Izabella Kaminska wrote a great piece on FT Alphaville today about the Japanification of Europe. That is, the appearance of a secular stagnation and deflationary trend in the European economy that closely resembles the issues Japan has faced over the last 20 years. You should go read her post for more details, but I did want to add some points that I think are important:
- While Japan has been suffering from a de-leveraging trend over the last 20 years, there has also been an incredibly powerful structural headwind – demographics. Population decline is a structural headwind that puts huge inherent downward pressure on any economy. To put this in perspective, here is the general trend in demographics between the USA and Japan:
- Europe’s Japanification is also resulting from a structural headwind, but it’s a bit different. Instead of a daunting demographic trend, Europe is suffering from a structural monetary issue. As I’ve explained previously, Europe’s countries are all users of the same currency, but lack a central government system. So they’re a lot like the states in the USA. Therefore, there’s no trade rebalancing between the nations because they all use the same currency. The difference is that the states in the USA don’t suffer from periodic debt crises resulting from trade imbalances because the US government acts as a massive rebalancer via the redistributive design of the system. In other words, all states pay into a federal system and the states that resemble Europe’s periphery are the ones who tend to get more federal aid. This helps bolster budget issues and avoid defaults. This system doesn’t exist in Europe so they are essentially relying on alternative measures to make things work in the meantime (read, ECB).
So, we see two cases of secular stagnation resulting from huge structural trends. Of course, Japan’s fix isn’t political, but demographic which makes it that much more daunting. And sadly, Europe can overcome its structural headwind with policy fixes, but refuses to do so due to the inability to accept the reality that full European unity isn’t a matter of if, but when.