Challenges for Europe in the World in 2030

Deliverable 4.3 WP#4

Global Development, Demography and Migration

Accademia Lincei, Rome, ITALY AUGUR

Introduction

• Previous deliverables focused on inclusion of demographic variables into CAM model

• In this deliverable we focus on concept of Economic Dependency

• This includes not only demographic variables but also employment and activity

• We test the impact of an employment-focused fiscal expansion for each European bloc in 2030

Conventional Approach to Ageing

• Increasing and unsustainable ‘burden’ to society of ageing population

• Reduce pensioner income; increase contributions from wages; reduce other social welfare spending; increase retirement age

• Implicit assumption that the elderly are ‘inactive’ and the working-age population are ‘active’.

Changes in working-age population…

1,5001,5501,6001,6501,7001,7501,800

90 00 10 20 30

North Europe

10,800

11,200

11,600

12,000

12,400

90 00 10 20 30

Central Europe

8,000

8,400

8,800

9,200

9,600

90 00 10 20 30

South Europe

7,2007,4007,6007,8008,0008,2008,400

90 00 10 20 30

East Europe

3,7003,8003,9004,0004,1004,2004,3004,400

90 00 10 20 30

Reduced governmentChina US interventionregionalisationmultipolar governance

UK

Working-Age Population(millions of persons)

leads to rising demographic dependency

.40

.50

.60

.70

.80

90 00 10 20 30

North Europe

.40

.50

.60

.70

.80

90 00 10 20 30

Central Europe

.40

.50

.60

.70

.80

90 00 10 20 30

South Europe

.40

.50

.60

.70

.80

90 00 10 20 30

East Europe

.40

.50

.60

.70

.80

90 00 10 20 30

Reduced governmentChina US interventionregionalisationmultipolar governance

UK

Total age-based dependency ratio(persons aged 0-14 and 65 and over per working-age person)

Dependency Reconsidered

• Need to include employment and activity rates in our measure of dependency.

• While demographic dependency rising, employment-related dependency is sensitive to policy changes.

• Potential for increases in employment to offset changes in population structure.

• Levels of employment among the young are very low, especially in South and East Europe

