Migrating European Youth Threatens Europe’s Pension Program

When the euro zone sovereign debt crisis was at running high in July 2012, the spread of sovereign paper over the German benchmark pointed to deep concerns.

At the close of business on July 20, 2012 the German 10-year Bund had closed at a yield of 1.17%.

The spread in basis points (bps and 100 bps = 1%), of Greek, Spanish, Italian and French 10-year paper over Germany was: Greece +2530 bps, Spain +610 bps, Italy +497 bps and France +80 bps.

Clearly, the market was at the time relaxed about France whilst simultaneously expressing serious alarm about the other three sovereigns.

The same spreads are now far narrower, although wider than in several months: Greece +213 bps, Spain +95 bps, Italy +182 bps and France +38 bps.

Good Education, Limited Prospects

Eight years ago, much was made about the plight of Europe’s youth as unemployment among those aged 18 to 25 years was running at frighteningly high levels. Whilst lower now, for some nations it is still  running at distressed levels as the list below reveals. I list the youth unemployment rates for each nation as at mid-2012 and the latest figure available.

Greece: 56.0%, 36.1% … Spain: 53.0% 30.6% … Italy: 31.1%, 29.3% … France: 23.2%, 19.9%

If one were curious in Germany, the same metric reads as 8.1% and 5.6%

Right now, as the euro zone struggles with tepid annual economic growth of 0.9% and regional youth unemployment running at 15.6% there is a serious demographic shift that leaves many parts of eastern and southern Europe facing a worrying future.

Take Spain for example. The nation is seeking measures to reverse the depopulation of its interior as the youth, feeling bereft any meaningful employment prospect, sought to move away from small interior villages and have headed for Spain’s larger cities or even seeking opportunities abroad.

To confront this the government is seeking to encourage entrepreneurs to create startup businesses by promising improved digital connectivity and support for industrial hubs and smaller enterprises.

On the surface one could say that as the fourth largest economy within the euro zone, boasting a GDP of €1.2 trillion ($1.3 trillion) and an annual growth rate of 1.8% there may be an interesting opportunity within Spain for hard working and talented young people. Unfortunately, this is not the case as Spain lets down its business buccaneers in two key aspects:

When it comes to the level of market attractiveness, Spain ranks only 8th in Europe for e-commerce activity and has a negligible market for software as a service (SaaS).

It is even worse when one considers the access to available capital. Data from the Banca Espana shows loans to the private sector decreased to €432.8 billion in January ($480.4 billion) from €435.5 billion ($483.4 billion) in December 2019. In mid-2012 the figure was €850 billion ($1.01 trillion). It is often said that venture capital just does not exist in Spain.

One can begin to see why it is frustratingly difficult to develop a successful startup operation that has a chance of establishing a national or even European footprint. Is it any wonder that the ambitious youth of Spain want to go abroad?

However, this is not happening in a way that might benefit other European nations as young Spanish entrepreneurs, in the main go to Latin America instead of France or Germany. Of course, the language is a driving factor but so is the similar approach to business culture.

A Problem For Europa

In the past five years, the number of young people of working age has fallen in many European regions. (Source: European Commission). This is a worry for according to the OECD, in Europe after World War Two i.e. 1945, the ratio of all people of working age to retirees was 41.9. By 1960 this had fallen to 6.5, a dramatic decline, however, the figures as of 2019 are truly worrying.

I show two sets of figures. The first is total workers per retiree in 2019 and the second is what we might call potential entrepreneurs i.e. aged 15 to 24 years.

Greece: 3.08, 0.46 … Spain: 3.57, 0.52 … Italy: 2.98, 0.44 … France: 3.11, 0.60 and in Germany, the same metric reads 2.77, 0.43.

The declining trend began in the 1950’s as there was a slow decline in the retirement age that led to declining work force participation of individuals 60+ reaching 55% in 2001 (OECD and Eurostat) before rising again to 57.4% in Q3 2019.

There also been a simultaneous decline in fertility rates accelerating the population distribution away from more workers per retiree to fewer workers. As a result, it is becoming increasingly difficult to finance pay-as-you-go (PAYG) public pension systems, where the contributions of current workers’ pay for the benefits of current pensioners.

Since 2000 many European countries have accepted that the costs attached to earlier retirement options and the longer retirement durations are causing financial instability in their social security systems.

Reforms such as increasing the retirement age have been successful in raising the work force participation of the elderly, however they have not been enough to establish financial sustainability.

Amid the concern that young working people are not only leaving small villages, but even their home country or even Europe has driven governments to discuss further reforms to their pension systems such as scrapping early retirement options, increasing age thresholds further and even looking for a link between an individual’s retirement age to their life expectancy.

What I notice with some bemusement is that for all President Macrons attempt at pension reform France is ranked by the Melbourne Mercer Global Pensions Index as having the most adequate and rewarding pension scheme in Europe.

It complacently leans on the fact it has a worker to retiree ratio of 3.11, the best in Europe and that allows France to have a low retirement age at just 62, the lowest in western Europe.

This raises the question if there is a limit to how long individuals can work? Recent research suggests that there is significant additional health capacity to work at older ages (Coile et al. 2016).

However, Coile and associates clearly state that their findings are not intended to suggest what retirement age thresholds should be.

Of greater worry for the euro zone is that the largest economy, Germany is experiencing difficulties in this aspect as well. In eastern Germany there has been a demographic shift driven by the exodus of younger people. It is alarming to note that 19 of the 20 European regions with the fewest young people are all in eastern Germany.

In the region with the oldest population in Europe, Spree-Neisse, just one in seven people are aged 15 – 24 years.

To counter this Germany is changing the law to make it easier for migrants from outside the EU to come to work, so as to plug a deepening skills gap. A move that plays into the hands of right-wing populists such as Alternative für Deutschland (AfD).