The world may have celebrated the arrival of the seven billionth child a few months ago, but the reality of a growing population dependent on diminishing resources – and coupled with greater longevity – is not exactly being welcomed with open arms.
The United Nations Food and Agriculture Organisation estimates that world food supplies need to rise by 40 percent by 2030, and by 70 percent to feed a forecasted global population of nine billion in 2050. Farmers in poor countries – where food will need to be grown to meet demand – must also be better supported, the UN says. However, to do this, UN Secretary General Ban Ki-moon has warned that the world’s richest countries will need to contribute up to $20bn (£10.2bn) a year to alleviate the crisis – hardly palatable as the world enters the fifth year of recession.
Europe’s infrastructure is also going to find it challenging to meet the energy demands of a growing population. Experts say that power blackouts will become more frequent due to massive under-investment in trying to maintain ageing national grid infrastructures, as well as the fact that energy from renewable sources is not well-aligned to work on electricity grids that were designed 50 or 60 years ago.
Power priorities
Overhauling national grids is the answer – but at considerable cost. Estimates suggest that EU member states need to invest between €23bn-€28bn over the next five years in their national grid networks, particularly as the demand for power supply is now cross-border. However, the fact that the European electricity grid consists of multiple regulatory bodies, owners and operators makes it difficult to form a consensus on prioritising areas for investment.
While renewable energy is contributing more power to the grid, a major drawback is the volatility of supply – solar and wind energy generation, for example, is not constant. In east Germany, wind turbines can produce up to 12GW during strong winds – more than the combined total energy output of all of Germany’s coal and gas fired power plants. However, the electricity generated can jeopardise the grid if demand falls off because there are not enough electricity storage capacities available. On the other hand, if the wind turbines need to be stopped, it can cause power gaps equal to the performance of two nuclear power plants within just one hour.
Yet it is the EU’s greying population that will present the biggest challenges in the next 20 years. Europe is currently the oldest region in the world, and the upward trajectory of European ageing has been linear for more than 150 years. The share of the population aged 65 and over is set to rise from 17 percent in 2010 to 30 percent in 2060, with those aged 80 and over being the fastest-growing age group, increasing from five percent to 12 percent over the same period.
Population ageing is undoubtedly going to be a key demographic challenge in many European countries over the next 50 years. Its implications for socioeconomic systems such as public pension programmes, health care or kinship structures, may be considerable. The latest Eurostat projections (Europop2010) show that, over the next 50 years, population ageing is likely to reach unprecedented levels in 31 European countries, though the magnitude, speed and timing are likely to vary.
Accounting for age
One of the primary concerns for world leaders gathered at Davos in January 2011 was how to handle the financial challenge of the world’s ageing population and understand the risk it poses for future economic and political stability. Published ahead of the conference, the World Economic Forum’s report, ‘Global Risks 2011’, warned of huge unfunded liabilities created by ageing populations.
The problem is so great that some of the world’s most advanced economies – including the UK – would be insolvent if they accounted properly for the pension and health promises they have made to their ageing populations, according to the WEF. The report outlined a sobering scenario in which demographic imbalances could contribute to a “systemic risk” to the entire financial system. EU governments are trying to push through unpopular reforms to raise retirement ages in a bid to contain their pension liabilities.
The EU has an average of 25 people over the age of 65 for every 100 people of working age, a figure predicted to more than double by 2060. This will put tremendous strain on national budgets and potentially hold back economic growth, says the WEF. Europe’s governments will have to spend on average an extra 2.5 percent of their gross domestic product on pensions in 50 years’ time. With nearly everyone in Europe eligible for a public pension, governments are attempting to get people to spend more years working as a matter of urgency.
As the report was made public, WEF Managing Director Robert Greenhill called on countries to rein in their pension commitments. “We cannot keep placing the cost of retirement on the next generation in a global Ponzi scheme,” he said, likening the layering of costs to a pyramid investment scheme that uses new investment to pay off earlier investors.
In 2001, the European Council warned that the effect of demographic changes on the long-term sustainability of Europe’s finances should be reviewed regularly. By 2006, costs relating to ageing populations – in particular projected pension and healthcare expenditure – were factored into budgetary projections of the Stability and Growth Pact, an agreement that requires eurozone members to limit their budget deficits. Throughout Europe, governments have brought in reforms to cap increases in pension liabilities, but different challenges remain for individual countries.
Public pension liabilities in Greece were projected to soar from 11.7 percent in 2007 to 24.1 percent of GDP by 2060, forcing the government to institute painful reforms. The IMF predicts that Greece will have the second highest growth in pension costs as a percentage of GDP in the G20 by 2030, with Spain and Belgium following closely behind. Conversely, in the same time period, Italy and Germany will actually see their pensions » costs start to fall, but that is because their populations are ageing so quickly that the bulk of their pension spending will be done in the next 10-15 years. While increases in Italy’s already high pension costs have been contained, its ageing society and low birth rates mean its old-age dependency ratio is set to increase from 30 percent in 2008 to 59 percent by 2060.
