But as health care and pension expenditures rise, the average savings rates of the aging population will fall. This will affect capital formation, change the nature of the real estate market, and shift retail preferences for commodities ranging from food to cars. Despite the tightening labor market, many younger people may find their choice of jobs limited as some companies prefer to relocate their principal operations to areas with plentiful and cheap labor. Most new companies are started by individuals 25–44 years of age, and the shrinking share of this cohort will also mean less entrepreneurship and reduced innovation.
In addition to these consequences, which aging Europe will share with low fertility societies in other parts of the world, the continent faces a specific problem whose resolution may crucially determine its economic and political future. As Demeny (2003) has noted, the process of moving toward a smaller and older population could be contemplated with equanimity only if Europe were an island, but instead “it has neighbors that follow their own peculiar demographic logic” (4).
This neighborhood—Demeny calls it the European Union’s southern hinterland— includes 29 states (counting Palestine and Western Sahara as separate entities) between India’s western border and the Atlantic Ocean, all exclusively or predominantly Muslim.
By 2050, EU-25 is projected to have 449 million people (after losing some 10 million from the present level and an assumed net immigration of more than 35 million, 2005–2050), half of them older than 50 years. The population of its southern hinterland is projected to reach about 1.25 billion by 2050. Immigration to the continent from this hinterland is already the greatest in more than 1,000 years.