Ageing population and automation threatening prosperity of EU

The European Union enjoys a long period of peace, prosperity and social growth across Europe. While near term risks, particularly from Brexit contagion are creating uncertainty, with various election cycles in the coming year seen as a test, the long-term picture for the EU too contains a number of risks, from increasing dependence of the old on the young for their bread, to the young finding themselves out-competed by robots.

The European Union was born at the signing of the Treaty of Rome in March 1957, following a period of considerable instability in Europe. The union has borne considerable fruit, from a long period of peace to prosperity for its people. The financial crisis, and the turbulence it brought to countries across Europe, has in part covered over the successes of the union; the region generates around a fifth of global GDP, and is a world leader in areas such as gender equality, renewable energy utilisation, and the social welfare gap is one of the lowest with most member states supporting those that, for whatever reason, cannot support themselves.

Today the EU faces a number of additional challenges, particularly the decision by English voters to leave; and, while Dutch and French voters have come out in favour of remaining, elections in Europe's powerhouse Germany later this year, remain decisive. In a new report from McKinsey & Company’s McKinsey Global institute, titled ‘Rome Redux: new priorities for the European Union at 60’, Europe's economy is considered in relation to the US, as well as some additional, long-term threats.

Prosperity through membership

The EU has, since its founding, enjoyed considerable expansion to its economic and social sphere, increasing from its 6 founding members’ 186 million inhabitants and $2 trillion in economic output to 12 members and 348 million inhabitants, with an output of $9 trillion, by 1992. In 2016 the Union still has 28 members, with a population of around 515 million and total GDP in the order of $15 trillion.

The EU, with its many additions along the way, as new members joined the union, has enjoyed a strong – averaged over all member states – adjusted purchasing power parity growth in itself and when compared to the US.

Since the 1970s the EU 28 has kept in step, at a somewhat higher level, to trends seen in the US. It is only since around 2000 that EU-15 countries have begun to see lower rates of performance, with stagnation occurring in the years that followed the crisis, even while the EU-28 as a whole has continued to perform well.

One of the reasons for the lower level of GDP growth activity across the EU-28 is, according to the consulting firm’s analysis, the result of a drop off in investment in the region. Investments, as a component of GDP indexed against 2007 fell sharply immediately after the financial crisis, and remained in the dip in the intervening years. Exports, imports and government consumption have all since surpassed the index mark, while household consumption has remained stable.

The drop in investment reflects three areas of slowdown, including government austerity programmes seeing reduced investment from states, with public investment down €34 billion below 2008 levels in 2015; the collapse of the housing bubble seeing household investment down €118 billion; and corporate investment failing by €109 billion.

Future trends

Aside from the challenge associated with the decision by the UK to leave the union, the EU faces a number of longer-term challenges related to demographics, digitalisation and automation.

Across Europe low fertility rates, coupled with increased life expectancy and a relatively low effective retirement age, means that the increasingly large numbers of old people are becoming dependent on younger generations for their daily bread. Life expectancy averages almost 80 in the EU, above the US’ average of 78 but below the almost 83 average in Japan. The retirement age, however, in the EU has fallen to around 64, somewhat below the average of 66 in the US and almost 70 in Japan.

Particularly Italy, Germany and Portugal are facing almost parity in terms of workers to aged dependants. Policies in the area of retirement age are likely to become issues of contention in the coming decade as younger workers see more and more of their tax dollars going to a group that already enjoyed higher incomes, access to housing and quality of life than the group itself is able to maintain in current conditions.

European works face further challenges, with automation likely to affect (negatively in the short terms at least) employment levels with the wider EU. The region is somewhat more protected from the effects of automation, as the number of work activities that can be fully automated is more limited, largely because the economy is extensively focused on knowledge and expertise intensive fields – fields in which current technology tend to be less easily automated.

Across the ‘Big 5’ EU economies, around 46% of activities could be fully automated, leading to a loss of 60 million full-time equivalent positions and $1.9 trillion in displaced wages. This is not considering the wider EU economies, in which considerable levels of automation too could take place. The regions high wages on average and rapidly decreasing automation costs, create a perfect storm of implementation – potentially further negatively affecting the regions already high levels of unemployment – particularly among its youth – if historic trends (which too involved ‘lost generations’) do not come to pass.