Economic weakness and demographic challenges: what next for Europe?

Summary

This event focused on the recently published European Economic Advisory Group Report of 2016, with special emphasis on the first two chapters (Macroeconomic Conditions and Outlook; Intergenerational Fairness).

In developed economies, the so-called intergenerational contract is facing challenges. Is the current model sustainable? When an individual is born, they receive net transfers from the state in the form of public services (mainly education). These are paid back as taxes during the early stages of the individual’s career. Thereafter the individual becomes a net contributor to the welfare state until retirement. Finally, they return to the initial stage, and receive public services in the form of healthcare and pensions. If properly implemented, this social contract offers a powerful and fair mechanism for intergenerational transfers.

Despite being one of the major hallmarks of developed societies, the intergenerational contract only works if public expenses are offset by working-life contributions. The “Great Recession” has accentuated the bias of public expenditure towards the elderly, leaving the younger to bear the costs of an increasingly expensive welfare state. Empirical evidence suggests that per capita pension and healthcare costs are increasing, even if you control for demographic factors such as the aging population. Although this does not make the social contract unsustainable per se, it comes at a time where neither demographics nor labour market indicators are showing positive trends.

Who gains and who loses from this situation? The current social contract seems to be most favourable to the generation currently receiving pensions in comparison with both previous and future ones. The problems young people face in entering the labour force should be addressed. Moreover, certain countries (for example Italy) are suffering from a brain drain, which generates implicit cross-subsidies between countries. The final remark from the panel was that a European-level social contract could be a potential solution to address this issue while enriching social cohesion in Europe.

Event notes by Jaume Martí Romero, Research Intern

VIDEO RECORDING

Materials and Relevant reading

Presentation | Torben Andersen
Presentation | John Driffill
Presentation | Pia Hüttl
EEAG reports
The growing intergenerational divide in Europe | Pia Hüttl and Guntram Wolff