Ageing population a ticking timebomb for EU

In France, trade unions are planning protests against modest plans to rein in the country’s pension funding gap of €14bn and rising.

Spain, pressed by the European Commission, is drawing up reforms to tackle underfunding in its pension system that forced the government to dip into the social security reserve fund last year.

“There’s a recognition that something needs to be done, and it’s just a question of the pace at which they move,” said Edward Hugh, an economist and demographer in Barcelona.

Spain’s pension plight is partly cyclical: more than 3m workers have lost their jobs since the onset of recession and have stopped paying into the pensions system.

Emigration is making the funding crunch worse. More than half a million foreign workers — lured to Spain during the boom years — have left since the start of 2010, while young Spaniards are moving abroad in droves in search of jobs.

Spain, Portugal and Ireland all lost about 2% of their working-age adults between 2010 and the first quarter of 2013, said Marchel Alexandrovich, an economist with London investment bank Jefferies.

In the medium term, he said, this raises the question of who pays for pensions and age-related health care costs in countries that are educating their youngsters only to see many of them emigrate and pay taxes elsewhere.

Spain is also paying the price of a low fertility rate for the past 25 years

The risk is that low fertility, high emigration and a rapidly ageing labour force form a vicious economic circle.

With fewer workers having to pay for more retirees, Spaniards who are braced for lower pensions will tend to save rather than spend, holding back the recovery and thus further eroding the tax base, Hugh fears.

Bulgaria’s population has shrunk by 582,000 people in the past 10 years to 7.3m. The Baltic states have also witnessed extensive emigration.

Many countries fall well short of the total fertility rate (of 2.1 children that women need to bear to hold the population constant in the absence of net migration.

The total fertility rate in Hungary, Poland, Romania and Slovakia fell more than 30% between 1990 and 2011. Hungary had a rate of just 1.2 live births per woman in 2011, with Poland and Romania at 1.3 — considered by demographers to be the danger level.

Germany has the smallest proportion of people in the 0-14 age bracket, the joint-highest proportion of pensioners (with Italy) and the highest median age, according to the European Commission.

Germany’s labour force fell by 70,000 in the past year. Immigration is coming to the rescue for now but the country’s growth prospects are darkening.

The Organisation for Economic Co-operation and Development reckons Germany’s potential growth will fall to less than 1% a year after 2020, from an already low 1.5% today, due to population ageing.

By 2050 France and Britain, with much more favourable demographic profiles, are projected to have bigger economies than Germany, whose population is set to shrink to just over 70m from nearly 82m now.

The Commission’s central projection is that EU employment will fall by 5m, or 2.5%, between 2010 and 2030. Not everyone is confident that Europe will rise to the challenge and make its welfare states affordable.

“Age-related spending plus slow-to-negative growth in labour forces will keep driving most developed nations toward bankruptcy until they reform their governments and financial sectors,” wrote Leigh Skene with Lombard Street Research, a London consultancy.