Ageing Europe faces demographic suicide

As their birth rate plunges, EU countries are failing to confront reality

Tim Congdon

“Demography is destiny”, according to a familiar quotation usually attributed to Auguste Comte. Familiar it may be, but the implications are often ignored. Demographics matter rather obviously for the future of the world; they will also influence the outcome of post-Brexit Britain.

Consider a naive projection. According to the latest data from the World Bank, in 2017 the average Italian woman had 1.3 children. To replace the population from one generation to the next, women need to have 2.1 children. It follows that — if the pattern persists — 25 or so years from now the number of Italians under the age of 25 will be almost 40 per cent lower than today. Indeed, if two generations of Italian women keep on having only 1.3 children, 50 years from now the number of Italians under the age of 25 will be over 60 per cent down from current levels.

It gets worse. People work from about the age of 20 to, typically, some point in their sixties. At the time of writing, the average retirement age in Italy is 61.7. Of course the Italians who are now between the ages of 36.7 and 61.7 will all be over the age of 61.7 when we look ahead 25 years. Inescapably, the overwhelming majority of this age group will not be working or producing. Yet, at that point, the number of young people entering the labour market with the ability to work and produce will be markedly lower than today.

Exactly how Italy will sort out these very predictable problems is uncertain. Of course its demographic malaise and the consequent public policy issues are not new. The decline in fertility goes back several decades and has already caused a significant fall in the working-age population. That fall, combined with a mediocre productivity performance, has meant that national output will this year be about 4 per cent lower than it was before the Great Recession hit in 2008.

When alerted to the issue raised by a falling population, young people in Italy might decide their prospects are better in other countries, and pack up their bags and emigrate. But this entirely rational response of individuals aggravates the difficulties for the community as a whole, because emigration of the young reduces further the ratio of the working-age population to its elderly dependents.

How is the Italian predicament relevant to Brexit? The answer is that Italy represents in an extreme form a problem that is common across the European Union. The average fertility rate of women in the EU is 1.6, with notably low levels in Spain (1.3), and Portugal and Greece (1.4), as well as in Italy. Despite the heavy immigration from Eastern Europe and the Middle East which has contributed to a populist backlash in European politics, and despite the tendency for young immigrant families to have more children than their native-born counterparts, women in most European countries are still not having enough children to stabilise the population.

Numerous assumptions are possible in demographic projections. Extrapolation of current fertility behaviour — with the often big differences between nations — can generate disruptive and mind-blowing conclusions three or four generations away. It may have encouraged the research teams responsible for the United Nations figures to bias central estimates against alarmism. In its “medium-variant” exercises out to 2100, the UN equalises future fertility across the globe at the replacement figure, even though fertility rates diverge enormously between nations and continents. The medium-variant numbers are therefore likely to understate the European problem, since no strong evidence has yet emerged which suggests that families in Italy, Spain and so on are having more babies.

In the absence of mass immigration, it is inevitable that the EU’s working age population will fall

In the absence of mass immigration, it is now inevitable that the EU’s working age population will fall over the next few decades. According to the UN’s medium variant, the number of people between the ages of 15 and 64 in the continuing 27 EU member states is 285 million this year, but it will drop to 270 million in 2030, 251 million in 2040 and 234 million in 2050.

The average rate of decline may not sound like much, at just over 0.6 per cent a year. But the decline has to be set in the context of weak productivity growth in the past decade and the damage from the looming increase in the dependency ratio (that is, the ratio of the elderly plus children to the working-age population).

Statistics from the Organisation of Economic Cooperation and Development (OECD) show that eurozone productivity, as measured by output per hour, increased by 0.9 per cent a year in the decade from the Great Recession. Let us make the neutral conjecture that performance on this front in the next three decades will be just the same as in the last one. Then the rate of productivity growth is barely higher than the rate of contraction in the working age population.

Unless something visionary and remarkable happens, the outlook has to be a long period of economic stagnation. Britain’s EU neighbours will experience a virtual halt in output growth, with living standards going sideways at best.

Scarier stories are easy to put together. Remember that the dependency ratio is rising in this period and that rises in the dependency ratio tend to be associated with a higher tax burden, because of increased public expenditure on health and pensions. At present the working age population in the EU27 is almost 66 per cent of the total population; in 2050 — again relying on the UN’s medium variant — the figure will have fallen to 57 per cent.

Suppose that higher taxation discourages people from working and tempts them to seek earlier retirement or to emigrate to lower-tax nations outside the EU, say, the United States of America, Australia or Canada. Again, the rational response of individual citizens worsens the adjustment problems for societies towards which they might be expected to have some loyalty.

