Europe’s Pitch Book: Doomed by demographics?
The demographic challenges facing Europe, as outlined in Marieke Blom's recent commentary, highlight a critical economic dilemma for the region's future growth. While the conventional narrative emphasizes an ageing population and its associated costs, it often underestimates the potential of underutilized demographics such as women and older workers. Per the full note source, the Draghi report illustrates a stark forecast: Europe's working-age population is poised to decline by two million annually by 2040. Despite this decline, the desk views the untapped labor reserves as a potential offsetting factor, presenting a more nuanced perspective on growth dynamics compared to the broader pessimistic outlook. Overall, it suggests opportunities to enhance productivity, negotiating a complex landscape characterized by a shrinking labor force and unprecedented fiscal pressures.
What the desk is arguing
The ageing demographic profile of Europe presents significant economic challenges, but this narrative often overlooks a crucial point: the potential for mobilizing untapped labor reserves. Per the full note source, the working-age population is projected to decline sharply by approximately two million individuals each year through 2040, exacerbating issues such as high public costs for pensions and healthcare. The upside potential, particularly through increased female and older worker participation, remains a vital consideration for future economic strategies.
The Draghi report underscores these concerns, noting that the existing working-age population of around 280 million is on the precipice of a drastic decline. The implication is clear: without a strategic pivot to mobilize these untapped labor reserves, Europe risks transitioning from a demographic tailwind to a headwind, threatening economic expansion in coming decades.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range between 1.04 and 1.12. Aligned firms include: - jpmorgan: target 1.10 for Mar26 - bofa: target 1.04 for Mar26
This perspective diverges slightly from bofa's more cautious stance, which anticipates a lower target level, while our desk aligns closely with jpmorgan’s outlook on utilizing demographic changes for strategic growth.
How other firms see it
Broadly, firms such as jpmorgan align with the constructive narrative surrounding potential labor force mobilization, while bofa holds a more pessimistic view regarding Europe's demographic challenges and their economic implications. The juxtaposition of these views underscores the significance of investor sentiment on currency movements.
Monitor the EUR/USD trajectory closely, especially in light of potential shifts in European Central Bank policies, as these factors could influence sentiment surrounding demographic forecasts and participation rates.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Europe's working-age population is set to decline by 2 million annually through 2040.
- 02The potential for increasing labor participation from women and older workers remains largely untapped.
- 03The Draghi report emphasizes the need for productivity improvements to offset demographic challenges.
- 04This demographic shift poses risks for economic growth and public service funding.
Market implications
Traders should observe the EUR/USD exchange rate closely given the projected demographic shifts highlighted in the Draghi report and the potential policy implications from the European Central Bank. Key levels to monitor include 1.075, as market sentiment may react sharply to any changes in the economic outlook related to labor participation rates.
Risks to this view
The call could be invalidated by further declining productivity metrics or significant shifts in ECB monetary policy that dampen growth expectations. Should demographic challenges intensify without corresponding increases in labor force participation, the prospects for economic recovery in Europe may further deteriorate, impacting currency stability.
Opinions Opinion by Marieke Blom Europe’s Pitch Book: Doomed by demographics? Published 07:00 Europe’s ageing problem clearly poses economic challenges. But the conventional view often overlooks the continent’s large, untapped labour reserves.
The participation of women, younger people and older workers has significant upside potential. Europe is proving capable of mobilising them The Draghi report sets out Europe’s structural problems clearly, starting with the two holy grails of long-term economic growth: working more hours and getting more done per hour. Without these two key sources, economic growth becomes very difficult.
And we all know Europe’s demographics are moving in the wrong direction. As the report reiterated, the working-age population has already peaked and is set to shrink by two million people a year by 2040. That means economic growth will no longer benefit from a steadily growing workforce.
Smaller and older populations bring three types of economic problems: a lack of workers, high public costs for pensions and healthcare, and weaker productivity growth. The working-age population, defined as those aged 15 to 64, currently stands at about 280 million. Using data from the Draghi report, we can see that this group has remained broadly stable over the past 25 years, after growing by some 75 million between 1950 and 2000.
The steepest decline is expected to occur between now and 2050. Draghi warns: ‘by 2040 the workforce is projected to shrink by close to two million people each year’. That is about 0.7% of the current working age population.
This clearly implies that demographics are shifting from being a tailwind of about 0.7% per year before 2000 to a headwind of about the same magnitude over the coming decades. Compared with the US, where the working-age population is expected to stabilise in future decades, Europe is projected to face a much larger drag. The difference is significant, particularly when compared with average annual economic growth of about 1.5% for Europe and just above 2% for the US.
On costs, more elderly people go hand in hand with higher pension outlays, higher healthcare spending, and relatively fewer people contributing as the dependency ratio rises. This is happening on a continent where, on average, the tax burden is already high, healthcare is often publicly financed, and many pension systems are pay-as-you-go, meaning that current workers pay for current retirees. Pensions already amount to around 11.4% of GDP, with health and long-term care adding another 8.6%, bringing the total to 20%.
