Europe’s not producing enough babies and that’s a big problem

Europe’s social welfare model is headed for crisis

PUBLISHED : Tuesday, 19 April, 2016, 9:00am
UPDATED : Tuesday, 19 April, 2016, 10:36am

While investors in Asia will be familiar with Japan’s demographic challenges, the euro zone and indeed Europe as a whole has its own problems in this regard, problems that are accentuated by an already inordinately high outlay on social spending.

Euro zone social protection spending alone amounted to 20.4 per cent of the currency bloc’s gross domestic product (GDP) in 2014, the latest full year available, said Eurostat, the European Union’s own statistics service last month.

Adding on health expenditures raises the total to 27.7 per cent of 2014’s euro zone GDP. Indeed, in total, Eurostat calculates that in that year general government expenditure in the euro area was the equivalent of 49.4 per cent of the bloc’s GDP.

To put that into perspective, the International Monetary Fund (IMF) wrote in January that it expects total government expenditure in Hong Kong in fiscal 2016 to represent 19.4 per cent of that fiscal year’s GDP.

Ongoing economic challenges, that have already seen the European Central Bank lower their benchmark interest rate deep into negative territory, do not make it easy for national governments in Europe to roll back, in any meaningful way, social spending commitments that have built up over many decades.

Fewer young people mean a smaller future work force from which governments can draw tax

Greece is a case in point where pension reform has been a particular bone of contention between politicians in Athens and the providers of Greece’s bail out funds.

Yet Eurostat data shows that in 2014 Greece paid out the equivalent of 15.3 per cent of its national GDP in spending related to old age, the highest level of old age-related spending as a percentage of local GDP, not just in the nations that comprise the euro zone but of all the countries in the entire European Union (EU).

However, the harsh reality is that the current demographic outlook for both the euro zone and Europe means tough decisions will be forced upon governments whether they like it or not.

Eurostat even forecasts that Germany, the euro zone’s economic powerhouse, will see its population shrink to 65.4 million by 2080 from 80.7 million now, resulting in a much smaller tax base from which to finance social spending obligations.

The demographic outlook for Europe generally is equally challenging.

“Currently, world population is growing at 1.08 per cent a year, which means a population doubling every 64 years,” writes Harvard University’s David E. Bloom, drawing on United Nations Population Division data in an article for the March issue of the IMF’s Finance and Development (F&D) publication.

But Europe has the lowest population growth of any region at 0.04 per cent, Bloom writes, meaning its population would only double in 173 years.

Bloom also notes that while many people live “in countries with fertility rates below the long-term replacement rate of approximately 2.1 children a woman,” in Europe the fertility rate is just 1.6. Within the euro zone the fertility rate in Greece, Portugal and Spain is even lower at only 1.3 children per woman.

That means that while adolescents and adults comprise 16 per cent of the global population, the figure for Spain is just 9 per cent, while for Italy and Slovenia, like Spain members of the euro zone, it is only marginally higher at 10 per cent in each case.

Fewer young people mean a smaller future work force from which governments can draw tax.

But the birth rate is only one side of the coin.

Europe is living longer leaving the prospect that fewer workers will have to support swelling numbers of older people.

While, as Bloom writes, “the old-age share of world population,” where old is defined as being over the age of 60, has reached “12 per cent today,” Eurostat said in June 2015 it envisages the percentage of EU citizens, aged 65 years or over, will rise to 28.7 per cent of the EU population in 2080 up from 2014’s 18.5 per cent.

Note also that Eurostat classifies “old” as applying to people over 65 not 60.

Expecting the size of the EU’s labour force “to decline out to 2050 before stabilising,” Eurostat forecasts the EU’s “old-age dependency ratio is projected to almost double from 28.1 per cent in 2014 to 51.0 per cent by 2080.”

As for the total age dependency ratio, which includes children, Eurostat projects that “to rise from 51.8 per cent in 2014 to 77.9 per cent by 2080.”

In the face of these demographic trends, the current scale of public spending in Europe cannot be sustained, and when reality bites, social and political tensions will become more acute.

Asia’s investors could well conclude that Europe, and within that the euro zone, is literally living beyond its means.