Europe’s Japanafication

I have just returned from a European river cruise that took me from Amsterdam to Budapest. It’s a voyage that’s highly recommended.

It’s the height of the summer season in the northern hemisphere and normally popular itineraries such as the one I sailed are full to capacity. On this particular line most of those travelling are Americans.

Their tourist dollars are the economic lifeline for the medieval villages along the route.
This year our boat – a boutique vessel compared with some of the others – carried only 93 passengers, well short of its 130 capacity with Australians and New Zealanders well represented.
Drawing conclusions about the European economy in general from such a narrow and selective database is hardly scientific but it served to point me in the direction of more pertinent data.

Whatever it takes

It’s just over two years since Mario Draghi, the president of the European Central Bank surprised the financial world with a pledge that he would do “whatever it takes” to protect the euro zone from collapse.
He was not setting up a straw man. The outlook for the euro zone was becoming increasingly bleak, as the solvency of banks in Greece, Portugal, Ireland and Spain was the subject of constant speculation that was feeding panic and raising the very real risk of systemic failure across the whole of the euro zone and beyond.
Just what Draghi had in mind was never spelt out – a wise move given the Bundesbank’s scepticism and certain resistance about a wholesale bail-out.
Draghi’s pledge was enough to stop the rot and to convince the markets that the politicians were not about to abandon the euro despite its now obvious flaws.
The financial crisis has been conducive in addressing these flaws but basic structural problems remain. For example, the euro zone is not an optimal currency area. Fixing this could involve creating uniformity across many policy areas such as industrial relations, welfare and health programs. Politically speaking, that’s not on.

There have been policy reforms in some areas, notably in Spain and Ireland. However, the principal strategy deployed in the financial sector has been a significant shift towards more conservative banking regulations and practices.

This has occurred against a backdrop of low demand for household consumption and corporate investment, low growth and low inflation.

A fragile recovery

These are the same economic drivers which we saw emerge after 1990 in Japan.
One consequence of this has been that where the crisis in 2012 was confined to economies on the periphery of the zone: Portugal, Spain, Ireland, the pain has now been spread to the core economies as well.
Recent economic data underscore just how fragile, even tenuous, recovery has been in the larger economies of the euro zone.
The data about to be quoted includes the impact to some degree of the “Putin factor”.
However, it would not reflect anywhere near the full impact since the tit-for-tat sanctions have been imposed. Should these proceed as expected the strains on the euro zone economies will be increased.
Italy is the third largest of the euro zone economies.
Data released last week by Istat, the national statistics institute, revealed that Italy has slipped into its third recession since 2008. Its economy contracted at an annualised rate of 0.8 percent in the quarter ending June 30.
Triple-dip recessions are not common. Each new Italian recession has hit a new low in economic activity.Italy’s current level of production is actually 9.1 per cent below where it stood in September 2007. In fact Italy is producing less today than it was back in 2000.
France is the euro zone’s second biggest economy.
The Economist magazine recently reported: “After two flat years, French growth came to a standstill in the first quarter. The business-confidence index is down on nine months ago, according to Insee, France’s statistics body, whose ‘turning-point’ indicator went negative in June for the first time in a year.
Output in manufacturing and services also fell in June. . . and firms cut jobs for an eighth consecutive month. . . Most worrying, investment has dropped or been flat in eight of the past nine quarters.”
Then there is Germany, the euro zone’s powerhouse.
Commerzbank has warned that the German economy may have contracted by 0.2 percent in the second quarter and is far too weak to pull southern Europe out of the doldrums.
Industrial production fell by 1.5 per cent over the three months.
The outlook is worse. The economics ministry said new orders in manufacturing fell 3.2 per cent in June with orders from the rest of the euro zone collapsing by 10.4 per cent.

Signs of a slowdown

Steen Jakobsen, economist from Saxo bank observed: “What this shows is that Europe isnowhere close to recovery. Monetary policy has run out of traction.”
Ominously the debt markets are pricing in 0.5 per cent inflation in Germany and Italy over thenext five years.
That’s a very Japanese number and should that figure become the anchor of inflationary expectations then deflation will be a real risk.
Stanley Fischer, the deputy chairman of the US Federal Reserve delivered an interesting paper in Sweden last week where he pointed to emerging problems in the US economy.
“We are also,” he said, “seeing important signs of a slowdown of growth in the productive capacity of the economy- in the growth in labour supply, capital investment and productivity.
“How much of this weakness on the supply side will turn out to be structural – perhaps contributing to a secular slowdown – and how much is temporary but longer-than-usual – lasting remains a crucial and open question.”
If it’s the former – a secular slow down then the US could find itself a very unhappy candidate for Japanafication.
General Advice Warning:
This advice is general advice only. It has been prepared without taking account of your objectives, financial situation or needs. Therefore, before acting on the advice, you should contact your Dixon Advisory Adviser to discuss the appropriateness of the advice, having regard to your objectives, financial situation and needs.

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Max Walsh


Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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