Poor demographics, poor productivity could be the new normal for Europe.

The debate about Europe’s economic problems tends to focus heavily on the need for countries such as Italy and Greece to introduce “structural reforms” to boost growth. However, Europe’s slump ranges far wider than southern European countries with a reputation for inefficiency and lax fiscal policy.

The Financial Times filed an interesting report on Finland last week. Finland’s governments were among the more enthusiastic in recent years in chastising high-debt countries about the need to cut deficits and focus on structural reforms. But things aren’t going so well in Finland these days. GDP has contracted for three years in a row (see page 28 of the European Commission’s statistical release).

The FT are a bit confused by these developments, admitting “the prescription for the current crisis is not as clear” as it was during Finland’s early-90s post-Soviet crash.

The truth, however, is that Finland’s slump isn’t so complicated. In fact, it’s a simple story that you can expect to see played out in many of Europe’s countries, most notably Germany, in the coming decades. Two factors are driving Finland’s slump: Poor demographics and poor productivity growth.

Demographics

The first key element of Finland’s slump is identified by the FT: Finland is ageing rapidly. As a result, the fraction of the country’s population aged in the usual “working age” bracket of 15 to 64 has been falling. This has meant there has been no growth in employment over the past four years despite a slight increase in the participation rate of those aged between 15 and 64 and limited changes in the unemployment rate over this period.

Eurostat project this demographic pattern is set to continue over the next decade. Even if the unemployment rate falls in Finland in the coming years, there is unlikely to be any growth in employment in the next decade. In this sense, as I have explored in a paper co-authored with Kieran McQuinn, Finland is leading the way for other countries.

Most notably, the fraction of Germany’s population aged 15 to 64 is set to plummet in the coming decade, falling below Finland’s by 2030 and then declining further. The pattern in the Euro Area 12 group of countries (i.e. the original 11 plus Greece) is relatively similar, also falling below Finland’s level in the 2030s. See below for Eurostat’s forecasts.