The effects of education and aging in an OLG model: long-run growth in France, Germany and Italy

The purpose of the paper is to provide a long-run analysis up to 2050 of the interplay between financial integration, diverging labour productivity, and the ageing process in the larger European countries. We use the Prometeia overlapping generation model for Italy, Germany, and France which are modelled as open economies in capital markets. Our projections provide a core-periphery structure in which Germany, the most abundant human capital country, shows the highest but a decreasing growth rate due to pronounced aging, and finances capital accumulation processes in France and Italy. We find that financial trends are reversed in the late 2010s when Italy begins to over-save as the gap in human capital endowment, and then in productivity, becomes larger compared to the other two countries. This leads to a reduction in physical capital accumulation and innovation processes in Italy. We employ fiscal experiments to correct the long-run divergent behaviour of countries in order to get a more homogeneous growth rate path among countries. We also measure the impact of taxation on net-wealth in Italy, and evaluate the internal and spillover effects.