EU Economy in the Japanization Trap? （Jiang Shixue）

How can we say a country is caught in a debt crisis or not? There is no definite definition. The former Italian Prime Minister Berlusconi was reported to say that Italy did not have a debt crisis because restaurants in his country were filled with diners.   

Sadly, neither is there a well-recognized definition of resolving the European debt crisis. When you say the debt crisis is over, do you mean gaining positive GDP growth rate? Or lowering the debt/GDP ratio and fiscal deficit/GDP ratio to the targets set in the European Union’s Stability and Growth Pact, i.e., 60% and 3%, respectively? Or a drop of the ten-year bond spread below 6%? Or no more bail-out? Or no more angry demonstrations in the central square of the capital city? Or no news coverage of the debt crisis by the Wall Street Journal, Financial Times, CNN, etc.?

Despite the nonexistence of a definition, we still can conclude that the European debt crisis is almost out of the woods. Even in Greece, the source of the European debt crisis, a sigh of relief was already there.

But recovery of the EU economy has been quite disappointing. As a matter of fact, the EU economy seems to be in the danger of suffering from Japanization, whose symptoms include sluggish economic growth, low inflation (deflation), and heavy debt burden. Alan Wheatley, Global Economics Correspondent of the Reuters, once said that Eurozone governments would find it tough to keep the ugly new word “Japanization” out of their lexicon.

Many economists suggest that feeble economic growth is the core of the Japanization trap. If the EU wishes to avoid the trap, it needs to jump-start the economy as soon as possible.

Weak economic growth has also affected employment. In some countries, particularly in Greece and Spain, unemployment rate stand as high as more than 20% and youth unemployment at 50%, thus worsening social problems.

Disaffection with the economic and social situation could explain why the anti-establishment parties in quite a few EU members got wide-spread support during European Parliament election in May 2014.

The European Central Bank (ECB) has the obligation to boost the economy. On 5 June, 2014, it lowered the main refinancing rate to 0.15%, the marginal lending rate to 0.40%, and the Deposit Facility Rate to minus 0.10%. Other measures included offering long term loans to commercial banks at cheap rates until 2018.

On 4 September, 2014, the ECB took another bold step. These rates were cut to 0.05%, 0.30% and -0.20% respectively, and it was stated that the lower bound had now been reached. Benoît Cœuré, Member of the Executive Board of the ECB, said, “With these measures, we entered practically uncharted territory.”

The ECB is the first major central bank to introduce negative interest rates. Will the policy tool be effective to stimulate the EU economy?

While some economists note that negative interest rate is not a guarantee to provide the massive impulse needed for stronger recovery, many others believe that the ECB action will bolster liquidity and loans to businesses by persuading commercial banks to borrow more funds.

Interesting enough, in Germany where economic growth is far higher than the rest of the other EU members, there is widespread aversion to low interest rates. Many Germans argue that the ECB’s mandate is to ensure price stability by aiming for an inflation rate of below 2% over the medium term.

Everybody knows that central banks of the US, Britain and Japan have applied quantitative easing (QE) to create money to buy financial assets for the purpose of fight against deflation, with varying degrees of success. Why does the ECB refuse to adopt QE?  One of the major reasons, as the Economist (August 2, 2014, p. 58.) suggested, is that banks rather than markets dominates the provision of credit in the Euro area.

According to economics text book, growth of any economy relies on three engines, i.e., investment, consumption and export. Therefore, we should not forget the important role of expanding EU exports.

It is still in everybody’s fresh memory that China offered a helping hand for the EU after the debt crisis broke out. China purchased bonds of Greece, Spain, Italy, etc., made more investment in the EU, imported more products from there, and even agreed to offer more resources to the IMF, which was part of the “Troika” bailing out Greece, Portugal and Ireland, along the European Commission and the ECB. Now China and other emerging economies can also help the EU to speed up its economic recovery.

Finally, it is important to point out that, for the time being, although the EU economy seems to be faced with the danger of falling into the Japanization trap, in the longer run, its growth prospects should not be pessimistic. We should not underestimate the EU’s solid economic foundation, its strong competitiveness on the world economic stage and its capacity to produce and export.

The EU’s economy will be Phenix Nirvana.

（Contant Jiang Shixue：jiangsx@cass.org.cn）