Turning Japanese

With depressing predictability, Europe seems to be turning Japanese - see the link to an excellent article by the less-hysterical-than-usual Ambrose Evans-Pritchard. The reasons have been clear for along time for anyone with half a brain and half a memory. Like Japan, the Europeans have failed to properly clean up their banks balance sheets, instead hoping that time and inflation will gradually reduce the problems currently hidden away by the simple trick of hopelessly optimistic marking to market of many loan assets - creating the dreaded zombie banks that act as a buffer to credit and capital allocation rather than a conduit Like Japan, they have an ageing population. Like Japan, they have an overvalued currency. Like Japan, they have made minimal structural changes to an economic model that is clearly broken - in particular very inflexible labour markets. Like Japan, inflation is turning into deflation, and already has done in several eurozone countries. Like Japan, the central bank has made some noise but actually done very little.

Europe can still fix these problems relatively easily, but seems to lack the political will to do so. The French are making things worse by taxing everyone and everything, and then changing their minds whenever unions or farmers protest, the Italians are doing little except squabble, the Greeks seem to be trying to wriggle out of their commitments to the Troika, the Spanish and Portuguese are making the right noises but it's far from clear that even half of what they say will be put into practice. And of course the Germans are steaming ahead serenely, seemingly unconcerned by the fate of all around them. To be fair to Germany, it is only their frugality over the years and consequent economic strength now that is holding the eurozone together, but I'm afraid they will have to accept and ECB rate cut to help out their weaker neighbours and weaken the Euro or they risk tipping the whole thing over the edge into a new depression.

Strangely, the Euro itself is not in danger at present. As long as the politicians want it, it will survive. A fact that seems lost to most non-eurozone commentators. If one of the euro-sceptic parties gets into power somewhere though, then all bets are off. Marine Le Pen with her Front National in France looks the most likely at the moment, but none of them can be written off entirely.

In the meantime, prepare for more talk from the ECB, but only put money on a recovery once they've actually acted.