Age takes toll on European growth
By George Trefgarne, Economics Editor (Filed: 18/06/2003)

The European Union faces a long-term crisis because of its ageing population which could see its share of the world economy halve, a leading US investment bank warned yesterday.

In a wide-ranging report, Citigroup senior economist Darren Williams warns: "In the absence of wholesale reform, population ageing could push European growth down to just 1pc to 1.5pc." That would cut the EU's share of world output from 18pc now to 10pc by 2050.

The ageing of Europe is a growing talking point among major investors as it has huge political and economic ramifications. The trend could put a big strain on European government finances, as the demand for pensions and healthcare will rise. It could also cause the EU economy to fall behind other regions, notably America, where the population is more youthful.

The European birthrate is just 1.5 per female, compared with 2.1 in the US, where immigrants from Hispanic countries tend to have large families. Immigration is also lower in Europe, at about 2pc per 1,000 people, compared with 4pc in the US.

As a result, European population growth has stalled and could fall by 7m to 370m by 2050, according to United Nations projections quoted by Mr Williams. The European population is also much older. The average age is 39, whereas in the US it is 35.

The situation is most serious in Italy, where the UN forecasts the population could fall by 20pc by 2050, and in Spain, where it could fall 10pc. Britain is in a better position thanks to its higher birth rate and levels of immigration and its population will be 6m higher by 2050.

Not only will the burden on taxpayers rise, there will be fewer to shoulder it, says Mr Williams. This will lead to a fall in the number of taxpayers per retired person, from four today to two by 2050. "A recent study by the European Commission suggested that population ageing could push EU government debt up to 200pc of gross domestic product." Currently, government debt is about 60pc of GDP.

Mr Williams says the accession of 10 eastern European countries to the EU will not help as they also have ageing populations. But he says the ageing population does have opportunities for investors. If European countries reform their pension systems and base them on a private rather than state system, this could boost equities over the next few years.