EU’s Solbes outlines demographic challenge

BELGIUM - The challenges Europe faces demographically have been spelt out by Pedro Solbes, European Commissioner for economic and monetary affairs.

“Our population in the EU is ageing for three reasons,” he said. “The fertility rate is below replacement level, an increased life expectancy at the rate of an additional year per decade and increasing immigration. But not enough to make an impact on the ageing population.”

He was speaking in Brussels at a European Commission-organised conference on the economic and budgetary implications of global ageing.

The active working population in the European Union countries would fall by 40 million in the next 50years, he said.

“The same number of elderly people will retire,” and the old age dependency ratio will change from four workers to every retiree to a two to one ratio by 2040.

Italy and Spain would have the biggest increases in old age dependency rates – reaching 60%.

The budgetary implications of this for countries in the single currency area on the average-age related public spending could increase by 5-8 percentage points by 2040 with much larger amounts in certain countries.

For some, age related expenditures could lead to unsustainable budget deficits. “This could complicate the implementation of the single monetary policy and lead to higher interest rates than otherwise.”

He added that budget stability meant keeping the tax burden at “reasonable levels”. Under current policies the risks of unsustainable budgets, he reckoned, existed in half the EU states.

When the “baby boomers” retired from the EU workforce from 2010 onwards this would reduce the potential economic growth rate by 1%-1.25% per annum. The “ultimate effect would be a per capita GDP some 20% less than otherwise could be expected in the absence of demographic change”.

Solbes pointed to a pension shortfall, as most entitlements to pensions are based on growth rate in the economy.

He believed the solutions lay first in reducing the amount of debt and secondly in increasing employment rates - but he pointed to the big gap between reality and the objective as a number of member states have underlying budget deficits above 60% of GDP.

Measures to increase employment of older workers were lagging still, he said. More reform on the pension side was required.

He was concerned with the inability to deal with these challenges, the cost of which would be borne long term. The temptation was to adopt a “wait and see” attitude and to defer difficult decisions. “Uncertainty is no excuse for inaction,” he maintained.

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