Eurozone: Japanisation?

Investors are right to wonder whether a stagnating economy with price deflation, such as Japan experienced in the 1990s onwards, will not be the fate of the Eurozone. There are many similarities— but also some important differences. The real problem is that the Eurozone economies are diverging not converging. The combination of tight fiscal and monetary policy in the periphery has caused a lot of economic slack and very low inflation rates or even deflation. This has depressed nominal growth to below low cost of debt, raising questions over debt sustainability. Unlike in Japan, a stagnation scenario cannot be sustained. The only safety valve is a depreciation of the currency, which we believe will become implicit policy by year-end.

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