Are demographics at the heart of the Eurozone crisis?
- 23 January 2012
In Spain, on current growth rates, in 2050 56% of the population will be retired. Germany, Italy and Japan have similarly unpalatable statistics, which threaten to create a heavier and heavier burden on the State.
The situation is dire. Indeed this piece in the Guardian puts demographics squarely at the heart of the Eurozone crisis: "Whether it is Germans refusing to share with Greeks or rich Greeks with their fellow countrymen, the euro crisis is a case of democracy in action. The problem centres on the demographic development of recent decades that means many voters are over 55 and still retain much of the wealth they gained in the boom. Even those who have lost a large proportion of their pensions continue to vote for politicians who promise to do all in their power to protect what's left of their other assets."
In this piece for Euromoney Alejandra Grindal of Ned Davis Research Group points out, a quickly ageing population will exacerbate the debt problems further. Developed Europe's public spending on the elderly is approximately 15% of GDP and may reach 25% by 2040.
Are there signs of a resolution? David Jacob, chief investment officer at Henderson, says that in essence there are two ways to resolve the demographic crisis in developing nations: working harder and/or working longer: The working age population needs to expand, or it needs to generate more growth i.e. be more productive. Neither is easy to achieve.
Jacob says that the countries with the biggest problem are Germany, Japan and Italy. The UK and US may, in contrast, see their working populations expand thanks to immigration, flexible labour laws and hikes in the retirement age. This is another area where emerging markets have the advantage – India's workforce is expanding, for example.
As such, for Jacob, promoting workplace flexibility will be vital in resolving the long-term demographic problem for many of the Eurozone countries. This research by Deutsche Bank shows that this is not happening yet: "Unemployment figures in the GIPS countries remain at record highs, whilst other euro countries are unable to satisfy their demand for skilled workers."
However, it does suggest that migration flows have responded to high unemployment in the euro periphery: " In Spain, for instance, the immigration surplus has shrunk from upwards of 700,000 in 2007 to a scant 63,000 in 2010. Without the reversal in the migration trend unemployment in Spain would be up to 1.7 percentage points higher and in Ireland as much as 3.5 points."
The second part of the equation is productivity. This has been divisive in the Eurozone and a significant contributory factor in the current crisis. Southern European countries have not been as economically productive as Northern European countries, which has left them growing more slowly. This blog post shows the productivity levels of different Eurozone members:
"Germany is not the most productive country – France, Holland, and Ireland are all higher. However, it would not surprise me to find that this is an average of West German productivity that is comparable to those countries, and East German productivity that has been recovering from a much lower level. The Irish are now very productive and this has risen sharply since the 2008 financial crisis."
However, this data from Markit shows that Eurozone productivity is declining, so – for the time being at least – is unlikely to compensate for the weaker demographics: "Productivity in the European Union's private sector economy declined in October for the second consecutive month, and at the quickest rate recorded for over two-and-half years. The seasonally adjusted EU Productivity PMI® fell from 49.3 in September to 48.9, signalling a modest contraction in output per head over the month."
It is clear that even when the current crisis is resolved, European policymakers will have a hill to climb in restructuring their economies for the long-term.
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