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The World Is Getting Grayer

Globally, almost all populations are getting older. Europe’s sovereign debt crisis provides a glimpse of the economic troubles this aging will cause, economist Edward Hugh says.

Francisco Torralba, Ph.D., 06/17/2013

This article originally appeared in the June/July 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.

Edward Hugh is a Catalan economist of British extraction who lives near Barcelona. As a macroeconomist, he specializes on demographic processes, migration flows, and growth and productivity theory. Although recently he has done a lot of work on the economic troubles of the eurozone (for obvious reasons), his curiosity has taken him far away from his home continent, and he has written about the economies of India, Eastern Europe, and Japan. Hugh is a regular contributor to a number of economics blogs, including “A Fistful of Euros,” “Global Economy Matters,” and “Demography Matters.”

I spoke with Hugh on March 14 at the Morningstar Investment Conference in Vienna, where he delivered a presentation titled “What Do Aging Populations Have to Do With the Sovereign Debt Crisis?” We started our conversation with a discussion of the demographic problem of the developed world, but ended up visiting topics as diverse as how the United States’ national identity has helped it through the financial crisis and how Italy might be the greatest threat to the eurozone’s stability. Our conversation has been edited for clarity and length.

Francisco Torralba: You argue that the demographic situation in Western Europe, Japan, and the UK implies that sovereign finances are going to be in a very sticky situation within 10 to 20 years. The populations of these countries are aging rapidly and will need help funding their retirements. But fewer younger people are working and paying into the system. What will be the ramifications of these trends for sovereign finances?

Edward Hugh: What this means for sovereign finances in Europe is that there is increasing pressure on the level of sovereign debt and increasing pressure from markets on sovereign bonds simply because of political risk. It’s going to be very difficult, as years go by, for the politicians to keep convincing voters that the necessary sacrifices have to be made to help an aging population. So, we’re in a complex situation.

But if I can broaden this a bit, it’s not simply a question of the demographic change in Europe, the United States, or Japan. What we’re facing at the moment is a paradigm shift in the way markets, investors, economists, and everybody are thinking about economic processes, debts, and sovereign risk. Somebody told me about a recent pensions meeting where a presenter said, “It’s the population, stupid.”

This idea is very simple, and it’s just surprising that it went out of people’s heads for so long. In fact, traditionally, economists were always interested in population dynamics and demographic processes. But there were some famous studies in the 1970s and 1980s by the Nobel Economist Simon Kuznets, who found that size of population was not a factor in economic growth. That was the necessary catalyst that caused people to think, “Well, then, population doesn’t matter.” But Kuznets’ research was very specific: the size of a population didn’t matter. Iceland is no different from China in this sense.

Later, as we got into the 21st century, with the growth of emerging markets, people started discovering again that population structure does matter. It’s not the size; it’s the population structure, stupid.

Francisco Torralba is an Economist for Morningstar Investment Management.

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