Youth Employment and Activity

Economic Dependency Ratio

EmployedPopulationYoungAgeOldInactiveUnemployedEDR =

EmployedPopulationYoungAgeOldRatioDependencycDemographi =

RatioDependencyWorkingAgeRatioDependencycDemographiEDR =

EmployedInactiveUnemployedRatioDependencyWorkingAge =

EDR in CAM Blocs, 2009

CAM European Bloc

Demographic Dependency Ratio

Working-Age Dependency Ratio

Economic Dependency Ratio

Central 0.76 0.48 1.24

East 0.76 0.78 1.53

North 0.72 0.38 1.10

South 0.84 0.69 1.53

UK 0.74 0.44 1.18

SCENARIO PROJECTIONS: ECONOMIC DEPENDENCY RATIO

Development, Demography and Migration

EDR in Europe

1.01.21.41.61.82.0

90 00 10 20 30

North Europe

1.01.21.41.61.82.0

90 00 10 20 30

Central Europe

1.01.21.41.61.82.0

90 00 10 20 30

South Europe

1.01.21.41.61.82.0

90 00 10 20 30

East Europe

1.01.21.41.61.82.0

90 00 10 20 30

Reduced governmentChina US interventionregionalisationmultipolar governance

UK

Economic Dependency Ratio

EDR in Japan, China, USA

1.01.21.41.61.82.0

90 00 10 20 30

USA

1.01.21.41.61.82.0

90 00 10 20 30

Japan

.68

.72

.76

.80

.84

.88

.92

90 00 10 20 30

Reduced governmentChina US interventionregionalisationmultipolar governance

China

Economic Dependency Ratio

EDR in Central Europe

1.01.21.41.61.82.0

90 00 10 20 30

Economic Dependency Ratio

0.3

0.5

0.7

0.9

90 00 10 20 30

Demographic Dependency Ratio

0.3

0.5

0.7

0.9

90 00 10 20 30

Reduced governmentChina USRegionalisationMultipolar governance

Working-Age Dependency Ratio

Economic Dependency Ratio and its componentsCentral Europe

EDR South Europe

1.01.21.41.61.82.0

90 00 10 20 30

Economic Dependency Ratio

0.3

0.5

0.7

0.9

90 00 10 20 30

Demographic Dependency Ratio

0.3

0.5

0.7

0.9

90 00 10 20 30

Reduced governmentChina USRegionalisationMultipolar governance

Working-Age Dependency Ratio

Economic Dependency Ratio and its componentsSouth Europe

REGIONAL FOCUS: WEST ASIA AND NORTH AFRICA

Development, Demography and Migration

EDR North Africa and West Asia

2.02.22.42.62.83.03.2

90 00 10 20 30

Economic Dependency Ratio

0.81.01.21.41.61.82.0

90 00 10 20 30

Demographic Dependency Ratio

0.81.01.21.41.61.82.0

90 00 10 20 30

Reduced governmentChina USRegionalisationMultipolar governance

Working-Age Dependency Ratio

Economic Dependency Ratio and its componentsNorth Africa

1.82.02.22.42.62.83.0

90 00 10 20 30

Economic Dependency Ratio

0.81.01.21.41.61.82.0

90 00 10 20 30

Demographic Dependency Ratio

0.81.01.21.41.61.82.0

90 00 10 20 30

Reduced governmentChina USRegionalisationMultipolar governance

Working-Age Dependency Ratio

Economic Dependency Ratio and its componentsWest Asia

Youth Unemployment in WA, NA Unemployment

RateActivity Rate

Youth Unemployment and Inactivity Ratio

Middle EastBahrain 32% 45% 68%Iran, Islamic Republic of 24% 31% 76%Iraq 17% 29% 83%Jordan 19% 27% 81%Kuwait 31% 35% 69%Lebanon 23% 29% 77%Oman 32% 40% 68%Saudi Arabia 11% 16% 89%Syrian Arab Republic 24% 30% 76%Turkey 32% 40% 68%Yemen 26% 37% 74%

North AfricaAlgeria 22% 28% 78%Egypt 25% 34% 75%Libyan Arab Jamahiriya 29% 37% 71%Morocco 30% 36% 70%Sudan 27% 35% 73%Tunisia 23% 33% 77%

AN EMPLOYMENT-FOCUSED ECONOMIC RECOVERY FOR EUROPE

AN INITIAL POLICY SCENARIO

Scenario CharacteristicsWe construct a scenario that programs changes

in macroeconomic policies that can stimulate an employment-focused economic recovery in Europe (as well as in the US);

We compare this scenario’s results with those of a baseline scenario (note: we are using the past set of scenarios applicable in Fall 2011)

We are in the process of comparing this scenario to AUGUR’s three European sub-variant scenarios

Specific Policy Assumptions Main Policy Changes:

An increase in government expenditures These expenditures are programmed to modestly

stimulate private investment (ratio of 1 to 0.2) A modest stimulus is imparted to bank lending to

reinforce the desired increased in private investment Note: public expenditures and private investment are

marshalled explicitly to target an increase in the employment rate, not economic growth alone

Employment Targets The Employment Target is based on a specific ratio of the

number of employed to the number of people of working age Important Point: we calibrate the size of the fiscal stimulus

needed to achieve a desirable, but also feasible, level of this ratio for each European bloc and the US

The Specified Targets: North Europe, West Europe & the UK: 70 - 74% South Europe: 62% East Europe: 60% The US: 72% Note the lower, more ‘realistic’, targets for South and East

Europe

Supportive Policies:Government Revenue

In order to contain future government deficits, we boost government revenue in conjunction with the projected increases in expenditures (based on reverting to past historical trends, before the crisis)

Targeted Increases in Government Revenue (government income as a ratio to GDP):West Europe and the UK: 25%South Europe: 23%East Europe: 21%The US: 20%

Supportive Policies:The Real Exchange Rate

In order to contain the possible negative effects of the fiscal stimulus on each bloc’s current account, we set targets for each bloc’s Real Exchange Rate (calibrated to offset the projected effects on its current account)

We set a ceiling ratio of 1 on the real exchange rate of the US dollar as a global reference point

We assume a break-up of the Eurozone since the targets for the real exchange rate for the two major blocs differ: West Europe: 1.3 (appreciation) South Europe: 0.75 (depreciation)

Targets outside the Eurozone also vary: North Europe: 1.7 (large appreciation) East Europe: 0.55 (large depreciation) UK: 0.9

Employment Growth Scenario:Results Summary

Core results: Economic growth is more rapid across the board compared to

that of the baseline scenario Growth of government expenditure is at first rapid but it

markedly slows down in most blocs after 2015 Government deficits are eliminated or significantly improved Government net income as a ratio to GDP is increased in the

majority of the blocs Government debt falls dramatically in all blocs Domestic price inflation remains relatively subdued across the

blocs despite the fiscal stimulus Most importantly, employment markedly rises across the blocs

Economic Growth

Average Growth Rate of GDP

Bloc Bloc CodeEmployment Scenario

(2012-2030)Baseline Scenario

(2012-2030)North Europe eun 3.2 2.4West Europe euw 2.1 1.7UK uk 3.4 2.0South Europe eus 3.5 0.8East Europe eue 5.5 2.1USA us 3.9 2.8

Average growth jumps from 0.8% per year to 3.5% in South Europe, and from 2.1% to 5.5% in East Europe

