Europe’s Newest Problem: Getting Old

by Alyssa Oursler | January 23, 2013 8:25 am

It might be a new year, but it sure isn’t a new Europe yet.

Just over a week ago, InvestorPlace editor Jeff Reeves reminded us that[1], while we have plenty of other things to worry about, we shouldn’t leave good ol’ Europe off our radars. The eurozone might not have crumbled last year, but the country still faces debt woes, unrest and a recession.

Some numbers that prove the trouble is far from over: Negative growth forecasts and not-so-hot manufacturing data, to name a few.

In coming years, though, we aren’t just facing some of the same old problems across the pond, but a new old problem. Namely, Europe is getting …. well, old.

I’ve touched on the issue of demographics a couple times in the last few weeks, first pointing to it as a potential growth factor for emerging market Mexico[2], then as a bad sign for the slowing growth market of China[3]. For Europe, things don’t look so good either; here, it’s the icing on top of what’s already one big mess.


The accompanying chart shows the dependency ratio (dependent vs. working population) of six countries in the European Union: France, Germany, Italy, Ireland, Greece and Spain. (Countries with the oldest populations are expected to be found within the EU[4].)

EuropeGraph Europe's Newest Problem: Getting Old
Click to Enlarge

As you can see, the proportion of the population that is young or elderly is on its way up for all countries — and has been, in some cases, for a couple decades.

While birth rates remain low in EU nations, the region’s once-large working population has been aging. In Germany — often thought of as the EU’s saving grace — the dependency ratio bottomed out in 1985 at 44. That means a whopping 66% of the country was working age at that point and now, a large chunk of that group is getting older and won’t be working anymore.

As a result, Germany’s dependency ratio (red) has increased by 20% since then. By 2025, it’s expected to increase another 19% and, for the decade after that, it’s expected to climb even more rapidly. By 2035, the proportion of Germany’s population that is not working is expected to be nearly double what it was a half-century before.

Things are the worst in the near- and short-term for France (dark blue); its dependency ratio already is 60 and is expected to remain the highest until 2025, when Germany’s problem picks up the pace. Spain (orange) and Italy (green) also have some steep slopes to keep an eye on down the road, with Spain projected to have the highest peak after several decades.

These are just estimates — and there are years for changes to be made. The Wall Street Journal recently noted[5], for example, that many countries already are working to ease the burden. Still, the European Commission projected that age-related spending would reach 25% of European Union gross domestic product by 2033, but instead reached it in 2010 because of the recession.

This a huge red flag considering that, as was the case with China, a problem for Europe is more than just a problem for Europe. Jeff pointed out the weakness for retailers[6], but it’s broader than that — 10% of S&P companies’ sales come from Europe[7], with plenty of them even more exposed. General Electric (NYSE:GE[8]) gets better than a quarter of revenue from across the pond, while Coca-Cola (NYSE:KO[9]) isn’t far behind; McDonald’s (NYSE:MCD[10]) and Starbucks (NASDAQ:SBUX[11]) are plenty exposed, too.

An aging population might be the last thing Europe — and the companies depending on the region — needs right now. But like it or not, that’s what’s coming.

Investors should take note.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Jeff Reeves reminded us that: http://slant.investorplace.com/2013/01/europe-the-monster-still-lurking-under-the-bed/
  2. for emerging market Mexico: http://investorplace.com/2013/01/play-this-demographic-dividend-long-term/
  3. slowing growth market of China: http://investorplace.com/2013/01/could-demographics-be-a-dagger-to-china/
  4. expected to be found within the EU: http://www.oeaw.ac.at/vid/download/edrp_2_09.pdf
  5. The Wall Street Journal recently noted: http://online.wsj.com/article/SB10001424127887323301104578255653798388268.html?mod=WSJ_Heard_LEFTTopNews
  6. pointed out the weakness for retailers: http://bigstory.ap.org/article/christmas-comes-slowly-austerity-hit-europe
  7. 10% of S&P companies’ sales come from Europe: http://www.forbes.com/pictures/eejk45kmil/biggest-sp-500-companies-with-european-exposure-and-weak-balance-sheets/#gallerycontent
  8. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  9. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  10. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  11. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX

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