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Falling birth rate to strain social contract – Makhlouf

Ageing populations, together with weak productivity growth, raise questions about Europe’s long-term outlook, Central Bank Governor Gabriel Makhlouf has said.

Speaking at the British Society of Professional Economists annual dinner (25 November), Makhlouf said that Europe was at a pivotal moment in its economic development, predicting added strains upon the social contract whereby upcoming generations support their elders.

Resilience

The need to build economic resilience to both short-term shocks and longer-term transitions was self-evident, he added, and productivity was at the heart of building that resilience. 

Makhlouf pointed to recent Mario Draghi and Enrico Letta reports that presented a menu of policy options to help boost competitiveness, and said that the European Commission had taken note of the pointers.

“On demographics, change is coming, but we should also look beyond current thinking on dependency ratios that generally assume ‘retirement’ at 65.

“Increased longevity as a result of healthier lifestyles presents opportunities for our citizens to have longer working lives, should they so choose,” he said. 

“Policies to incentivise working longer, alongside promotion of life-long learning, need to be part of our thinking,” he added.

Rapid transition

Governor Makhlouf said that population structures in many countries would go through a very rapid transition phase, culminating in a far larger retired and elderly population.  

“A shrinking working-age population is a headwind for growth. To put it in human terms, the social contract that exists between generations – whereby current workers support retired individuals in the expectation of similar support when they themselves retire – will become increasingly strained.” 

This would put further pressure on the ability of governments to fund spending commitments for older population groups, he said.

Greater longevity must incentivise education and training throughout working lives, rather than the common assumption that formal education and training largely ended in the 20s, the Central Bank governor added.

The coming demographic challenge must not simply find alternative sources of growth, but also re-assess ‘retirement’ and human capital accumulation over the life-cycle, he said.

The structural adjustment that would be required could not be avoided, he said, and it was high time to enact reforms to spark European productivity growth.

“We require substantial co-ordination of all our policy instruments. Monetary policy cannot be the only show in town. There remain structural impediments to the smooth intermediation of funds to innovative projects.

“The long-touted Capital Markets Union – now rebranded as the Savings and Investment Union – is a prime example. Even in the presence of accommodative monetary policy, it is not clear that financing would flow to the most productive projects. Several cross-border barriers remain,” he said.

Policies that sought to boost productivity and innovation must be complemented by completion of the EU single market, and removal of remaining barriers to trade in goods and services, he added.

The digital euro would support a deeper and stronger single market, fostering cross-border relationships that would boost competitiveness, he said.

Private providers and new entrants access the digital euro infrastructure will enable innovation in payments and consumer financial services.

2% inflation target

“Finally, on the always topical issue of monetary policy, recent data make me increasingly confident of reaching our 2% inflation target during 2025, but the stickiness of services inflation and elevated wage growth leave some room for caution,” he said. 

“Services inflation has averaged around 4% this year in the euro area.  With goods inflation around its long-term average of 0.5% to 1%, I want to see services inflation closer to 3% in order to be more in line with our target.”

He commented that there were some signs of labour-market loosening, which would help to ease upward wage pressures.

Forward-looking surveys and wage trackers also point to a slowing of wage growth next year.

Volatile

Measures of economic activity had been volatile, he commented, and third-quarter GDP was towards the top-end of the range in Central Bank September projections. 

Against this, the November PMI was weak, along with data on new orders.

“Weaker growth is a downside risk to inflation, and we will know more after the updated Eurosystem staff projections in December.  It is clear that policy remains restrictive and, shocks aside, rates are on a downward trajectory,” Makhlouf concluded