Italy’s demographic collapse is a major challenge for the entire European project

Europe’s fastest ageing country is at risk of a debt crisis similar to Greece’s - and potentially far more damaging.

via Sterling Lanier/ Unsplash

Back in 2005, The Economist labeled Italy the “sick man of Europe,” citing its stagnant economy and failure to implement reforms. Things have changed in the 20 years since then, with the magazine deciding that first the UK and then Germany were more deserving of the title.

Yet, while Italy no longer holds the dubious honor of being Europe’s "sickest" economy, it is the continent’s oldest. And that presents a new and growing threat - not just to Italy itself, but to the European Union as a whole.

For decades, Italy has faced a demographic double hit.

On the one hand, birth rates have been extremely low, leading to a steady decline in the number of young people and hollowing out the population from the bottom up. Last year, for instance, there were fewer than six births for every ten deaths.

At the same time, life expectancy has continued to rise, resulting in a growing elderly population as more people live longer. Together, these trends mean that Italy’s population is not only shrinking, but also ageing rapidly.

If current trends continue, by 2050, more than one-third of Italy’s population will be over 65 - compared to less than 20% in the UK today. At the same time, the total population is expected to fall by 7.5 million people, roughly equal to the combined populations of Scotland and Northern Ireland.

These trends could have severe economic consequences. A shrinking, ageing population makes it harder to grow the economy: fewer workers means less gets made, while fewer consumers means weaker demand.

As the population ages, fewer workers must support more retirees. Currently, there are 2.5 working-age adults for every senior citizen in Italy. By 2050, that number will drop to just 1.4. Since not all working-age adults are actually employed, this means each worker will have to bear a much heavier financial burden - essentially paying for the pension, healthcare, and social needs of one retiree. You don’t need to be an economist to know that this is simply not sustainable.

Italy’s precarious demographic outlook is made worse by its existing debt problem. Public debt stands at 135% of GDP - more than double Germany’s level - and it is still rising, as successive governments are unable to balance the budget.

Financial markets are already concerned, with investors demanding significantly higher interest rates to lend money to Italy compared to more stable EU economies like Germany and the Netherlands.

If market confidence collapses, Italy could face a debt crisis similar to Greece’s - only far more damaging. Italy’s economy is many times larger than Greece’s, and a crisis there could shake the entire Eurozone, triggering a continent-wide recession.

There’s another dimension to this looming crisis. With Europe increasingly needing to provide for its own security, especially amid rising threats from Russia and waning American involvement, major countries like Italy would be expected to step up and fill the gap.

But that may be unrealistic. Last year, Italy spent less than 1.5% of its GDP on defence, falling well short of NATO’s previous 2% target. Given its fiscal and demographic strains (and its geographic distance from Russia), it’s unlikely to be able to significantly increase its military spending in future.

Despite the promises at the recent NATO summit, when faced with a choice between guns and butter, Italy’s government will most likely choose the latter.

This could create a major rift within the EU and whatever eventually remains of NATO, undermining collective security and weakening Europe’s cohesion. Eastern member states, which feel the threat from Russia more acutely, may grow frustrated with Italy not pulling its weight and act accordingly. Already we are seeing elements of this, with Poland looking to prioritise the “Weimar Triangle” with France and Germany as a key security alliance, effectively bypassing Rome.

Italy’s demographic collapse and its corresponding mounting debt and limited military spending pose a serious challenge - not just for Italians, but for the entire European project. While it may no longer be the "sick man of Europe", Italy’s deeper structural issues could soon leave the EU facing a crisis that’s impossible to ignore.