This was the backdrop of this year's European Health Forum Gastein (EHFG) and will also provide the backdrop for upcoming Economist events on Ageing Societies and the Business of Longevity. The keynote address at EHFG was given by Nobel laureate Paul Krugman, professor of economics and distinguished scholar at The Graduate Center, City University of New York. He won the 2008 Nobel Prize in Economics. In an exclusive interview ahead of EHFG, Martin Koehring of The EIU spoke with Professor Krugman about the economic dimensions of demographic change in Europe.

Martin Koehring (MK): Professor Krugman, your keynote address at the European Health Forum Gastein is entitled "Greying baby boomers – a twofold challenge". Explain to me briefly what this two-fold challenge entails?

Paul Krugman (PK): We are going to have a much larger ratio of retirees to working-age adults than we had in the past. European countries, and even the US, have large welfare states. Although children and the elderly are both dependent, the elderly are much more expensive. So that’s a fiscal problem: how do we pay for the basics of our societies with a smaller fraction of the population actually working?

But it turns out that that’s not the only problem—and not even the most pressing problem. The second issue is maintaining full employment, keeping our economies growing in the face of what is now looking more and more like weak demand, for which the most likely core explanation is demography. It’s very difficult to get a lot of investment when the working-age population is not growing. That’s been the story of Japan since the 1990s, but is now the story for the EU as well. So we have both a supply-side and a demand-side problem.

MK: So there will be more older people, more dependent people, more people with multiple age-related diseases. These trends are bound to pose major threats to the sustainability of social and healthcare services. In your view, how can health systems, especially in Europe, maintain or even increase access to health and social services against this difficult backdrop?

PK: There are at least three things I would like to talk about. One is cost control, which doesn’t necessarily mean cutbacks, but means looking for the cheapest ways to provide the essentials. Even within Europe there’s a wide range in terms of the costs of the different healthcare systems, with Switzerland at the high end and the UK at the low end. There are choices to be made to make healthcare costs somewhat lower.

Second, it’s really crucial to provide something like full employment. That means there’s more output to be taxed. A policy of economic stimulus, to get out of this sluggish-growth environment we are in, is another important thing.

And the third thing is other pieces of the welfare state. All advanced countries are pretty similar in levels of productivity, but make surprisingly different choices about how they structure their social programmes. Quite a few European countries have made what look like major errors, not so much in healthcare as in retirement policy—too strong incentives for early retirement. I often do a US vs France comparison. Whereas the French do, by American standards, miraculously well in healthcare, providing excellent quality and far lower costs than we do, the US does a far better job on retirement: a clean, simple retirement system that keeps people in the labour force much, much longer than they are in France.  So by moving to better-structured incentives in retirement systems you would have bigger economies and also spend less on those systems than you would otherwise; this would free up resources for healthcare.

MK: You already mentioned a couple of comparisons between countries. If you look at the financial sustainability of health and welfare systems in Europe and the implications for health outcomes, which countries are best prepared to cope with the challenges, and why?

PK: Health outcomes are remarkably similar, but in what we spend there are national differences. Broadly speaking, the more centralised the system is, the cheaper it is. Fully public systems like the NHS [the UK’s National Health Service], where the providers of healthcare are themselves government employees, do seem to be significantly cheaper than decentralised systems where you have some form of regulated competition between independent groups. The system that looks most like the American system would be Switzerland, which has notably higher health costs than other European systems such as the UK’s.

In addition to the difference in systems you have the difference in economic prospects, including demography.  And here the basic story is that Southern Europe has a really big problem because of a poor demographic outlook. Italy is probably the worst because it has a combination of almost Japanese-level demographics and the collapse of productivity growth since around 2000. This makes it very difficult to see how the Italian system can be sustained. Smaller countries have a real problem with emigration. Portugal for example has traditionally high levels of mobility, and people are leaving. Who is going to pay for the system with people moving away to find jobs?

Meanwhile, Germany is, in the long run, not as sustainable as you may think. It has pretty poor demography. France is in better shape than people might think, in part because it had this pro-natalist policy, which means that its demography actually looks a lot better.

