Defusing Europe's demographic 'time bomb' to remain competitive

There has been a lot of talk in recent years about a demographic "time bomb" ticking in Europe, the need to reform pension and welfare systems and revamp as part of building a more competitive European Union. Leading Czech and British economists met at Prague Castle last week for another in a series of conferences about the future of Europe. The focus this time around was on the Lisbon agenda, aimed at making the now 25-member strong European Union an unrivalled knowledge-based economic powerhouse, by 2010.

Radio Prague put the question "Can Europe sharpen its blunt competitive edge?" — the organizing theme of last week's conference — to economist and former Czech finance minister Pavel Mertlik, now with Raiffeisen Bank, on the margins of the event.

RP: You mentioned the fact that we are behind the United States since the 1990s — Europe has been 'outstripped' by the United States. Is it possible for us to catch up? Can Europe sharpen its competitive edge in the coming years?

"Definitely yes, but it will not be easy because it will take a lot of political decisions which are very unpopular; in the area of reforming the welfare system of Europe, in investing much more in university education in general, reform of education throughout Europe. Also, it will require improvements in competitive environment inside Europe - where, very often, still national protectionist policies dominate certain areas, though Brussels fights against them.

Photo: European Commission
RP: You noted that the demographic trend in Europe was also a problem.

"Definitely it is, but it's not a problem specific to Europe. All developed nations have problems with low fertility rates, but in certain European countries, particularly the Czech Republic, for example, but also Italy, Estonia, it's really a huge problem. Nowadays, the number of children per woman is only 1.1 — which is far below what is necessary for, say, simple reproduction of the population."

RP: What are Europe's strengths and weaknesses in terms of trying to catch up and possibly outstrip the United States and maybe even China, in time?

"Well, I think that the strong points in Europe are, definitely, high environmental standards and low energy consumption. For years, Europe invested a lot — more than any other global region — into improving the environment and it pays off. On the contrary, for example China, its production is growing very quickly but the environmental standards are very low and it is becoming a kind of waste area of the world and it may be dangerous globally. I think this is not, in the long term, sustainable. To a certain extent, this is true for the United States as well. And the fact that the U.S. is not willing to sign the Kyoto Protocol reflects this."

"Among the down side of European development are the sometimes too large welfare systems which don't appropriately stimulate work. Simply said, for many Europeans to take social welfare benefits is an attractive option to participate in the labour market, to work — and this definitely is not a good side of the European economic environment.

"I think that social cohesion is very important, but to really reach it, we need important reforms, not only in the pension area, but in many other areas. And of course, from a political point of view, it will be very difficult to go into these reforms."

RP: That leads me to the next question. The European Union has expanded to 25 member states and when you say, obviously, in the coming years there will have to be consensus on many reforms. Do you feel that Europe's expansion will impede that process?

"I think not. It can even foster the process. Because of various historical reasons, many of the eastern European nations have less developed social welfare systems than some older EU members like, for example, Germany. So, reform impetus can come not only from the West. So I think this is not the basic problem. The basic problem will be to cope — in all European countries — with the problems of aging populations and a lack of attractive economic possibilities for some strata of the population. And we have to work together to find solutions that will be socially acceptable and at the same time stimulating economic growth."

Since the launch of the Lisbon process, over six million jobs have been created whereas the employment rate in the United States has fallen. But the original 15 EU members still need to create 11 million new jobs by 2010 if they are to reach the target of having a 70 percent employment rate by this time.

Also speaking at the 'Can Europe sharpen its blunt competitive edge' conference last week was Keith Didcock, deputy director of the Foreign Policy Centre in London, who told Radio Radio about the conclusions reached in the course of the two-day panel debate.

Photo: European Commission
"What this conference is trying to suggest is that Europe needs to look outward much more and it needs to do so because of several factors which are harming its competitive ability. The first of those is demographic decline, an aging population, lowering fertility rates, which means that, overall, European populations are going to shrink in the future and we are suggesting that Europe needs to improve its ability to attract immigrants in order to boost its population and boost its productivity."

"We are also suggesting that Europe needs to create an 'ivy league' of elite universities because it is very clear that European universities are not in the top fifty - overall - and Europe really needs to tackle the quality of its higher education system. Thirdly, Europe needs to promote the liberalization of world trade because that is the best route towards improving Europe's economic competitiveness and to do that it needs to reform the Common Agricultural Policy."

"And finally we would like to see the Euro being turned into the world's reserve currency. It can challenge the U.S. dollar and become the most widely held reserve currency in the world and also the currency of international trade."