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Insight: Ageing deepens debt-laden Europe's economic woes

A woman waits for bus in downtown Lisbon April 8, 2013. REUTERS/Rafael Marchante
A woman waits for bus in downtown Lisbon April 8, 2013. REUTERS/Rafael Marchante

By Alan Wheatley, Global Economics Correspondent

RIGA/LISBON (Reuters) - Long after the debt crisis is over, Europe will be grappling with an even more serious problem - how to pay for growing numbers of old people.

The population of some countries is stagnant or already shrinking, notably Germany's. That will reduce savings and potential economic growth.

The workers who remain are getting older and so are less productive. That will hold back living standards.

And the ranks of retirees are swelling. That will threatening the financing of pensions and health care.

In the 27 countries of the European Union, each pensioner is today supported on average by four people of working age. By 2050, this old-age support ratio will have fallen to just 2:1, according to United Nations and EU projections.

Latvia, which has applied to join the euro in 2014, is but an extreme example of these trends. By 2060 there will be four Latvians of working age for every three aged 65.

Because of emigration and low fertility, the Baltic state's population shrank by 14 percent, or 340,000 people, between 2000 and 2011, prompting warnings of an existential threat to the nation.

"I don't want to make apocalyptic statements. I hope that the country can manage. But the alarm bell has rung," said Mihail Hazans, an economics professor at the University of Latvia and the county's leading demographer.

ALARM BELLS

Many European countries are raising the retirement age. And some, including Britain, have favorable population profiles.

But Martins Kazaks, chief economist with Swedbank in Riga, said governments had yet to grasp the magnitude of the policy shifts required.

"If you define the tipping point as the point of no return, then in some respects we have passed it - and not only us, but most of Europe," Kazaks said.

"With an ageing population and the burden of pensions and welfare, the growth rate is going to be lower. If you don't do anything today, the future is going to be a lot more difficult," he added.

Policymakers need look no farther than low-growth Japan to grasp the economic impact of population decline and ageing.

"Europe is the new Japan," said Douglas Roberts, an economist with Standard Life in Edinburgh.

Apart from putting pension systems on a more sustainable footing, investing in education and training so that workers are more productive should be a policy priority, economists say. So should expanding child care to allow more women to join or stay in the work force.

How to share out the cost of ageing spells potential political trouble, pitting cosseted pensioners against younger generations who are overtaxed and overworked.

George Magnus, a senior economic adviser to Swiss bank UBS in London, said it was understandable because of the euro zone crisis that the current focus was on the near-term affordability of welfare.

"But behind that is a very structural issue, which is really about the social model and the rights and obligations of citizens vis-a-vis the state. We are going to have to have that debate," said Magnus, author of "The Age of Aging".

Edward Hugh, an economist in Barcelona, agreed that the sovereign debt crisis gripping the developed world was at root about how to meet implicit liabilities for ever older populations: expectations of future levels of health care and pension provision may prove too optimistic.

As such, Hugh is critical of policymakers in Europe and at the International Monetary Fund for neglecting the impact of demographic change.

"In the absence of policies that acknowledge these issues exist and that then address them, none of the sustainability analyses - debt, financial sector, whatever - are worth the paper they have been written on," he said.

PORTUGAL'S POPULATION PAINS

Recession-hit Portugal also illustrates the vicious economic and fiscal circle that Hugh identifies in countries on the periphery of the euro zone as a result of demographics.

Portugal's fertility rate, which stood at 1.32 last year, has been below the 2.1 replacement rate - the number of children each woman needs to have to maintain current population levels - since the early 1980s.

In 2012, only 90,000 children were born, the lowest number in more than a century, as economic fears gave couples pause.

In short, ageing is pre-programmed. By 2050, Portugal is projected to have more people aged 60 or over than any other EU member - 40 percent of the population against 24 percent today.

What's more, some 100,000 to 120,000 Portuguese, or 1 percent of the population, are emigrating every year to look for better-paid work, depleting the tax base and adding to the strain of financing the welfare state.

"One of the biggest problems we have is holding on to employees," said Joao Carlos Costa, general manager of Arpial, a metal-working firm in Lisbon.

Jose Cesario, secretary of state for Portuguese communities abroad, puts a brave face on the drain of brain and brawn.

Emigrants acquire valuable skills and remitted some 2.7 billion euros in 2012. Influential members of the Portuguese diaspora of around 5 million can also act as ‘ambassadors' for the country, Cesario said in an interview.

But he acknowledged that both Switzerland and Luxembourg had urged him to slow the flow of emigration.

"It's the fish that bites its own tail," Cesario said, using a Portuguese proverb. "We can get emigrants to come back only if we have economic development, but we cannot do that without them." If he had the solution, Portugal would not be in the situation it is, he added.

LATVIAN EXODUS

The same goes for Latvia.

"It's a big challenge for Latvia, both for the economy and for our society." Prime Minister Valdis Dombrovskis told Reuters. "What we need to concentrate on now is economic growth and job creation so that people see perspectives here in Latvia and so don't have to leave."

The government also hopes to lure back 100,000 emigrants, or a third of those who have left since the turn of the century, by 2030.

Given that Latvia is one of the poorest countries in the EU, that will not be easy. "We're not expecting people to pack their bags and be here on Monday," said Dace Acule, a public policy researcher in Riga who has worked on a proposed package of incentives.

One emigrant unlikely to be tempted back is Datsa Gaile, who has been in Britain since 2006. She left Latvia because, as a single mother, she was unable to bring up her two sons on a wage of about 150 lats ($275) a month.

After a rocky start, she learned English, got a string of ever-better jobs and now runs Anglo Baltic News (www.anglobalticnews.co.uk), a website aimed at the estimated 100,000 Latvians in Britain.

"The main problem at the moment is that there are not enough jobs in Latvia. It's a bit risky if you decide to go back," said Gaile, who lives in Northampton, a town in central England that is home to 8,000 Latvians.

"Also, I have been away for almost eight years and my lifestyle has changed. People are different here. They have more opportunities in this country," she added.

Professor Hazans of the University of Latvia said at most 20 percent of recent emigrants might return. What's more, his surveys show that the proportion of ‘firm stayers', who have no thought of leaving Latvia, has fallen to a quarter from a third since 2010.

As in Portugal, a vicious economic circle becomes hard to break.

"Emigration sends a negative signal to foreign investors. It also sends a negative signal for domestic business startups," Hazans said. "You think about how many potential customers you will have."

The psychological harm of sustained emigration, which has accounted for two-thirds of Latvia's population decline since 2000, is as striking as the economic damage. Women's fertility rate has dropped to 1.1, one of the lowest in the world.

Acule, the policy researcher, spoke of the "demographic sadness" of a country where most people have a relative working abroad.

Hazans added: "The sense of bitterness is still very much there. Why? A feeling that if everyone is leaving the boat, the boat must be sinking. Or if the boat is afloat and others are leaving, why am I staying?"

The imperative, then, is for Latvia to sustain its recovery from a deep recession in 2008/09, when output slumped by 20 percent as the government opted for austerity rather than devalue its way out of the financial crisis.

Whether it be in Latvia or Portugal - or eastern European countries such as Bulgaria and Romania - only more and better-paid jobs will stop the hemorrhaging of people and perhaps improve longer-term demographic prospects.

"If you get the chance to live and work normally in our country, it's a luxury. It's a luxury to be able to stay," said Dace Beinare, an adviser with SOS Children's Villages, a non-governmental organization in Riga.

(Additional reporting by Aleks Tapinsh in Riga and Daniel Alvarenga in Lisbon; Editing by Giles Elgood)

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