Global Economic Collapse: The EU is battling to avoid economic slowdown as deflation grips the bloc

By CHARLIE BRADLEY PUBLISHED: 19:52, Wed, Oct 23, 2019 | UPDATED: 20:13, Wed, Oct 23, 2019. Express.co.uk

With deflation continuing and negative interest rates deepening in Europe, there are fears amongst some economists that the EU along with the US are hurtling towards a financial situation similar to that of Japan after its crash in 1990. Following the crash of the Bank of Japan, US Federal Reserve Chairman Ben Bernanke and his colleagues had diagnosed issues in Tokyo as having derived from lacklustre cutting of interest rates, the Financial Times claims. Therefore, the US decided to respond to the 2008 crash in different fashion, recapitalising the banks in an attempt to stimulate economic recovery.

Rob Harding highlights in his FT report that after an initial recovery, Western economies are now struggling to bat away deflation, which would make economic recovery a lot more difficult should things go downhill.

This is known as ‘Japanification’, and has sparked concerns that the European Central Bank and the US Federal Reserve could fall into the same economic trap as Japan.

Bank of Japan board member and deputy governor from 2005 to 2013 Kiyohiko Nishimura believes that the country’s ageing population played a huge part in the difficulties faced by Tokyo’s economy.

He told FT: “The problem here is not unique, it is universal. In some sense this is kind of inevitable and we have to face it.

“It’s really a structural thing. This is the first time in human history that many people are facing a very long retirement. Japan is a spearhead of that change.”

According to the European Commission’s Ageing report 2018, the total population in the EU is projected to increase from 511 million in 2016 to 520 million in 2070.

However, the working-age population (people aged between 15 and 64) will decrease significantly from 333 million in 2016 to 292 million in 2070.

The report also finds that the ageing of Europe’s population will put pressure on public spending.

It states that overall in the EU, the total cost of ageing (public spending on pensions, health care, long-term care, education and unemployment benefits), is expected to increase by 1.7 percentage points to 26.7 percent of GDP between 2016 and 2070.

However, another economist in Japan – Heizo Takenaka – disagrees that ageing is the catalyst, stating to FT: “I do not support this idea. About 24 countries around the world are experiencing a declining population but only Japan is suffering deflation.”

Mr Takenaka instead argues the increasing deflation is a result of a failure to open new growth opportunities, and he told the FT that the EU were experiencing more damage than the US due to its more regulated economy.

With ‘Japanification’ gripping the EU, the UK’s decision to leave the trading bloc could either prove a masterfully timed escape, or see the British economy fall to the same issues but further from European business.