Will Europe become the new Japan?
Mario Draghi says it isn't; many people fear it will become it; and would that be so bad, after all? The proposition is that Europe will become the new Japan.
It is not a new idea, but it has been given legs by fears that one aspect of the Japanese economy over the past 25 years – persistent deflation – is in danger of becoming embedded in the eurozone. Mr Draghi was seeking to tackle that possibility when he said that the European Central Bank needed a "safety margin" when tacking deflation.
We learn today whether there is any shift in ECB policy in response to this. The eurozone is some way from outright deflation. November figures show annual inflation for the region at 0.9 per cent, up a touch from 0.7 per cent in October. But while in Germany inflation on the harmonised basis was 1.6 per cent, in Spain it was only 0.3 per cent (after zero in October). But you can understand the concern, particularly for the highly indebted periphery, which need some inflation to reduce debts. The whole region is well below the ECB ceiling of 2 per cent, so it has room to move.
However, while deflation is naturally the aspect of Japan's economic predicament that the ECB focuses on, there are other ways in which Europe is coming to resemble Japan, of which the most obvious is demography. UN projections for the population of Japan through to 2050, shows the country is projected to fall from 127 million to 108 million.
Germany is similar, falling from 83 million to 72.5 million. But Italy is projected to stay at around 60 million – though the age structure will be different, while France and the UK are projected to increase from 63 million to 73 million – ie to become about the same size as Germany. So in population terms Europe is not the new Japan. Germany is, or at least will be unless its relative economic success sucks in immigrants. Italy may become it if, as seems to be happening now, large numbers of young people leave for jobs elsewhere.
But France and the UK are heading in the other direction. There is, however, a third dimension to Japan's relatively stagnant economy: the lack of structural change. In Japan the issue is partly regulation, from restrictions on the retail trade and immigration, to protection of farmers and other groups. But it is also something deeper and understandable: a desire to protect a lifestyle. If you look at Europe through Japanese eyes, you can see elements that are familiar in Germany.
There are also examples of the desire to protect what is seen as a special lifestyle, for example in France.
But if you take Europe as a whole, there are places that look outward rather than inward, with Switzerland, Scandinavia, Ireland and the UK at the top of the list.
The UK differs from Japan in its attitude to immigration and its relationship with the rest of the Anglosphere.
I think the point is that what has happened in Japan is largely the result of a choice of its people. There was an out-of-control property boom, the aftermath of which was bound to be a drag on growth for a decade. I feel the huge fiscal deficits and the ultra-low interest rates, while appropriate in the short-run, actually inhibited what would have been a decent medium-term recovery. But the real reason why the country has stagnated is because it did not want to make the structural reforms. Apply that thought to Europe. The region is a kaleidoscope. Some of the structural changes needed to make for a more competitive economy are being taken by countries on the periphery, notably Ireland. But there are places where not a lot is happening – Italy for example. Germany, having pioneered labour market reform, may be relaxing again. The business mood there is quite cool to the grand coalition. France? Hard to know, for the Hollande government is probably an interlude and the next government will take a different direction. The rigidities of the single currency and single interest rate don't help, but you cannot blame everything on the euro or the ECB. It is a question of what people in Europe want.
Do they want comfort and stability at the expense of growth? Or do they want something more exciting?
I think the point is that what has happened in Japan is largely the result of the choice of its people