Sunday, June 16, 2024

Has Europe already reached its demographic tipping point?

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In Telendos, a tiny Greek island in the Aegean Sea, Savas Glinatsis until recently held the distinction of being the sole student in the local primary school.

A decade ago the island had over 100 permanent residents but now the population is close to 60, according to the 2021 census. Savas, who turned eight last year, was the island’s only child.

“He was entirely alone,” says his mother, Maria Platsi, a native of Telendos. In November, Platsi decided to relocate with her son to Kalymnos, a larger neighbouring island. “I wish Savas could attend school in Telendos as I did, but I cannot bear for my child to be isolated,” Platsi says.

Europe’s dearth of children is not confined to Greece. This year could mark a turning point in EU history, with the population of 448mn beginning a decline that is expected to persist, marking an unprecedented shrinkage in peacetime, according to UN projections.

The EU population rose in the year to January 2023, helped by an influx of displaced persons from Ukraine, after a temporary two-year dip that reflected the impact of the pandemic. Last year, Eurostat forecast that the population would peak at 453mn in 2026.

But the 2023 numbers came in below expectations as EU births fell to levels Eurostat had not forecast for another two decades, suggesting the peak may come before 2026.

What is becoming clear is that the EU’s long-predicted demographic inversion appears to be coming sooner than many experts predicted. While in the past few decades immigration has helped prop up population numbers, and the increased participation of immigrants and women in the labour force has compensated for the accelerating fall in the EU’s working-age population, soon these factors will not be enough.

The EU is not alone in facing these pressures. Japan’s demographic decline has become an enduring problem while China and South Korea now have some of the lowest fertility rates — the number of children per woman of reproductive age — in the world.

But many of the 27 countries that make up the EU have experienced extremely low birth rates for decades. With the most productive part of the population now shrinking, there is additional pressure on government finances with consequences for the bloc’s economic prospects and geopolitical standing.

Consequently, the EU has become a testing ground for government-led pro-natal policies, most of which have so far been ineffective at stopping birth decline. Another remedy — increased immigration — is a politically charged topic in many capitals. Populist anti-immigration parties are likely to make gains in the European parliament elections held from June 6 to 9.

“If we do not consider the demographic trends and mitigate [them] where possible, we may end up sleepwalking into dark scenarios,” says Dubravka Šuica, the European Commission’s first ever vice-president for democracy and demography.

These scenarios include “looming threats to our competitiveness, pressure on our budgets, the strain on public services and pensions, and the potential for jobs across every sector of the economy to go unfilled”, she adds.

Šuica, who is at the end of her five-year term, has called on governments to establish ministries of demography and on the EU to create a council with a dedicated budget line. Without proper organisation, she says, “nobody feels responsible”. Another problem is that the demographic effects play out slowly, over the long term, reducing the impetus on governments to act now.

For Šuica, the issue necessitates a greater sense of urgency among policymakers. “The EU is on the brink of a demographic revolution,” she says, one that demands a “profound rethinking of our institutional, political, economic, and cultural frameworks”.

The countries that now form the EU are relatively new to these demographic challenges. After the second world war, most European countries experienced a baby boom, which contributed to solid population growth across the continent.

Since then, factors including rapid growth in educational attainment, particularly among women, improved nutrition and hygiene, control of infectious diseases and the dissemination of birth control methods have resulted in plummeting birth rates and rising life expectancy. Over this time, the EU’s share of the global population has more than halved to less than 6 per cent.

Crucially for economic growth and public finances, the EU’s working-age population, those aged 20-64, who contribute the bulk of tax revenues, shrank from a peak of 270mn in 2011 to an estimated 261mn this year, according to UN data. Relative to total population, the EU working-age group peaked at 61.4 per cent in 2008 and has now dropped to 58 per cent.

With a declining share of the population in work, “GDP per head is going to be persistently low,” says Michael Saunders, economist at Oxford Economics. “Compared to the path you’ve been on for most of the last 50 years in which living standards continue to improve, it feels very different.”

Germany has lost about 2mn people aged 20 to 64 since the numbers in that group peaked in 1998, according to an FT analysis of UN data. In the next decade, the EU’s largest economy is set to lose another 10 per cent of its working-age population, some 5mn people.

In February, German economy minister Robert Habeck flagged labour shortages as the biggest risk to the country’s economic growth. The Institut der Deutschen Wirtschaft, a think-tank, has estimated that the lack of workers could cost Germany €49bn of lost output in 2024.

Declines in the EU’s working-age population are expected to exacerbate shortages in some sectors more than others. Many member states have a high demand for skills in areas such as engineering, science, technology and care, and as the baby boomers retire, shortages in both high- and low-skilled occupations are projected to “rise considerably”, says the EU Commission.

Demand for workers has eased over the past year as Germany’s economy has struggled. But nearly 40 per cent of businesses are still suffering from a shortage of qualified workers, rising to nearly 70 per cent among legal and accounting services, according to a survey by the Ifo Institute, a Munich-based research institution.

Lower sales last year did not lead to lay-offs among the 867 staff at Ringmetall, a Munich-based manufacturing company that is part of Germany’s famed Mittelstand of small and medium-sized firms.

“All of [our production sites] are quite remote to decrease the cost base of production,” says Ingo Middelmenne, head of investor relations. “This makes it more difficult to find good employees. So once we have them, we try our best to keep them.” Retainment measures include offering office staff flexible working, but that option isn’t possible for factory-floor workers.

Immigration and increases in employment rates, particularly among women — whose participation in the workforce among those aged 20 to 64 rose nearly 10 percentage points since 2009 to 70 per cent in 2023 — have so far compensated for the overall demographic declines. But most forecasters say that soon they will not be enough.

The IMF predicts that European total hours worked will fall across the next five years, while they are expected to continue to rise in the US.

