One way of remedying this situation would be to boost productivity in order to maintain sustainable economic growth. New technologies, such as artificial intelligence (AI), have the potential to play a key role here, but their adoption will have to be rapid and businesses will have to restructure to make the most of them.

A falling fertility rate in Europe

According to the United Nations Population Fund, the number of births per woman worldwide has fallen progressively over the last 75 years, from 5 in 1950 to 2.3 in 2021, and is expected to reach 2.1 by 2050, which corresponds to the replacement or fertility rate needed to keep the population stable. The fertility rate is already below the replacement rate in many European countries. The United Nations anticipates a 7% contraction in the European population between 2022 and 2050, which will have a significant impact on growth. Luxembourg was one of the few countries with a fertility rate below the replacement level as early as 1950, when the United Nations began collecting data. Although the fertility rate has risen slightly in the years since, it is still below the replacement rate.

A risk to growth

Is a demographic decline in Europe really such a problem? It could prove difficult for European workers to maintain the standard of living to which they are accustomed, and for governments to achieve the growth targets they have set themselves. Without significant changes, longer life expectancy and an ageing population will call into question the economic viability of current income and pension models. Economic growth is directly linked to the size of the working population. Any reduction in the workforce will have an impact on growth, as fewer workers will contribute to the production of goods and services.

To maintain the current situation, one solution would obviously be to encourage births. Some countries, such as Norway, which have invested heavily in family policies, are still finding it difficult to raise their fertility rates significantly. And even if European countries managed to persuade couples to have more children, it would be at least 20 years before they entered the labour market.

Another solution would be to make workers work longer. In Japan, for example, the employment rate for people aged 65 or over reached 25.2% in 2022, compared with 18.6% in the United States and 10.9% in the United Kingdom. However, the adoption of such a measure in European countries is not well received. In France, for example, plans to raise the retirement age to 64 led to fierce protests in 2022 and to people taking to the streets.

Increasing productivity to compensate in part for lost production

To deal with the threat to growth posed by the shrinking working population, Europe needs to reverse the downward trend in its productivity. According to Eurostat, annual productivity growth in the European Union has slowed from 1.5% between 1999 and 2008 to -0.6% in 2023. The main reasons for this decline are a lack of investment and a slowdown in the spread of technology. GDP per capita depends directly on the number of hours worked and the productivity of that work. So if the work is more productive, the workforce may be less important.

AI could provide a solution, as this technology has the potential to boost productivity, in the same way as the Internet did in the 1990s. According to the World Economic Forum, thanks to the internet, average annual productivity growth in non-farm businesses in the United States reached 2.5% between 1991 and 2007, compared with 1.5% over the previous 15 years. For the time being, however, the concrete results of AI in terms of productivity have yet to be seen. In any case, companies will have to reinvent themselves to get their employees to work with AI.

Productivity gains are not a magic bullet and would have to be considerable to compensate on their own for the loss of output resulting from a shrinking workforce. It would be preferable for them to be accompanied by longer working lives and higher fertility rates in order to defuse the demographic time bomb. In this context, AI and new technologies should not be seen as a risk, but rather as a breath of fresh air for the European social security model.

Inevitable change

Europe is at a decisive turning point, facing the twin challenges of an ageing population and falling productivity. Innovation and adaptation are more imperative than ever. In the future, the adoption of new technologies such as artificial intelligence will be decisive, but it will require a collective commitment on the part of businesses, governments and individuals. At the same time, there are lessons to be learned from countries such as Japan, where the increased participation of older people in the labour market has benefited the economy. By adopting such practices and actively addressing the factors contributing to lower productivity, Europe's workforce can continue to strengthen, despite shrinking in size.

Lionel De Broux and Johanna Lindberg are respectively chief investment officer and macro and investment strategy communicator at Banque Internationale à Luxembourg.

This article was originally published in .