Challenges for Europe in the World in 2030 Deliverable 4.3 WP#4 Global Development, Demography and Migration Accademia Lincei, Rome, ITALY AUGUR

Introduction Previous deliverables focused on inclusion of demographic variables into CAM model In this deliverable we focus on concept of Economic Dependency This includes not only demographic variables but also employment and activity We test the impact of an employment-focused fiscal expansion for each European bloc in 2030

Conventional Approach to Ageing Increasing and unsustainable ‘burden’ to society of ageing population Reduce pensioner income; increase contributions from wages; reduce other social welfare spending; increase retirement age Implicit assumption that the elderly are ‘inactive’ and the working-age population are ‘active’.

Changes in working-age population…

leads to rising demographic dependency

Dependency Reconsidered Need to include employment and activity rates in our measure of dependency. While demographic dependency rising, employment-related dependency is sensitive to policy changes. Potential for increases in employment to offset changes in population structure. Levels of employment among the young are very low, especially in South and East Europe

Youth Employment and Activity

Economic Dependency Ratio

EDR in CAM Blocs, 2009 CAM European Bloc Demographic Dependency Ratio Working-Age Dependency Ratio Economic Dependency Ratio Central East North South UK

SCENARIO PROJECTIONS: ECONOMIC DEPENDENCY RATIO Development, Demography and Migration

EDR in Europe

EDR in Japan, China, USA

EDR in Central Europe

EDR South Europe

REGIONAL FOCUS: WEST ASIA AND NORTH AFRICA Development, Demography and Migration

EDR North Africa and West Asia

Youth Unemployment in WA, NA Unemployment Rate Activity Rate Youth Unemployment and Inactivity Ratio Middle East Bahrain32%45%68% Iran, Islamic Republic of24%31%76% Iraq17%29%83% Jordan19%27%81% Kuwait31%35%69% Lebanon23%29%77% Oman32%40%68% Saudi Arabia11%16%89% Syrian Arab Republic24%30%76% Turkey32%40%68% Yemen26%37%74% North Africa Algeria22%28%78% Egypt25%34%75% Libyan Arab Jamahiriya29%37%71% Morocco30%36%70% Sudan27%35%73% Tunisia23%33%77%

AN EMPLOYMENT-FOCUSED ECONOMIC RECOVERY FOR EUROPE AN INITIAL POLICY SCENARIO

Scenario Characteristics  We construct a scenario that programs changes in macroeconomic policies that can stimulate an employment-focused economic recovery in Europe (as well as in the US);  We compare this scenario’s results with those of a baseline scenario (note: we are using the past set of scenarios applicable in Fall 2011)  We are in the process of comparing this scenario to AUGUR’s three European sub-variant scenarios

Specific Policy Assumptions  Main Policy Changes: An increase in government expenditures These expenditures are programmed to modestly stimulate private investment (ratio of 1 to 0.2) A modest stimulus is imparted to bank lending to reinforce the desired increased in private investment Note: public expenditures and private investment are marshalled explicitly to target an increase in the employment rate, not economic growth alone

Employment Targets  The Employment Target is based on a specific ratio of the number of employed to the number of people of working age  Important Point: we calibrate the size of the fiscal stimulus needed to achieve a desirable, but also feasible, level of this ratio for each European bloc and the US  The Specified Targets: North Europe, West Europe & the UK: % South Europe: 62% East Europe: 60% The US: 72%  Note the lower, more ‘realistic’, targets for South and East Europe

Supportive Policies: Government Revenue  In order to contain future government deficits, we boost government revenue in conjunction with the projected increases in expenditures (based on reverting to past historical trends, before the crisis)  Targeted Increases in Government Revenue (government income as a ratio to GDP): West Europe and the UK: 25% South Europe: 23% East Europe: 21% The US: 20%

Supportive Policies: The Real Exchange Rate  In order to contain the possible negative effects of the fiscal stimulus on each bloc’s current account, we set targets for each bloc’s Real Exchange Rate (calibrated to offset the projected effects on its current account)  We set a ceiling ratio of 1 on the real exchange rate of the US dollar as a global reference point  We assume a break-up of the Eurozone since the targets for the real exchange rate for the two major blocs differ: West Europe: 1.3 (appreciation) South Europe: 0.75 (depreciation)  Targets outside the Eurozone also vary: North Europe: 1.7 (large appreciation) East Europe: 0.55 (large depreciation) UK: 0.9

Employment Growth Scenario: Results Summary  Core results: Economic growth is more rapid across the board compared to that of the baseline scenario Growth of government expenditure is at first rapid but it markedly slows down in most blocs after 2015 Government deficits are eliminated or significantly improved Government net income as a ratio to GDP is increased in the majority of the blocs Government debt falls dramatically in all blocs Domestic price inflation remains relatively subdued across the blocs despite the fiscal stimulus Most importantly, employment markedly rises across the blocs

Economic Growth Average Growth Rate of GDP BlocBloc Code Employment Scenario ( ) Baseline Scenario ( ) North Europeeun West Europeeuw UKuk South Europeeus East Europeeue USAus Average growth jumps from 0.8% per year to 3.5% in South Europe, and from 2.1% to 5.5% in East Europe Moderate increases in North Europe, the UK and the US Modest increase in West Europe

Employment Rate (%) Employment Scenario: Employment Rate (%) Bloc Bloc code North EuropeEun West EuropeEuw UKuk South Europeeus East Europeeue USus  Employment Rate results: In some blocs the employment outcomes by 2030 exceed our targets Migration contributed to these increases in North Europe, UK, and South Europe Workers return to East Europe, a region that had suffered from marked out- migration after the mid-1980s Employment Scenario: Net Migration as % of Employment Bloc Bloc Code North Europeeun West Europeeuw UKuk South Europeeus East Europeeue USAus

Net Lending (% of GDP) Net Lending converges towards zero in all blocs Although this ratio dramatically improves in blocs such as South Europe and the US, it remains negative Government deficits are improved due to the eventual slowdown in government expenditure after an initial increase and an improvement in government net income. (Also helping is the acceleration in the growth of GDP, the numerator of the ratio) Employment Scenario: Government Net Lending as % of GDP Bloc Bloc Code North Europeeun West Europeeuw UKuk South Europeeus East Europeeue USAus

Government Debt (% of GDP) falls dramatically in all blocs. South Europe’s debt burden is also reduced but not as substantially as one would hope. In these circumstances, some debt restructuring or relief is desirable (as is happening now) Falling Debt: Two Examples 132% 88% 80% 50%

The current accounts of S. Europe, E. Europe and UK all progressively improve But the US continues to slide into deeper current-account deficits Exchange-Rate Impact: 4 Blocs

Domestic Price Inflation Despite the fiscal stimulus, domestic price inflation remains subdued across the European blocs and the USA (with the highest rates recorded in the UK and East Europe) Employment Growth Scenario: Domestic Prices (Expenditure Deflator) annual % change Bloc Bloc Code North Europeeun West Europeeuw UKuk South Europeeus East Europeeue USAus

 We will be re-running this scenario on the basis of the modified baseline (for Deliverable 4.1) and including the Economic Dependency Ratio as an outcome  We will compare our results to those for the three European Sub-Variant Scenarios: EU Breakup, Federal Europe and Multi-Speed Europe (in some of which employment rates are also targeted)  In the latter two scenarios, regionalisation is the underlying context so their results naturally differ from ours  We will focus more in the future on such factors as youth unemployment and net migration flows  We will also devote more attention to the policy implications of our findings, addressing the current debate on growth strategies and employment policies for Europe Future Research and Modelling