THE euro area has been doing better of late: growth of 0.4% in the first quarter (1.6% on an annualised basis) was the strongest in the two-year recovery; unemployment has fallen to 11.1%, its lowest in three years; and inflation is positive again. There has even been a surge of hope that Greece’s membership of the currency may yet be preserved. But even if a deal is stitched together to keep Greece in, the euro will soon face a broader crisis. The slow growth and strained government finances of recent years will soon be dramatically amplified by demography. And the member facing the most severe onslaught is not a small Mediterranean country but Germany, the euro area’s muscleman.
The economic impact of an ageing population is initially positive but ultimately negative. The big generation born after the second world war contributed for many years to higher growth by making the workforce larger, both in absolute terms and relative to the population as a whole. But as baby-boomers retire, they are being replaced by smaller generations born when fertility was much lower. Unless there are offsetting improvements in productivity or...Continue reading
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