Moderate increases in North Europe, the UK and the USModest increase in West Europe

Employment Rate (%)

Employment Scenario: Employment Rate (%)

BlocBloc code 2000 2008 2009 2015 2030

North Europe Eun 72.5 74.8 72.4 73.3 75.6West Europe Euw 64.3 67.8 67.6 68.8 71.1

UK uk 70.8 71.4 69.5 70.7 73.6South Europe eus 56.3 61.7 59.1 59.5 64.1East Europe eue 56.2 57.0 56.2 57.2 62.4

US us 72.3 69.7 66.2 66.6 71.9

Employment Rate results:In some blocs the employment outcomes by 2030 exceed our targetsMigration contributed to these increases in North Europe, UK, and South

EuropeWorkers return to East Europe, a region that had suffered from marked out-

migration after the mid-1980s

Employment Scenario: Net Migration as % of Employment

BlocBloc Code 2000 2008 2009 2015 2030

North Europe eun 0.33 1.04 0.98 0.94 1.43West Europe euw 0.38 0.36 0.34 0.31 0.15

UK uk 0.55 0.68 0.72 0.85 1.33South Europe eus 1.29 1.73 1.61 1.43 2.02East Europe eue -0.24 0.09 0.08 0.15 0.42

USA us 1.20 0.65 0.68 0.61 0.60

Net Lending (% of GDP) Net Lending converges towards zero in all blocs Although this ratio dramatically improves in blocs such as South Europe and the US,

it remains negative Government deficits are improved due to the eventual slowdown in government

expenditure after an initial increase and an improvement in government net income. (Also helping is the acceleration in the growth of GDP, the numerator of the ratio)

Employment Scenario: Government Net Lending as % of GDP

BlocBloc Code 2000 2008 2009 2010 2011 2012 2015 2030

North Europe eun 6.7 7.7 1.3 -0.5 -0.3 0.1 -0.6 -2.9West Europe euw 0.2 -0.9 -4.7 -5.2 -4.3 -3.6 -1.4 0.8UK uk 1.3 -4.9 -11.3 -11.3 -9.4 -7.6 -3.6 0.9South Europe eus -0.9 -3.9 -8.6 -10.3 -10.3 -9.9 -6.5 -2.4East Europe eue -3.6 -3.2 -6.2 -6.5 -5.2 -3.6 -1.4 1.0USA us 1.5 -6.1 -11.1 -11.4 -9.8 -8.3 -4.7 -2.2

Government Debt (% of GDP) falls dramatically in all blocs. South Europe’s debt burden is also reduced but not as

substantially as one would hope. In these circumstances, some debt restructuring or relief is desirable (as is happening now)

Falling Debt: Two Examples

20

40

60

80

100

120

140

160

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

South Europe

40

50

60

70

80

90

100

110

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

UK

132%

88%80%

50%

The current accounts of S. Europe, E. Europe and UK all progressively improve But the US continues to slide into deeper current-account deficits

Exchange-Rate Impact: 4 Blocs

-12

-10

-8

-6

-4

-2

0

2

4

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

East Europe

-8

-6

-4

-2

0

2

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

South Europe

-4

-3

-2

-1

0

1

2

3

4

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

UK

-6

-5

-4

-3

-2

-1

0

1

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Employment Growth ScenarioBaseline Scenario

USA

Domestic Price Inflation Despite the fiscal stimulus, domestic price inflation remains

subdued across the European blocs and the USA (with the highest rates recorded in the UK and East Europe)

Employment Growth Scenario: Domestic Prices (Expenditure Deflator) annual % change

BlocBloc Code 2000-08 2008-09 2009-10 2010-11 2011-12 2012-15 2015-30

North Europe eun 2.3 1.7 1.8 2.9 1.6 1.5 0.6

West Europe euw 1.7 0.1 0.9 2.2 1.8 1.8 1.2UK uk 2.6 1.8 3.4 4.3 3.0 3.4 2.8

South Europe eus 3.0 0.4 1.0 2.0 1.5 2.3 2.7East Europe eue 5.2 2.1 1.9 3.0 3.2 4.1 3.9USA us 2.8 0.2 1.7 2.7 1.3 0.9 1.7

We will be re-running this scenario on the basis of the modified baseline (for Deliverable 4.1) and including the Economic Dependency Ratio as an outcome

We will compare our results to those for the three European Sub-Variant Scenarios: EU Breakup, Federal Europe and Multi-Speed Europe (in some of which employment rates are also targeted)

In the latter two scenarios, regionalisation is the underlying context so their results naturally differ from ours

We will focus more in the future on such factors as youth unemployment and net migration flows

We will also devote more attention to the policy implications of our findings, addressing the current debate on growth strategies and employment policies for Europe

Future Research and Modelling