25th May 2019

Brussels warns of unsustainable pensions

The European Commission has unveiled gloomy figures about the EU's economic prospects due to ageing population problems, warning that several member states might face unsustainable health and pension costs.

The paper to be presented to EU finance ministers on Monday and Tuesday (13-14 February) predicts that while Europe's overall economic growth is set to fall from today's 2.2 percent of GDP to 1.9 percent in the next decade, public spending will also soar to 4 percentage points by 2050.

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"For most countries, a drop in growth like this predicted for such a long period is something we have never observed before and it remains the main challenge for the future," commented one commission official.

The "new" member states are likely to see the greatest reduction in economic output, starting with their current growth of 4.3 percent which is expected to go down to 0.9 percent by 2050.

On the other hand, several "old" EU countries will face "somewhat stronger" pressure on their public spending due to ageing populations, with pension costs set to soar by 9.7% in Portugal, 7.4% in Luxembourg, 7% in Spain and 6.5% in Ireland.

EU economic commissioner Joaquin Almunia has called on his colleagues from national governments to "exploit a fast-closing window of opportunity to intensify reform efforts."

"Unless this is done, many EU countries...will simply not be able to face the cost; not when there will be two workers per elderly citizen as opposed to a ratio of four to one now," Mr Almunia stated.

Good and bad news

The demographic changes in Europe are linked to both the so called "baby boom" generation of the 1950s - who will be retiring in the coming years - and to low fertility rates, mainly in Germany, Austria, the Mediterranean countries, and central and eastern European states.

The most worrying result of these changes is that the working age population (between 15 to 64 years) in Europe is likely to shrink by 48 million (16%), while the number of elderly people will jump by 58 million (77%) by 2050.

The commission argues the good news is that Europe is still showing potential for a growth in the labour market, with employment expected to rise from 63 percent to 67 percent in 2010, while the Lisbon goal of reaching 70 percent employment, is to be reached ten years after the initial deadline, in 2020.

Also, the EU executive says some countries that have introduced pension reforms, like Germany, France or Austria, already face more optimistic scenarios about their future budgetary contraints.

Euro under threat

The Brussels paper does not link the projected fiscal problems of individual EU member states to the performance of the bloc's common currency.

But some experts argue the euro could come under threat when the pensions boom hits Europe.

Dutch ex-commissioner Frits Bolkestein recently pointed out that within ten years, when the difficulties associated to ageing start to more clearly put pressure on public expenditure, some countries unprepared for it will be forced to borrow more and increase their budget deficit.

This could have serious consequences for interest rates and inflation, and on the whole for the EU's stability and growth pact - the set of rules underpinning the euro - threatening the euro, Mr Bolkenstein pointed out in January.

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