Spijker from the CED said. He said that one of the causes of low fertility rates is the lack of resources among younger generations. Dr. Spijker said young Europeans need child allowance, subsidized child care and rental subsidies.
The unemployment rate among people under 25 years old was at 13.9% in August, compared to 6.6% for all the active population, Eurostat’s data showed. Dr. Permanyer said young generations are highly educated and policies should promote young employment. “It’s not only about the quantity of workers, but the quality of those workers,” he said.
Dr. Pinazo said improving the working conditions in long-term care services would attract young talent to a fast-growing sector, in which many educated professionals will be needed. We should value care, she said.
“Taking care of others is inherent to human beings. In our life, we will all take care of others and be taken care of,” Dr. Pinazo said.
Write to Maria Martinez at maria.martinez@wsj.com