ECB will become more active as Eurozone turns Japanese
In one key respect the Eurozone is turning Japanese, namely in the area of demographics, and this could mean the European Central Bank having to be a lot more activist in the years ahead.
It is probably only a matter of time before the very conservative ECB does go for full blown quantitative easing. The Eurozone's demographic profile not only makes it steadily more prone to slower economic growth, but also deflation, which will create fewer hurdles for dramatic central bank action, as eventually happened in Japan.
This would suggest the possibility of long periods of EUR weakness as has been happening recently, while markets anticipate ECB stimuluses.
Japan has been stuck in a two-decade long economic malaise with Abenomics only recently making some impact. But whether that will last is yet to be seen. Japan's demographic situation is chronic and is bound to have an economic impact as the number of people who are active falls.
However, the Eurozone is developing a similar demographic profile – it's population is now ageing quickly and like Japan that will make stimulating economic growth more challenging.
EUR/JPY – Old country currencies
Fewer young people, less economic activity
The fertility rate in the EU is 1.59 births per woman, which is still a lot better than Japan's at 1.39. To keep a population level (without immigration) it needs to be 2.1. Then there's the age profile. In the EU, 18.2% of the population is over 65. EU and Eurozone figures will be very similar as the latter makes up most of the former. In Japan it is 20%. The number of over 65s relative to younger population segments is set to rise relentlessly in both areas for years to come.
However, the situation isn't completely hopeless for the Eurozone. Germany, which has a demographic profile similar to Japan's, has managed to keep growing by becoming more efficient, moving up market and using immigrants, many of them from southern European countries.
With a Eurozone unemployment rate of 10.2%, which masks huge variations across countries, nonetheless, shows that there's plenty of spare human capacity if only the economy would provide jobs. In Japan the unemployment rate is just 3.8%.
If individual Eurozone countries can reform their economies to create more entrepreneurs, become more competitive with more jobs and reform welfare there is a chance that a good part of the ageing phenomenon can be offset for quite a while. And this must happen for the EUR to ultimately survive because the ECB cannot be expected to do all the heavily lifting on its own.
By Justin Pugsley, Markets Analyst
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