The last few paragraphs may have sounded over-the-top and a bit shrill. But it must be emphasised that some of the EU27 confront more difficult demographic strains than others. Little media attention has so far been paid in the UK to Germany’s travails, perhaps because all too frequently it is tagged as “Europe’s economic powerhouse” or something of the sort. But in coming decades it will suffer a particularly severe demographic reverse. In the 2020s its working age population will fall by 0.9 per cent a year. In the 2010s output per hour advanced by roughly the same figure. On the face of it, the risk has to be a decade of zero growth. What do the UN demographic projections say about the UK? Crucially, does it face the same sort of challenges as its EU neighbours?

The answer is that it does face challenges of the same sort but they are milder and more manageable. The working-age population is estimated to be 43.2 million in 2020, and then to rise to 43.6 million in 2030 and to be stable at about the same level for the subsequent few decades. As in the rest of Europe, the number of old people will rise faster than the working-age population, but the increase in the burden will be less sharp and its costs will therefore be easier to absorb.

The contrast between the UK and its EU counterparts can be shown in a chart. If Russia is put to one side as no longer a mainstream European nation, the UK working age population is at present the second-highest in Europe behind Germany. It is quite a long way behind Germany and so also is its national output. But by 2060 the UK will start to overtake Germany, and it will also on this metric be well ahead of France and Italy.

Whether UK national output becomes the largest in the European orbit is uncertain but entirely possible. Although British productivity growth has been feeble since the Great Recession, and less indeed than in the rest of Europe, the longer-term record is more favourable to the UK. Through the 1990s and early years of the twenty-first century the UK’s supply-side efficiency benefited from the Thatcher reforms of the 1980s.

The demographic trends — certainly for the next generation, and probably for the generation after that — ought to be associated with some growth in output and living standards in the UK, whereas nations like Germany and Italy will be held back by falls in working-age population and employment. The UK joined the Common Market in 1973 largely because of its self-image as an economic slowcoach relative to dynamic, fast-growth European neighbours and rivals. British policy-makers may in the twenty-first century make mistakes on the financial and economic front, as did their predecessors in the 1960s and early 1970s.

But more plausible is that policies relevant to output growth will be much the same in the UK and EU27, while there is at least a chance that post-Brexit UK will move closer to a low-tax, free-trade, light-regulation “Singapore on Thames” model. If so, people in the UK will regard their nation as an economic success story, at least in relative terms. Poor economic performance will not support the case for rejoining the EU.

One of the puzzles here is the failure of the European intellectual and political elite to anticipate the demographic trials that lie ahead. Members of the elite have undoubtedly become aware of the issues. Andrej Plenkovic is the prime minister of Croatia, which currently holds the EU’s rotating presidency. In an interview with the Financial Times at the end of last year he described depopulation as “a structural, almost an existential problem for some nations”. A few days later he warned that freedom of movement across the continent was “killing” small nations. Plenkovic was worried not because freedom of movement allowed in too many immigrants, but because it gave talented young people in medium-income small nations (on the Baltic Sea and in the Balkans) the opportunity to emigrate to larger and richer nations like Germany and France (and also to the UK before Brexit).

It is hardly startling to suggest that, if fewer people are available to work, less output will be produced

The origins of europe’s so-called “demographic time-bomb” have been acknowledged and understood for over 30 years. The slide in the fertility rate began in the 1960s and is clearly related to the rise in female participation in the workforce. Steps could have been taken in the 1990s, by putting the appropriate incentives in the various nations’ systems of taxes and social security, to check the fall in fertility and to ensure that successive generations replace each other.

But nowhere did that theme gain any traction in the political debate. Did it echo too much the horrid “master race” strands of inter-war fascism? Can it be overlooked that Nazi Germany blessed Lebensborn (“Fount of Life”) homes, which had the deliberate aim of raising the birthrate of “racially pure” Aryan children?

But, if fascism was one kind of madness in the twentieth century, demographic suicide will be another in the twenty-first. It is not complicated to work out that — if no migration occurs, and four generations of women have a fertility rate of 1.3 and thereafter the fertility rate returns to the 2.1 replacement level — the population of a nation drops from one century to the next by 85 per cent.

Common sense demands that these questions be raised in public debate, although they fringe controversially on gender politics, the role of the family in modern societies and the meaning of “national identity”. As Burke warned in his Reflections on the Revolution in France, no one generation has the right to think selfishly only about itself. “Society is . . . a partnership not only between those who are living, but between those who are to be born.”

At any rate, in a demographically challenged continent the UK is relatively well placed for the next few decades. The stability of its working age population does not guarantee that post-Brexit Britain will have a better economic performance than the EU27, but it does make that outcome more likely.

Population trends are far from being the only determinant of economic success, but they do influence the growth of output and living standards. It is hardly startling to suggest that, if fewer people are available to work, less output will be produced or that, if the number of dependants rises relative to the number actively producing goods and services, the pie is smaller and less of it can be enjoyed by both dependants and producers.

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