The ageing of Europe’s population is a looming issue for all EU countries, including the UK. In part, it is occurring due to the unusually large baby boomer generation reaching retirement age. But other trends are important too, such as increased life expectancy, improved public health, declining fertility rates and more choice over family planning. In this issue of Brussels Briefing, we consider what all this means for policy.

Why is there a problem?

An ageing population has the potential to cause social, economic and political fall-out by increasing the dependency ratio – the proportion of the population that is retired (economically inactive) compared to those who are employed and so contributing to economic resources. This could lead to slower economic growth and increased public expenditure, especially on pensions, the NHS and better social care for the elderly. Yet, these problems are not inevitable if governments take action now.

How can the European Union help respond to these challenges?

While national government have overall responsibility for policy in these areas and countries respond in different ways, the EU can help to coordinate and implement the necessary reforms. Already the European Commission has suggested a broad policy framework to tackle potential problems in five key areas.

Reducing the rate of population ageing

Studies suggest that many women in Europe would like more children. By introducing family-friendly policies to encourage this, it would be possible to increase fertility rates and slow the rate of population ageing. Measures could include encouraging flexible working and a better work/life balance, good quality affordable childcare and making it easier to combine motherhood with a fulfilling career. However, while there is some evidence that policies like these can have a positive impact, for instance in France in the 1990s, the jury is still out on whether they can have a sustained impact on fertility rates. At best, then, they can only be part of the solution.

Immigration

The projected increase of immigration into the EU over the next 20 years will for a while help meet labour market needs, especially in terms of low skilled work. Immigrants both reduce the average age of the population as they tend to be young and raise the birth rate because of higher fertility rates. But in the long term, as they get older and become more settled, they too retire and their birth rates move closer to those of the indigenous population. At the same time, many migrants only stay for a short time to work and then return to their home countries, as Britain has seen recently with workers from Eastern Europe. While not a long term solution, migration can provide net benefits in the short term. Governments need to recognise this and encourage legal migration and the proper integration of new arrivals, while cracking down hard on people trafficking.

Increasing the proportion of people in employment

Raising the employment rate among people of working age would help to offset the increased number of retirees. The EU’s Lisbon Jobs Strategy recognises this and has set a target rate of 70%. This can be achieved in a number of ways, including improving education and skills training, getting more women into work, making labour markets more flexible and reforming social security systems to improve work incentives. European governments are already working towards their own policies in this area, with coordination and guidance coming from the EU through the Lisbon Strategy.

But the number of older people in work could also be increased, thus delaying the move from being economically active to inactive. Part of this effort could be focused on the 55-65 age group, reducing the number taking early retirement, keeping their skills up-to-date, and reducing age discrimination. The EU could help enforce these principles with legislation. Increasing the retirement age could also have a significant impact. One study has suggested that raising it to 72 would have the same effect on economic growth as increasing the employment rate to 70%, though politically that will be a difficult pill to swallow.

A more productive European economy

As the workforce shrinks, improving productivity can help European economies to continue to grow. Again, the Lisbon Strategy can be of great help here. It aims to optimise European economic performance by deepening the internal market, enforcing competition rules, improving regulation and helping to drive innovative research and development. Indeed, the ageing population could even be seen as an economic opportunity, as it will create a new market for goods and services to meet the needs of older people, in a diverse range of sectors including ICT, finance, transport and social care.

Ensuring sustainable public finances

Recent reforms have eased fears in many EU member countries that an ageing population threatens the public finances. Implementing the Lisbon Strategy could further aid that process. Hitting the 70% employment rate target, for instance, would certainly increase tax revenues. Meanwhile efforts to reduce early retirement, improve incentives for older people to stay in the labour market and raising the retirement age would relieve much of the pressure.

As life expectancy increases, there is a worry that more elderly people will mean more public spending on health. While older people do use more health care resources, the issue here is the number of older people, not increased life expectancy. People may now live longer, but they also live healthier lives for longer. Due to the sheer size of the baby-boomer generation, there will certainly be a difficult period with larger number of order people to care for, but it will not be a permanent problem. This also links in with raising the retirement age. If people remain healthier for longer, they should be able to work longer, further reducing pressure on the public purse.

Conclusion

While demographic changes will inevitably put pressure on European governments, specifically with regard to the public finances and economic growth, there is no cause for panic. With some forward planning and careful reforms, our economies can adapt to the coming changes and continue to be efficient, productive and competitive. The EU can provide support and encouragement to member states to reform their economies and labour markets, not least through the Lisbon Strategy.

