Analysts associated with the Brussels-based think tank Bruegel recently released a study quantifying the added debt pressure member states of the European Union (EU) are facing from population aging. As is the case in the US, the projections show the required fiscal adjustments needed to prevent a relentless rise in borrowing will be substantial. With a few exceptions, most European countries will need to implement reforms that are so politically challenging that their electorates have successfully resisted them to date. However, the stakes are likely to rise in the future, as continued failure may call into question the durability of the agreements upon which the EU was founded.

Coming out of the pandemic, EU officials recognized that the bloc’s suite of fiscal rules needed to be updated as many countries borrowed heavily to protect their populations from the worst effects of restrictions on economic activity. Even so, the basic terms of the founding EU treaty remain as they have been, with an expectation that member states will, in normal times, keep the ratio of central government debt to GDP below 60 percent while also limiting annual deficits to an average of no more than three percent of GDP.

For those countries already operating outside of these boundaries, there is a requirement that they will agree to a credible course correction in consultation with European Commission (EC) officials. In general terms, non-compliant members are expected to implement tax and spending changes over a seven-year planning horizon, which is to be followed by a decade of continued progress toward eliminating any remaining excess borrowing.

The Bruegel analysis works with these rules and the EU’s long-term projections of aging-related fiscal pressures to create an analytical framework for assessing the scale of the adjustments that member states must implement through 2052 (relative to a baseline of 2024 outcomes). The required course correction is measured in terms of the required change in a country’s structural fiscal position, that is, the projected budget deficits during periods of steady economic growth and after removing net interest payments on previously borrowed funds. The required adjustment can be viewed as having two components, one associated with eliminating any excess borrowing tied to policies in place as of 2024 and the other related to the effects of population aging after 2024.

While there are two countries that are expected to escape any needed changes (Estonia and Sweden), the other 25 are looking at varying levels of fiscal consolidation, with some needing changes that appear to be well beyond what is realistic in today’s political environment.

Figure 1 provides the results of the study’s projections for the median EU member state and for several selected countries.

Figure 1.

As shown, the median EU member is expected to require tax hikes and spending restraint in 2052 that would improve the structural balance in that year by 2.8 percent of GDP relative to what is observed for the relevant countries in 2024. For Belgium and Spain, the required adjustments will be more substantial, largely due to the lack of substantial reforms to date. It is noteworthy that Greece is expected to require less of a course correction owing to the many changes the government implemented in recent years to escape from the crisis that engulfed it in the aftermath of the recession of 2007 to 2009.

The authors of the Bruegel analysis note that EU countries are not without effective reform options. They cite several which have been shown to deliver tangible results, including pension reforms which encourage longer working lives, immigration reforms which boost the size of national workforces, and structural economic changes which increase total factor productivity (TFP).

However, they also examine the types of recommendations that EC officials have forwarded to national governments in the past, and also the response rates of the governments on the receiving end of these suggestions. The evidence here does not bolster confidence that a solution for population aging will be readily implemented. On the front end, the EC tends to steer clear of the most controversial measures, such as policies that would boost immigration as a way of backfilling workforces depleted by aging. On the receiving end, the response rate of the countries has been extremely low. Of the more than 1400 recommendations related to demographic trends and productivity enhancement the EC sent to countries over the period 2011 to 2023, only 10 were fully implemented after one year.

The fiscal challenges from population aging have been visible in high-income countries for some time, but the tendency to put off difficult reforms means the required adjustments are now larger than would have been the case if decisive action had been taken earlier. The range of policy remedies is fairly well understood. What is still missing is the political will to act.

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