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Challenges posed by the ageing EU population for the financial sector - Economic and monetary challenges

Reforming to sustain growth and meet the fiscal costs of ageing

By De Lecea António - Principal Advisor, Acting Director, Investment, Growth and Structural Reforms, European Commission

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Europe will turn “increasingly grey” in the coming decades as the baby boom generation retires and the average life time span continues to rise. Europe is adjusting to face these new developments that are having effects on both growth and public expenditure.

Due to ageing, the population of working age will increase more slowly and will start to decline at the EU level from 2022 onwards. With unchanged policies, the potential output growth will remain barely above 1% in 2020. Ageing is an important underpinning factor of this weak performance.

Thanks to pension reforms, public pension expenditure in the euro area as a share of GDP is projected to be almost the same as in 2013, but the fiscal impact of ageing is estimated to be substantial in many euro area countries, becoming apparent already over the course of the next decade. These developments are to be seen against the overall background of persistent high levels of public debt and limited fiscal space, calling for continued efforts on structural reform.

Labour productivity is projected to be the primary source of potential growth and hence of income to finance ageing costs.

Increases in participation and employment rates, especially among women, and among older workers, will partly offset the decline in the share of the working age population. But labour productivity is projected to be the primary source of potential growth and hence of income to finance ageing costs. To that end, sustaining and accelerating current efforts to boost investment and productivity remains crucial.