EUROPE – Rapid population ageing is the “ultimate stress test” for the European welfare state and is just a business cycle away, a new report states.

“The ultimate stress test for the European welfare state, rapid population ageing, is only one business cycle away,” the International Monetary Fund said.

“After 2010, population ageing will accelerate dramatically. The direct effect of ageing will be to shrink employable labor resources and boost the number of beneficiaries.”

The fund expressed concern over the “lack of reform momentum” in areas such as labour and pensions in Europe.

“While there has been tangible progress in these areas, political fatigue seems to have set in early, and efforts fall short of the necessary restructuring of work incentives.”

Michael Deppler, director of the IMF’s European department, said on a conference call: “There's a need to continue to press ahead with all of the reforms in all of those areas, including Germany's Agenda 2010, which is a good first step that needs to be continued.”

He called on Brussels to “take on more of a leadership role vis-à-vis the euro area as a whole to help governments in overcoming the political resistance to reform”.

He added there was a “massive fiscal unsustainability problem out there that needs to be incorporated in the mindset of the people”.

“The main way you can pay for those social insurance schemes is to have more labour employed because taxes on labour are the main basis of the funding of these systems.

“So this is a problem, a quintessentially European problem which the continent needs to come to grips with and resolve.”