Macroeconomic Implications of Demographic Developments in the Euro Area

The ECB has an interesting and useful Occasional Paper on the above topic (which can serve as a good point of departure for those who are unfamiliar with the issues raised).

The paper contains a useful summary of the 'best guess' arguments about potential demographic trends. As they indicate the three parameters involved - fertility, longevity and migration - are all subject to variance and volatility, so any longer term projections must have a fair degree of uncertainty attached. However it is clear that Europe is getting older, and has (and will continue to have) below replacement fertility. These features will undoubtedly condition the macro economic climate for many years to come.

Abstract

This paper examines the macroeconomic consequences of future demographic trends for economic growth, financial markets and public finances. It shows that in the absence of reforms and responses by economic agents, the currently projected demographic trends imply a decline in average real GDP growth and a severe burden in terms of pay-as-you-go pension and health care systems. Population ageing will change the financial landscape, with a potentially larger role for financial intermediaries and asset prices. All this points to a need to closely monitor demographic change also from a monetary policy perspective. While population projections are surrounded by considerable uncertainty and the effects of demographic change tend to be drawn out, the magnitude of the potential effects calls for an early recognition of this issue. This paper provides some input to the examination of possible policy issues.