And then there is productivity. Research has shown that worker productivity tends to peak before or around the age of 50 and declines from there. So, in Europe, the share of workers in lower-productivity age groups is gradually rising.
In addition, as companies expect demographic trends to weigh on future demand, they have less incentive to invest . As a result, ageing is associated not only with a smaller workforce, but also with weaker productivity growth. It all paints a very dark picture for Europe.
But each of these arguments is open to challenge. Let’s start with productivity. The research showing that productivity peaks at age 50 was conducted on earlier generations of workers.
Today's older workers are different. They are much healthier. Across 41 countries , the cognitive health score of a 70-year-old in 2022 matched that of a 53-year-old in 2000.
Europe’s future generations of older workers will also be much better educated. By 2050, almost half of those aged 50 to 60 are expected to have a tertiary education , compared with fewer than a quarter today. Europeans have caught up in education versus the US, although Central and Eastern Europe, in particular, has more upside.
So what about the existing negative relationship between age and productivity? Some researchers say it could be explained by a cohort effect, where younger workers are simply better educated. And on the investment side, there is also evidence that companies facing labour shortages invest more , while an abundant labour supply can slow innovation.
The impact of ageing on productivity therefore needs to be viewed in light of these offsetting effects. When it comes to the cost of pensions, healthcare and long-term care, projections show that spending will rise from about 20% to 21.6% of GDP between now and 2050. That is hardly a dramatic increase.
The increase is muted by continued GDP growth, a rising retirement age, and pension benefits increasing more slowly than GDP – which, to be clear, does restrain retirees’ spending power. In the US, ageing is expected to increase public spending by 2.7% of GDP between 2025 and 2055, with half coming from healthcare and half from Social Security. That is much more than the expected impact in Europe.
The perception that “Europe’s public finances are doomed” does not stand up to scrutiny, while the US faces some difficult choices of its own. Most significantly, the decline in the working-age population can be mitigated if the existing population works more. Workers can retire later, more women can participate, unemployment can fall, and the hours worked per employee can rise.
On all of these fronts, Europe has a very significant amount of untapped labour potential, especially when compared with the US. You may see this as an impossible route to take: Europeans love their holidays, people take to the streets when retirement ages go up, and female labour force participation can seem difficult to increase further. But a lot has changed, and that does not receive enough attention.
Between 2009 and 2023, the participation of people aged 60-65 increased by 23 percentage points . Female participation increased by six percentage points. Unemployment has fallen by three to four percentage points since the beginning of this century, and youth unemployment is at historical lows.
On all of these fronts, Europe has made faster progress than the US – but levels are still lower. Female labour force participation increased strongly in Europe (%) Source: World Development Indicators, World Bank "> Source: World Development Indicators, World Bank This brings us to the outlook. Looking ahead, the statutory retirement age is rising in most countries.
Younger female cohorts work more often than older cohorts. Better education will also support participation: unemployment is lower among the highly educated, and they retire later. Using these assumptions, official projections show a four percentage point increase in labour force participation by 2070.
And total hours worked are projected to decline by 9% between 2022 and 2070, which is less than 0.2% per year*. Yes, that is still a headwind, but at about a quarter of the speed, it’s much less dramatic than the 0.7% annual decline suggested by the Draghi report. These official projections were based on legislation in place by 2024.
Since then, pension reforms have continued in many countries. Moreover, Europeans already live longer after the age of 65 than Americans, and life expectancy is rising faster , implying greater potential for future increases in retirement ages. Strong further upside lies in female participation.
Women are much more highly educated than before, and more often highly educated than men. Their life expectancy at 65 is three years longer than for men, while retirement ages for women are lower than for men (in Eastern Europe also due to lower statutory pension ages). There is policy progress on childcare and parental leave .
Women are the single most important driver of any potential increase in annual hours worked (now at 1,600, but at 1,700 at the beginning of the century and at 1,800 in the US). So, a lot has already been set in motion, and there is plenty of upside, also relative to the US. Policy interventions would make it possible to keep total hours worked broadly stable.
And the upside on education is also still significant. The demographic picture is nuanced. It’s not great, but it’s far less dramatic than is often portrayed.
And Europe is not alone: the US, China, Korea and Japan all face challenges of their own. The narrative of demographic doom looks less convincing when viewed in an international context. But more importantly, it often overlooks the potential of healthier, better-educated older workers, much lower youth unemployment, and higher female labour force participation.
On all these fronts, Europe has been making steady progress for years. * Migration is deliberately left aside here. Projections I refer to assume migration remains at historical levels. Future inflows are highly uncertain, subject to political debate on both sides of the Atlantic and could significantly affect demographic outcomes.
Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Europe Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion Author Marieke Blom Chief Economist and Global Head of Research Marieke Blom is Chief Economist and Global Head of Research at ING Group.
Marieke has worked at ING since 2014. She is a member of the board of the Dutch Royal Economic Society (KVS). She is also a…
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