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Oct 5, 2012 | 10:02 GMT

Germany's Demographic Challenges

Germany's Demographic Challenges
Sean Gallup/Getty Images
Summary

Germany and Europe face a shrinking, aging population. To mitigate the population decline over the coming decades, Germany will try to attract foreign labor, and to address the population aging, it will attempt to reform its social security system. Both efforts will lead to tensions within German society. As it struggles to maintain a productive labor force, Germany also will likely become a less relevant source of capital in the coming decades, potentially weakening its position in Europe. Based on their population growth, countries such as France, the United Kingdom and Turkey will likely see their positions strengthen within Europe.

Compared to 1960, around half as many children are born in Germany every year, while life expectancy has increased by a decade. The Federal Statistical Office of Germany reports that Germany's population will decrease from the current 82 million to around 65 million by 2060, assuming life expectancy increases by eight years, the birth rate stays at 1.4 children per woman and Germany experiences net immigration of 100,000 per year.

Map of Germany

Map of Germany

On top of the population decline, Germany's aging population will change the structure of the labor force. In 2010, the number of people between 20 and 65 years old was around 50 million. The Federal Statistical Office expects the population of this age group to decline to between 33 million and 36 million by 2060, when more than half of Germany's population will be older than 51. If Germany wants to keep its labor force at a constant size, the retirement age will have to be increased from 65 to 71. Currently Germany plans to gradually increase it to 67 by 2030.

Apart from saving for their own retirement, which already is a prominent trend among Germans, the younger generations will also have to carry the social security system that supports the aging population. Future German governments will face the challenges of maintaining labor productivity in an aging population, getting the public to approve changes to social security systems and ensuring cohesion between generations that can maintain the pension system.

Net Migration into Germany

Net Migration into Germany

Encouraging immigration is a promising way for Germany to counter population decline. However, even if Germany had net immigration of between 150,000 and 200,000 per year, the population would still decline to 70 million by 2060. Since reunification, Germany has seen large fluctuations in immigration. Changes in immigration laws, EU expansion and economic stability in Germany all contributed to these fluctuations. However, immigration will probably not be able to offset the consequences of low birth rates, especially considering the general population decline in Europe, which would be the origin of most of Germany's future immigrants since cultural and political barriers will limit immigration from outside Europe. Recruiting labor from outside of Europe will be especially difficult since the country does not have any cultural ties with former colonies that can attract people from outside the Continent who speak the local language, the way that France or the United Kingdom do.

Though immigration may not be able to compensate for the declining birth rate, Germany will remain a prominent destination for immigrants due to its level of development, and it will likely try to increase its attractiveness by easing entry requirements as it has done in the past. While recovering from World War II, Germany signed bilateral agreements with countries such as Italy, Spain, Greece and Turkey to attract foreign labor. Turkey's population is expected to grow over the next few decades and to even outgrow France and the United Kingdom, so Turkey will probably remain an important source of labor for Germany.

European Population Projections chart

European Population Projections

Also, workers from Russia could play a more prominent role in Germany, even though Russia faces its own demographic challenges. This would require a strategic partnership between the two countries since Moscow will likely try to strengthen its domestic industries and keep its people employed in Russia. Similarly, other European countries facing a declining labor force will likely resist the outflow of workers, potentially leading to tensions among the countries that currently allow free labor mobility within Europe.

The demographic changes will not have an immediate effect on Germany's economic position. Typically, people between 30 and 60 have the highest savings rate, and a large proportion of Germany's population is between the ages of 40 and 60. Also, Germany is currently the third-largest exporter in the world and is criticized for running persistent trade surpluses, which aggravates the trade imbalances within Europe. A combination of trade surpluses and a high savings rate has helped Germany establish its role as the most important European creditor. In 2011, only six EU countries, including Germany, had positive net international investment positions, meaning their foreign asset holdings were larger than the liabilities held by foreigners. In Europe's current debt crisis, Germany is considered the most important creditor, providing around one-third of the financial aid that the eurozone gives to struggling countries. This gives Germany important leverage in influencing the struggling countries' reform efforts.

In the long term, Germany's demographic outlook will challenge its trade surplus and position as creditor. A study by the Center for European Economic Research showed that Germany would not have a trade surplus by around 2030 due to decreased exports (resulting from lower productivity) and growing imports by retirees. Further, the study expects the saving rates to drop. Since the German population will decline, less investment will be required, but the study claims that the drop in savings will be greater than the drop in investment required, so Germany would become a capital importer by around 2030.

Japan has an aging population but is also the largest international creditor, taking the net international investment position as the benchmark. This shows that a country does not necessarily have to become a capital importer because of demographic change as long as domestic savings rates are high.

Germany currently has one of the highest household savings rates in Europe and therefore could follow in Japan's footsteps. However, it is unlikely that this savings rate will stay as high, since empirical studies show that Germans, like most people, decrease their savings rate as they age. With an overall declining and aging population it is likely that savings will decrease — especially since there will be fewer young people generating the capital to support the social security system.

This will have wider implications for Europe since Germany is currently its largest economy and an important source of capital and therefore able to exert power on the Continent. As Germany's position weakens over the coming decades, other countries with more favorable demographic trends, such as France, the United Kingdom and Turkey, will likely see their position strengthen and eventually challenge Germany's power in Europe.

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