Why Italy's demographic crisis is Europe's worst and may be its future too

Italy faces the most severe demographic decline in Europe, with Scope Ratings projecting an almost 19 per cent reduction in its working-age population by 2040. This far surpasses the expected drops in countries like Germany (14 per cent) and France (2 per cent). The alarming statistic is compounded by Italy’s birth rate, which fell to a historic low of 379,000 in 2022, marking the 15th consecutive year of decline — the lowest since the country’s unification in 1861, according to a report by Reuters.

Economic impact of an ageing population

Italy’s sluggish economy, one of the slowest growing in the eurozone, is poised to face further challenges due to its shrinking workforce. The country’s 2023 growth forecast was recently revised down to 0.7 per cent and the employment rate remains the lowest in the European Union. Only 66.3 per cent of Italians between ages 20-64 are employed, compared to the EU average of 75.3 per cent, as reported by Reuters. As Italy’s labour force shrinks, particularly for women struggling to balance motherhood and work, the Bank of Italy warns that boosting female labour participation is imperative for long-term economic growth and public debt sustainability.

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A Europe-wide challenge

Italy’s demographic crisis is part of a larger European trend. The 2024 Ageing Report predicted that while the EU population will slightly increase to 453 million by 2026, it will eventually decline to 432 million by 2070. More troubling is the projected rise in the old-age dependency ratio — the number of people over 65 relative to those of working age. In 2022, the ratio was 36 per cent. By 2070, it is expected to soar to 59 per cent. This puts additional strain on the economy, as fewer working-age individuals are supporting a growing number of retirees.

Labour force participation: Will it ee enough?

Although labour force participation is expected to increase among older workers and women across Europe, the rise won’t be enough to offset the shrinking working-age population. The EU’s workforce is projected to decline by 12 per cent between 2022 and 2070, a drop of 25 million people. In some member states, the labour force may shrink by over a quarter. For Italy, this means reforms are critical, especially as the old-age dependency ratio rises sharply.

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Long-term outlook

McKinsey Global Institute’s report The Graying of Europe shows how demographic ageing will reshape the continent. By 2025, one in five Europeans will be over 65, with the median age in Italy reaching 51. As retirees surge and the working-age population declines, countries like Italy will face severe economic challenges, risking stagnation and lower living standards if adequate reforms aren’t implemented.

Italy’s path forward

With Italy’s economic future in jeopardy, upcoming reviews by ratings agencies such as S&P Global, DBRS, Fitch, Moody’s and Scope will scrutinise Rome’s medium-term fiscal plans. Labour market reforms that focus on boosting female workforce participation and addressing the demographic imbalance will be crucial to securing Italy’s long-term growth and managing its almost €3 trillion debt. Without such reforms, Italy risks deepening its economic stagnation and becoming a stark example of Europe’s demographic crisis, Reuters reported.