Plugging the pensions gap
Research from Eurostat, the EU’s statistical office, predicts that by 2040 there will be less than two people of working age for every retired person in Germany and Italy – that compares with just over three today. In France, the situation is slightly better, as there will be just about two workers for every retired person. But the figures perhaps hide a darker reality: as Europe’s population lives longer, living standards will deteriorate in the next decade or so.
A conference in the European Parliament last November was told that EU action is “urgently needed” to tackle a crisis in Europe’s pension systems. Polish MEP Danuta Jazlowiecka, who hosted the debate, said there were “huge disparities” between what people should be saving for their retirement and the amounts they are actually saving – a “pensions gap” of around €1.9trn.
Analysts also believe that Europe’s growing and greying population could have an impact on financial markets. In the current recession, investors have punished countries for weak fiscal spending controls, poor financial management, and unchecked public spending. For example, once investors realised there was an enormous hole in Greece’s public finances they started to punish Ireland, Portugal, Spain and even Italy; all saw their bond yields rise.
In the future, investors may start to punish the credit markets of those countries with poor demographics. Public spending is likely to be under greater pressure as European governments are forced to set aside increasing funds to pay for the healthcare and welfare of their pensioners, rather than invest in infrastructure.
To get a sense of how large this problem is, it is worth putting it in perspective. The cost to bailout the banks after the 2008 sub-prime crisis cost $1.1trn globally. The cost to bailout Europe’s periphery is €700bn so far and counting. However, the cost to bailout the EU – which is still set to bring in new member states – from an entitlements crisis would be on a far larger scale and could bankrupt the entire currency bloc.
A new way of thinking
An ambitious project led by researchers at the University of Sheffield is set to tackle the grand challenge of Europe’s ageing population over the next 10 years. The FUTURAGE Road Map, created by Alan Walker, Professor of Social Policy and Social Gerontology in the Department of Sociological Studies, will provide the European research agenda for ageing over the next 10 years. The Road Map aims to tackle the health inequalities across Europe and will aid the EU’s target to increase healthy active life by two years by the year 2020 (and thus set the ball rolling to further increase retirement age).
Professor Walker says that “there continues to be a structural lag between this socio-demographic forward leap and societal institutions and attitudes, for example, in the labour market and media; hence the need for a new vision. This has to be a positive vision in which all older people, regardless of competence and capability, are included as full citizens, expected to contribute and participate and in which they feel empowered.”
Economists believe that the future prosperity and economic vitality of European nations will increasingly depend on their ability to identify and recruit sources of skilled labour from other parts of the world. The Middle East and North Africa (MENA) is the developing region closest to Europe, and it has a booming population and an abundant supply of workers. The European Institute for Research on Euro-Arab Co-operation (MEDEA) says: “It appears obvious that MENA will play a pivotal role in Europe’s competition for skilled workers.”
According to MEDEA, the Arab population in Europe is likely to double or even triple by 2030 under the dual effect of natural growth and new flows. In such a scenario, the Arab minority would increase to a figure of 12 or even 18 million. This means that Arab immigrants would represent a little over two percent of Europe’s population in 2030 in the case of a doubling, and, in the case of a tripling, a little over three percent.
In some cases, this could create social tensions. A doubling or even tripling of the immigrant Arab population in certain countries like France would result in an Arab population of eight or even 12 million by 2030, equalling between 15 to 16 percent of the population.
Growth potential
But for some other European countries, the influx of Arab migrant labour has been a boon to the local economy. According to the Pew Forum on Religion and Public Life, an organisation that examines the cultural relationship between religion and modern life, the migration of Muslims into Spain has helped the country reach an incredible economic growth over the past decade, especially in the construction sector that accounts for 18 percent of the GDP. Currently, Muslims make up just over a million of the country’s population, but this is expected to double to about 1.9 million in the next two decades.
Europe’s ageing – and stagnating – population growth is not all doom and gloom. The EU – which is set to expand from its current membership of 27 to include the Balkan states, Iceland and possibly Turkey – will remain one of the biggest and most lucrative markets for goods and services, and may benefit from – in the short-term at least – the movement of cheap labour from its neighbours in North Africa and elsewhere.
The demographic change in Europe may also lead to fresh market opportunities. As one fund manager said: “The obvious growth sector is healthcare. People think about drug manufacture, but it is a broader opportunity, with healthcare appliances such as hearing aids.”
There may also be growth opportunities in leisure, holidays, independent care in the home, technology adapted for older people, residential care, educational and financial services. Those companies that can think ahead to shape their products and service offerings to reflect the European outlook in 20 years time may be able to steal a march on their competitors.