Worried about climate change? Here's another big crisis ahead

Giles Merritt looks at the alarming implications of Europe’s demographic decline, and warns it could threaten the EU’s long-term survival.

Climate change isn’t our only scary threat. Europe’s ageing has consequences that although less physical will also have a devastating economic and political impact.

So far, Europe’s policymakers at both EU and national level have done little to highlight the consequences of the growing number of people reaching retirement and the equally rapid shrinkage of the workforces governments rely on for so much of their tax revenue.

Every year, several million EU citizens switch out of the black, taxpaying side of national balance sheets into the red column of those receiving pensions and the bulk of healthcare services. By mid-century, 33 million people currently of working age will have become pensioners, taking Europe’s over-65s to almost 30 per cent of the population.

Longer, healthier lives are a blessing that may become a curse unless Europe adapts to the implications. The heaviest burden is eventually going to fall on the shoulders of today’s young – the Millennials and Generation Z. Even before that, the impact on the EU project risks being catastrophic.

The strains and stresses of the inter-generational imbalance will impose huge pressures on the European Union. The EU’s southern and eastern member states are due to suffer disproportionately from ageing’s effects. Without stronger cohesion policies – including the ‘debt union’ that German taxpayers have long opposed – the euro could be an early casualty.

The single currency was badly shaken by the sovereign debt crisis a decade ago following the near-meltdown of the global financial system. Its survival then is no guarantee it will resist more sustained future shocks. Unless tackled imaginatively, the economics of ageing will produce long-term divergences between the EU’s richer and poorer members; precisely the opposite of what the ‘Big Bang’ enlargement was meant to achieve.

Two broad policy avenues should be pursued. The first is to break out of the infertility loop that has seen birthrates plummet, especially in countries where big families were once the norm. It’s not too late to reverse the depopulation trend, but it would mean some far-sighted tax and benefits shifts and revolutionary changes in areas like housing, education and re-skilling.

EU governments today spend half as much on housebuilding as ten years ago, and across Europe rents and mortgages have risen to absorb 40 per cent of an average household’s income. It’s a major factor in women’s late child-bearing and the discouragement of larger families. So too are child-minding costs that could easily be state subsidised.

The second category of policies is much trickier because it requires agreement on joint actions by member states. Paying for sharply increased healthcare and pension costs is likely to cripple the public finances of poorer EU countries, requiring massive transfers from richer ones. The stand-offs a decade ago within the eurozone over bailing out Greece, Spain and Italy will look like minor tiffs compared to what is looming.

The EU institutions have always found it hard to focus member governments’ attention on crises ahead. It’s tough enough to tackle immediate ones. This may explain why the European Commission has been loath to sound alarm bells warning of the inescapable dangers that await the EU.

The Commission could once be described as “the world’s largest think tank.” In the heady early days of the Single Market, the rising stars among its Eurocrats were encouraged to think the unthinkable. It’s time to revive that spirit.

The Commission’s widening responsibilities in an enlarged EU have diluted its role as a political gadfly, but now it needs to re-awaken that approach and insist that member governments face up to the scale and depth of the demographic outlook. For the present, Europe looks to be sleepwalking towards disaster.

• Friends of Europe: An EU that ignores ageing is no longer fit for purpose, by Giles Merritt
• #CriticalThinking: The world in 2030: will Europe be ready? by Chris Kremidas Courtney
• Debating Europe: Can our pension systems cope with an aging population?