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. Beno?t C?uré, 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 econo