Demographic change and Decarbonization — the Dual Challenge for Europe

World population growing, Europe shrinking

Europe is the only region of the world where the population will decline in the coming decades. This population reduction is already beginning: Europe will have a smaller population than in 2020 as early as 2030.

An aging population threatens prosperity

Population aging has a number of negative consequences for a society’s economic prosperity. Compared with economies with a young population, there is a risk of a loss of international competitiveness:

  • A demographically induced shortage of skilled workers increases wages and therefore costs of production for companies. The same applies if non-wage labor costs rise due to higher contributions to pension insurance and health insurance.
  • Empirical studies also show that both labor productivity and the innovative capacity of companies and economies decline as the workforce ages.

Decarbonization as a new public task

The EU has set the goal of being CO2 neutral by 2050, requiring a much more significant reduction in carbon emissions over the coming years than has been the case to date: It requires almost a threefold increase in annual reduction volumes.

  1. It must increase its investment in low-emission infrastructure. This applies to transportation, public buildings, and much more.
  2. Because ecological transformation is a knowledge-based activity, it requires high skills, especially in the areas of technologies, information technology, natural sciences, and so on. This also requires government spending in the entire education sector and in research and development.

Options for action in the area of financing

The government can raise social security contributions and increase its revenues. However, this has a negative impact on the labor market: Gross wages paid by companies increase.

Increasing employment

In essence, the aim is to increase labor force participation in the EU. Three main areas come to mind here:

  1. Improving the compatibility of family and work. This can increase the labor force participation of women. It relates to better care options for children but also support for caring for the elderly.
  2. An improvement in people’s health because healthier people are available to the labor market for longer. This also means that the labor force participation of older people will increase, and working people will retire later.
  3. An increase in the level of education. Better educated people not only have higher productivity. They also have better opportunities in the labor market, which ensures a higher level of employment.

Outlook

Europe’s economies are facing enormous structural changes. Particularly problematic is the fact that adjustments to societal aging, ecological transformation, and digital transformation must occur simultaneously.

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Global & European Dynamics

Global & European Dynamics

Our mission on this blog is to shed light on Europe’s role in the world economy. https://globaleurope.eu/