The Entangled Triangle: Demographics, Politics, and the European Economy

What does its interplay mean for Europe's future?

Kevin Thomas Ryan

Europe faces a significant challenge: the old continent’s population is aging and shrinking. Europe has one of the oldest populations globally, with low birth rates and a high average life expectancy. This trend is expected to continue. ?This demographic shift has far-reaching consequences for both the political landscape and the European Union’s economy. Here's a breakdown of what the entangled triangle of demographics, economics, and politics could mean for Europe's future.

Why is this important?

Demographics, politics, and the economy all interact with one another. A change in one part of this entangled triangle impacts the other sides. Demographic shifts have a significant influence on economic growth, the labour market, defence capability, and government budgets. Demographic trends in Europe can also influence political agendas, which influence the allocation of resources. ?This is becoming especially important as regionalisation trends alongside globalisation, making local answers to local problems more prominent.

A shrinking population means a shrinking workforce. Fewer workers in the economy can impact productivity, reduce consumption, and see businesses and providers of public goods and services throughout Europe struggle to fill vacancies for much-needed qualified workers in sectors targeted for growth, particularly at a time when the European Union is seeking to reindustrialise, enhance its homegrown security capabilities, transition to a green economy, and become more competitive in the global economy.

The EU needs a lot of investment in the years to come to fulfill its ambitions in multiple areas, but demographic trends run counter to those ambitions. An aging population across the continent means that an increasing number of workers will reach retirement age and have different life needs from things such as private housing to public services. They will also require pensions and more healthcare services.

While the prospects of a bigger silver economy has its own benefits, still, governments will increasingly face pressure on their national social security systems which may mean higher taxes or cuts in spending to balance national accounts. Furthermore, as Europe greys, many aging workers will also start to draw from their private savings, investments, and pensions which means less new money available to invest in the economy.

A smaller workforce, less private investment, less consumption, smaller income tax revenue, and higher public spending costs are a recipe for dampened economic growth and hindered innovation, particularly when several member states, such as France, Italy, and Greece, already struggle with high levels of public debt.

Politically, an aging European population should be expected to vote for parties and public policies closer to their preferences, which likely requires more public spending on public goods such as healthcare. Spending in these areas may necessitate spending cuts or tax rises elsewhere, potentially leading to social unrest by younger generations and a new round of populist politics.

Absent, public policies that encourage Europeans to have more babies, that support childcare, or encourage longer working lives, political leaders in search of higher economic growth may have to look towards more targeted workplace automation or increased immigration of skilled workers to increase productivity and competitiveness.

EU-level solutions may become necessary, requiring more policy competencies to be transferred to Brussels from the 27 member states. That may require changes to EU treaties and referendums in several member states. ?Such policies that priortise robots over humans, more immigration, and more centralised political decision-making in Brussels, could (depending on how they are approached) prove politically divisive, polarizing political opinion, stalling political decision-making, and further hampering economic growth.

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