Similarly, the European Commission’s latest ageing report forecasts that labour input will fall from the late 2020s despite often “substantial” expected increases in job participation among older workers stemming from pension reforms.

Given the expected decline in hours worked, “labour productivity growth would become the sole driver of GDP growth”, said the report. That is not encouraging considering that EU productivity growth has been weak for over a decade and has contracted since the end of 2022, widening the gap with the US.

Many experts urge governments to invest in skills and education to boost the value of what is produced per hour worked. The EU has attempted to address the issue with initiatives such as the “European Year of Skills”, helping people to get the right skills and companies to fill skill shortages.

“We will need to make major investments for the enhancement of [the] human resources that we have, rather than trying to increase the fertility rate,” says Wolfgang Lutz, founding director of the Wittgenstein Centre for Demography and Global Human Capital in Vienna.

He adds that the risks of not doing so include “social conflict” and “losing out in terms of global competitiveness” with “not only our role in the world being diminished but also the wellbeing of people in Europe”.

This scenario is already evident in the widening economic gap with the US, where the working-age population is growing, helped by immigration. Jan Hatzius, chief economist at Goldman Sachs, forecasts US economic growth will continue to be stronger than in the EU in the next decade, mostly because of its better demographics.

A key factor determining the EU’s competitiveness and economic growth is the bloc’s ability to attract global talent.

The EU has recognised that it is struggling to establish itself as a top destination for high-skilled workers. Last year the European Commission launched a “Skills and Talent Mobility package”, a series of measures to make the EU more attractive to talent from outside, such as the Talent Pool platform, which facilitates recruitment of jobseekers from non-EU countries in EU-wide shortage occupations.

But immigration is largely a matter for member states and is a leading voter concern. Some of the discussion ahead of the EU parliamentary election has been hijacked by “great replacement” theorists, who believe that liberal elites are promoting non-white immigration from outside Europe to undermine ethnic and cultural homogeneity.

“I can understand that people somehow feel like [they should] go far right . . . because they think that migrants will spoil their [nation’s] identity, but at the same time we cannot live without [immigrants],” says Šuica.

Reflecting this, Italy’s rightwing prime minister, Giorgia Meloni, signed a deal with Albania to send some asylum seekers to the western Balkan nation for the processing of their applications. But her government has also increased the number of work permits for non-EU workers.

Across Italy, schools have been closing or merging due to a lack of pupils. In Trapani, a small city in Sicily, immigration has provided an important inflow of new students. “Population decline is a challenge for us, we struggle to have the minimum number of pupils to create a class,” says Anna Maria Sacco, the head of Ciaccio Montalto, an education body which oversees four schools. “What saved us are foreign-born students.”

Since 2019, the number of foreign-born pupils rose by more than 50 per cent in the primary school she manages, limiting the fall in overall pupil numbers to 15 per cent.

In a bid to slow demographic decline, many EU countries have introduced financial incentives such as “baby bonuses” in Italy, Poland and Greece, and loans that get written off for couples with at least three children in Hungary.

Since its re-election last July, the centre-right administration in Greece has pledged to address the country’s demographic challenges, establishing for the first time a Ministry of Social Cohesion and the Family with a specific mandate to tackle low birth rates. This year, the government raised the birth allowance, a one-off payment for having a child, from €2,000 to €2,400-€3,500 based on family size.

“The allowance doesn’t solve the issue but rather creates a reinforcing framework,” says Marina Stefou, secretary-general for demography and housing policy in the new ministry. The government also provides vouchers for families to access both public and private nurseries. “To reverse the declining demographic trend, you have to make measures permanent and give parents a [long-term] perspective,” Stefou adds.

However, even family-friendly policies which have helped support fertility rates in the past, such as good and affordable childcare, no longer work as well as they did, according to Šuica. In 2022, the number of babies born in the EU fell below 4mn for the first time since data collection began in 1960.

Births hit a postwar low in France and Spain, and a nine-decade low in Greece. In Italy they are at the lowest they have been since the modern state was created in 1861, while in Finland, they are the lowest since comparable data collection began in 1776.

The EU fertility rate dropped to 1.46 in 2022, with the figure as low as 1.16 in Spain, 1.24 in Italy and 1.29 in Poland. It fell below the replacement level of 2.1, at which the population is stable without immigration, in the early 1970s.

The trend in births is unlikely to be reversed, according to Sarah Harper, professor of gerontology at Oxford university. Better education and independence mean “women have lost the obligation to reproduce”, she says. “We have an entire regional bloc that for quite a long time has had very good health and economics and education” — the drivers of lower fertility and longevity, she adds.

Experts think that Europe could make more of its “longevity dividend”, capitalising on healthier older generations and breaking negative narratives around ageing. Europe has the highest life expectancy of any continent and the highest median age.

Most EU countries have taken steps to keep people at work for longer, such as increasing the retirement age to reflect longer life expectancy in Italy, Portugal and Greece. However, in 2022 only 6 per cent of those aged 65 and above were in employment in the EU compared with a quarter in Japan, according to OECD data.

Šuica believes older people should stay at work if they want to. “We are creating brain drain by retiring too early because your knowledge, your expertise, your wisdom go with you somewhere and you are not any more contributors to society.”

Europe has also seen the number of those aged 85 and over double in the last two decades, adding pressures on health spending and public finances.

These strains are keenly felt in the district of Fiesole in Florence, Italy. Don Mauro, a local priest, says that in his district cemeteries and retirement homes are struggling with a lack of space and funerals far outnumber baptisms.

Lots of older people are now living on their own and are “very frail”, the priest says. He has started helping families to find carers, often foreign-born women, but says there is a “severe” shortage as immigration has not kept up with demand. The number of young people and babies is falling and “older people need more time and support”, he adds.

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