They will closely monitor the baby's and your health if you refuse induction but they can medically intervene if the baby's health starts to deteriorate, although i'm sure that if it got to that, the majority of mother's would be allowing them to do what was necessary to save their baby.
From what i can gather online, the placenta is only designed to support the baby for so long and is less efficient after 42 weeks so may not provide everything the baby needs. Also, the vernix protects the baby's skin from the amniotic fluid and that starts to break down in prep for the birth. My hospital authority don't induce until 42 weeks so theres gotta be some give and take.