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EU governments must adapt to ageing populations, warns ECB official

Frankfurt

EUROPEAN GOVERNMENTS must make changes now to cushion the effects of an ageing population or risk grave economic harm, a top European Central Bank (ECB) official said on Wednesday.

"While today each pensioner is supported by approximately three workers, by 2070 there will be just two workers for each pensioner," ECB chief economist Peter Praet said.

But the bulk of the challenge for European Union (EU) capitals will come sooner, as the "baby boomer" generation born after World War II heads into retirement between now and 2030.

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With higher levels of spending earmarked for the costs of old age, governments will have less freedom to smooth out boom-and-bust cycles or graver economic crises with extra outlays, Mr Praet warned.

The older population's effects on the wider economy - like a smaller labour supply or slower productivity growth - are squashing real interest rates lower, limiting central banks' freedom to intervene as they have over the past decade, he added.

Meanwhile, simulations show that if nothing is done, debt levels in the 19-nation euro single currency "would rise to well above 100 per cent" on average, Mr Praet said.

In fact, "risks (are) tilted towards stronger increases than assumed," the Belgian economist warned.

Countries that are deep into the red like Greece and Italy already prompt fears for the euro's future.

Leaving aside allowing debt to balloon, Mr Praet saw two broad areas for leaders to tackle: reforming social security systems to reduce age-related costs and reducing spending elsewhere to finance higher spending on the old.

"The appropriate course of action should reflect deep societal preferences" that may vary from one EU country to another, he acknowledged. Possibilities could range from shifting more pension provision to the private sector to increasing pension contribution rates. AFP