Image by European Health Forum Gastein

MK: You mentioned a couple of economic challenges that countries like Italy and Portugal face. Given this fragile economic situation in many European countries, do you think the cost of healthcare should increasingly fall on the shoulders of individuals if their governments do not have the means to offer a fully comprehensive public healthcare system?

PK: I see no evidence that this makes sense. Out-of-pocket expenditure on healthcare is fundamentally a non-starter. Healthcare has to be paid for by some kind of insurance, which is going to be either private or public insurance. And we have abundant evidence that private insurance markets for healthcare work really badly, at high costs, and are poor at policing health costs. Given that people are not really going to pay out of pocket, what is really the advantage of private insurance over public insurance, especially as public insurance is by all evidence much more cost-effective? The US still has a relatively privatised system, where individuals are responsible for getting their own health insurance, albeit less so than a few years ago, and we also have health expenditure per capita that is about twice as large as the rest of the OECD. That does not suggest that pushing more of the burden onto individuals is a route we really want to go down.

MK: So far we have talked about the challenges that population ageing and multimorbidity pose for the European economy. But what about the opportunities arising from demographic change? For example, the so-called "silver economy"—that is the growing public and consumer expenditure related to the rights, needs and demands of the (growing) population aged over 50. According to the European Commission, Europeans over 65 already have a spending capacity of over €3trn. Older people are also increasingly economically active. Professor Krugman, to what extent can the silver economy help to counteract the macroeconomic challenges arising from population ageing?

PK: We are clearly going to be needing a lot of people in various kinds of services, health and otherwise, serving the older population. We already moved from a world where the typical worker was a factory worker to a world where the typical workers sits in an office. We may be heading for a world where the typical worker is a nurse. Nothing wrong with that; that can be a major part of the economy. The possibilities of continuing to be productive later in life will surely expand. In an information economy, in an economy where physical presence is less essential, there surely got to be room for extending the years of productive work life if we get the incentives right. A couple of years ago the US was pretty close to the point where value added in healthcare was about to overtake value added in manufacturing. So this becomes a different kind of economy, but equally valid. And maybe there are possibilities for a lot of improvements in productivity and quality of services for things that are geared towards an older population. There is nothing wrong with the notion that we can become an economy that caters in important respects for the needs and also the potential of people over 65.

MK: And what about the other element of demographic change: migration? In the run-up to the Brexit vote here in the UK some Leave campaigners tried to argue that immigration was bad for the UK health system because there would be growing strains on health and social services. But actually 20% of the NHS workforce here in Britain is non-British, including 30% of doctors. And also data from The Migration Observatory show that immigrants here have a positive net fiscal impact [the difference between taxes and other contributions migrants make to public finances and costs of public benefits and services they receive]. What is your view on the costs and benefits of migration for the future of European health systems, Professor Krugman?

PK: Migrants, by and large, tend to be working age. We are not talking about hoards of retirees descending on Britain and demanding benefits. We are talking mostly about working-age people who are cheap in terms of the actual healthcare they require. Healthcare, at least at the moment, requires a fair amount of labour without the need for a lot of formal education. So you require workers that are willing to work for relatively low wages. And on the other side, you have very highly trained people. To the extent that migration is bringing in both doctors and people to do all of the chores that are required in a hospital, that’s good for healthcare.

The problems of the NHS in Britain never had anything to do with migration, but were all really about the Cameron government’s austerity fixation. But in order to sell that they were blaming migration—and the public believed it, so the result was Brexit. There are issues with migration, but they are really not mostly economic. The concerns about migration have to do with things like cultural identity and so on. But I think in terms of the economics, and certainly healthcare and generally in terms of an ageing population, working-age people coming into your country is one great solution to the challenges of taking care of your own elderly as they grow in number.

MK: What can governments do now to pave the way for alleviating some of the pressure we discussed and reaping the benefits of the opportunities we discussed, so that the systems will be able to cope in 10-20 years' time?

PK: Right now what we need is a large programme of public investment in Europe, especially in Germany, that would help the European economy to get out of its slump. The infrastructure investment could, among other things, include things that could help to maintain productivity of workers as they get older. You have a European economy that is both seriously misaligned and seriously depressed relative to its potential. The solution is to spend as productively as you can. That won’t solve all the problems of healthcare, but would at least provide an environment in which we can better tackle the challenges.