Gary Titley MEP
March 2008
INTRODUCTION

2006 was the warmest year on record in the UK and this winter has seen temperatures well above normal. In the North West, we also experienced very heavy rainfall with some areas getting double the normal amount in December. But other parts of the world have suffered far more. Increasingly unpredictable weather patterns have produced more and more devastating storms, floods and droughts that have led to death and destruction on a terrifying scale. That is why climate change has shot up the political agenda and has now become a top priority for most world leaders. In this issue of Brussels Briefing we look at how the EU is addressing this crucial issue.

The Strategy

In the report "Winning the Battle against global climate change" published in 2005, the European Commission outlined its strategy. It saw the issue as presenting a four-fold challenge - climate risk itself and the political will to face up to it; international participation in efforts to tackle climate change; the innovation needed to change the way we produce and use energy and the adaptations countries needed to make to deal with the unavoidable effects of climate change.

In response to these challenges, the Commission said that any policies brought in would need to extend action against climate change to ALL polluting countries and to those economic sectors responsible for the pollution like transport. New technologies would also need to be developed and introduced to clean up industry's emissions, while successful market schemes such as the EU's emissions trading system should be extended. In addition work towards eliminating the damage done to the most vulnerable regions and economic sectors should be undertaken.

Europe, Kyoto and the Stern Review

Under the Kyoto Protocol, the EU undertook to make an 8% cut in green house gases that cause global warming by no later than 2012. Efforts to achieve this target have taken many forms, including promoting renewable energy and reducing emissions through the EU Emissions Trading Scheme (ETS). This came into force alongside Kyoto and is the largest scheme of its type in the world.

The ETS works by giving each major greenhouse gas emitter a capped budget indicating how much they can emit. To keep to this budget, they can either cut emissions or buy credits from other emitters who have an excess. The idea is that the bigger polluters will find ways to cut emissions to avoid paying higher costs. Moreover, the budget caps will get steadily tighter over time, eventually bringing down emissions right across the EU.

Recently the ETS has come under fire because the original allocation of credits to large polluters like power stations was over generous, causing the price of the credits to fall. Such issues must be worked out and lax allocations on heavy polluters tightened if the ETS is to work properly. But the system can still be a very effective and valuable tool in the fight to curb emissions.

In the UK, the Labour government gave a commitment at Kyoto to cut emissions by 12.5% based on 1990 levels. It has already achieved this goal and now aims to cut carbon emissions by 20% by 2010. The UK government also sponsored the Stern Review, a report on the financial costs of global warming written by Sir Nicholas Stern, the former chief economist at the World Bank.

The report indicates that whereas it would cost about 1% of global GDP to cut emissions sufficiently to halt climate change, the cost of doing nothing would be a 20% shrinkage in the world's economy. Sir Nicholas said: "We have the time and knowledge to act but only if we act internationally, strongly and urgently." Taking up this call, the EU is already working towards a treaty to replace Kyoto, despite it still having five years to run. The successor treaty would look to embrace countries like the United States, India and China, who were not party to the original agreement.

What the European Parliament is doing

Over recent years climate change has figured prominently on the European Parliament's agenda. Speaking on behalf of Labour MEPs, Gary Titley has urged the new Parliament President, Hans-Gert Pottering, to explore the possibility of making the European Parliament carbon neutral and also to make climate change one of his top priorities during his two and a half year term of office.

Already last year, the Parliament approved an EU-wide regulation to gradually phase out the sale and manufacture of certain products that use fluorinated greenhouse gases, like car air conditioning systems. MEPs also backed proposals to set up a scheme to deal with aviation emissions and include it in the ETS. In December, the Parliament passed a resolution in favour of "sustainable competitive and secure" energy for the EU, aimed at reducing European dependence on foreign oil and relying more on renewables. The new policy was spearheaded by Welsh Labour MEP, Eluned Morgan.

The European Council

At the Spring Summit in Brussels, earlier this month, EU heads of government made several key commitments on climate change. Urged on by the British Government, they agreed to cut greenhouse gas emissions in the EU by at least 20% by 2020. Moreover, this figure will rise to 30%, if other developed countries such as the USA commit to the same target. Equally significant was the pledge to increase the percentage of energy generated in the EU from renewables to 20% overall.

The European Council also reiterated its strategic commitment to limit world temperature rises to no more than 2 oC, to review the ETS and to work towards a global emissions cut of 60% to 80% by 2050 with countries like the USA, India and China. Prime Minister Tony Blair commented that, as a result of the deal, this year's Spring Council had been one of the most important he had ever attended.

Conclusion

The overwhelming weight of scientific evidence now indicates that climate change and global warming is not only happening but is also caused by human activity. If a global catastrophe is to be averted, urgent action is needed. Whether it is through legislation on greenhouse gases, the setting out of clear emission reduction targets or global treaty negotiations, the EU is once again proving its leadership by taking important action on climate change and global warming.

Gary Titley MEP
March 2007