Even before the advent of the Covid-19 pandemic, the world had entered a strange phase, where the demographic pyramid after many generations was being reversed, as the world is getting older. The effects of this aging were first seen in Japan (the first post-development economy) and then in the E.U. and China which are the export economies. The workforce of the E.U. it is specialized and has an average age of 47 years, which means that its consumption needs are low.
For this reason anything extra produced must be exported. As we approach 2030, the demographics will continue to reverse. The E.U. and China will also become post-development economies. The United States of America and Mexico will be the only economies that can rely on young people to increase consumption. At this point it is important to state a simple formula regarding economic growth: GDP growth equals population growth and productivity growth.
For five generations this has been the case for some of the strongest economies in the EU, where you are experiencing an increase in the birthrate. More specifically, in the 1970s, with the negative birth rate soaring, the population decline became irreversible. Fewer births in the 1970s correspond to a reduced labor force today, as well as a reduced number of taxpayers in their countries. And as if that wasn’t enough, a mass retirement of the older population is expected soon which may lead to further economic contraction of the EU. This is something that businesses are experiencing today and are struggling to find staff.
This demographic collapse has direct implications for the competitiveness of the whole of Europe. If we look, for example, at the population structure of the E.U. today, we will see that it consists mainly of experienced workers with long service, who will soon be retired. They may be productive, but at the same time there are no European consumers to absorb their production. So the European Union turned into an exporting union as its economy relied on exporting its surplus production to other countries.
So in recent years, with the covid 19 Pandemic affecting exports and demographics not allowing for consumption, the development of the E.U. reached a dead end. At the same time, it was difficult to achieve an increase in aggregate demand, since, as with negative interest rates, with a declining population, traditional economic theories are difficult to apply.
Aggregate demand = consumption + investment + government spending + (exports-imports)
Based on the above, our development model is problematic as with the decrease in exports, total demand is now mainly based on consumption and investments. The first countries to fall victim to this inverted pyramid have historically been able to escape by relying on exports, most notably Japan which was right next to China, the biggest growth story of the last half century, but not all countries can do this at the same time.
Although we have now returned to positive interest rates, the problem has not been solved. Negative interest rates, which we have been using for some time, aim to increase consumption in the economy but few can afford it and even fewer are new people starting families. In addition, they led to an increase in investments in non-productive assets e.g. properties such as, for example, the thousands of empty houses across Europe.
Looking ahead the solution cannot be to produce more and more cars, houses and televisions and try to stimulate demand where it does not exist. Instead we should focus on producing better outcomes for consumers through innovation and efficiency. And to do this we should keep in mind:
- the size of the workforce,
- the length and complexity of the supply chain;
- the possibility of governmental support,
- and working hours per week.
Innovative and sustainable solutions that create quality of life are the only way to move to the next phase.
