Hamish McRae: Europe the new Japan? That’s not for us, thanks

Some analysts — mostly American ones —have, in response to the stagnation in the eurozone, been posing the question “is Europe the new Japan?”

There are certainly parallels with Japan’s situation 20 years ago. Last week, the European Central Bank cut its forecasts sharply for both growth and inflation next year, holding out the possibility that the eurozone might indeed topple into some sort of deflationary spiral. ECB president Mario Draghi hinted that the bank might consider quantitative easing — adopted here, in the US and now eventually in Japan — early next year to counter the threat of deflation.

So the fear is there. But the question is too simple. There are certainly similarities with Japan, including a very low birth rate, the prospect of a declining population, high public debt in some countries and, in some, falling prices too.

But there are also huge differences, including much higher overall immigration and vastly greater cultural divergence. Japan is homogenous; Europe is not.

The better question surely is whether Europe, or at least much of it, wants to be the new Japan. The negative associations of the phrase ignore the fact that Japan has been successful at increasing its living standards, caring for its ageing population, maintaining a calm and largely crime-free society and coping with the catastrophe of a grave nuclear accident. You could say it looks inward rather than outward, caring for its own people rather than accepting immigrants and seeking to project power overseas. But many in Europe would support that too.

Maintaining an extensive welfare system, protecting those in work even if that makes it harder for outsiders to get jobs, supporting substantial public pensions, investing heavily in public infrastructure — all these aspects of the European socio-economic model are pretty attractive. If the price of maintaining this model is a stable society rather than a vibrant one, many would opt for that.

It is not, however, an attractive prospect for the ambitious young. Britain has been a practical beneficiary of a wave of young people from continental Europe choosing to make, or at least start, their careers here.

For years, Europe has been losing many of its graduates to the US, initially for postgraduate degrees and then for employment. We have become a sort of halfway house towards America, offering some of the attractive characteristics of its job model but without the disruption and barriers to entry.

One big question — which I don’t think we can answer at the moment — is whether the main driver of this migration within Europe is cyclical or structural. The job opportunities in Europe are in the north — in Germany, Britain, Sweden and so on. For all sorts of reasons, including the impact of the euro, it has been a two-speed recovery. Thus southern and eastern Europeans have moved to take advantage of the greater opportunities elsewhere, as you would expect. If this is largely cyclical, as growth resumes in Italy, Spain and elsewhere — as it eventually will — the present tensions will ease. If, on the other hand, it is mainly structural, young people will continue to move out of what will increasingly literally become “old Europe”. That will make it, like Japan, older still.

We will have more of a feeling in another year or so. If a combination of a monetary boost from the ECB coupled with more expansionist policies among national governments can manage to crank up a bit more growth, we may start to see a significant fall in unemployment in the weaker eurozone countries. But this is a big “if”.