By Santificarnos.com

According to U.S. Census Bureau estimates, the world population as a whole will experience a slowdown in growth (down from 1.23% per year in 2000 to 0.46% in 2050) and an ageing process (the proportion of over-65s is predicted to increase from 6.9% of the total in 2000 to 16.4% in 2050).

The outlook for Europe is particularly worrying. The EU-25 is fast approaching negative natural growth -which immigration will not be sufficient to counteract- and a rapidly ageing population. The prospects for the United States are more encouraging. Despite some ageing, the U.S. has its population growth guaranteed by the birth rate and immigration.

It is calculated that the U.S. population will increase by 67 million between 2000 and 2025, and by a further 70 million between 2025 and 2050, whereas the EU-25 will grow by o­nly 6 million to 2025, and then lose 31 million by 2050. At the same time, the ageing of the population will be much more marked in Europe than in the United States. By 2025, the average age of Europeans will increase by seven years, compared to three or four years in the United States.

How will population ageing affect the economies of the two great powers? Is it a threat to Europe's economic growth? These are some of the issues addressed by Professor Antonio Argandoña of IESE in the article "Europa frente a Estados Unidos: el factor demográfico" ("Europe vs. the United States: the demographic factor"). The results of his comparative analysis of the impact of demographic change in the United States and Europe are clearly unfavorable to Europe.

According to Argandoña's diagnosis, the ageing of the European population will have a double negative effect o­n the economy. o­n the o­ne hand, it will lead to a shrinking of the labor force. By 2025, the EU-25 will lose 13 million citizens in the 15-64 age bracket, and a further 47 million by 2050, compared with increases of 30 and 34 million in the United States. That will result in a dwindling, and eventually negative, contribution to GDP growth, and a steeper increase in wages. Furthermore, Argandoña fears that the ageing of the population may undermine job creation and weaken the entrepreneurial spirit. That would hinder the adoption of the innovations that are vital in order to ensure productivity growth. In his view, "the possibility of long-term low economic growth in Europe cannot be ignored".

At the same time, population ageing will increase the dependency rate. The population over 65 is predicted to increase, as a proportion of the labor force, from 24% in 2000 to 35% in 2025, and to 52% by 2050, compared to 19%, 29% and 35%, respectively, in the United States. Owing to the increasing number of retirees and the fact that people live longer, health care costs and the total pension cost in Europe will rise. And o­n top of all that, because the working age population that sustains the growing retired population will shrink, the pressure o­n the public purse will be even greater.

Added to these demographic effects are other, structural factors that widen the productivity gap between the EU-25 and the United States. They include a lower activity rate, a smaller number of hours worked per year, and early retirement. What adjustments and changes will Europe have to make if it wants to avoid becoming even less competitive compared to the United States?

Argandoña suggests extending private pension schemes, raising the retirement age, and cutting state pension benefits. Even so, lower growth may reduce capital market returns, or the funds may end up coming from other countries, which would entail a transfer of ownership of Europe's financial and productive capital into foreign hands. Population ageing may also reduce the savings rate and so reinforce Europe's reliance o­n foreign capital, which in turn would push up interest rates.

In short, the demographic and economic outlook for Europe is anything but rosy, particularly compared with the United States. Nevertheless, although these changes "are very likely to take place, because demographic movements have considerable inertia", Argandoña remains optimistic and does not believe that the looming crisis is insurmountable. He does, however, urge the EU not to sit back and wait for it to happen, but instead to rise to the challenge of population ageing, even if it demands certain sacrifices.


This article was published in Spanish in the book "Europa-Estados Unidos: flexibilidad, crecimiento y bienestar" by Círculo de Empresarios, Madrid, December 2004, pages 13-25.


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