Hamish McRae: As its population ages and inflation stalls, Europe is becoming more like Japan than it might like to admit

Economic View: The reason Japan stagnated is because it did not want to make structural reforms

Mario Draghi says it isn't; many people fear it will become it; and would that be so bad, after all?

The proposition is that Europe will become the new Japan. It is not a new idea at all, but it has been given legs by the rising fears that one aspect of the Japanese economy over the past 25 years – persistent deflation – is in danger of becoming embedded in the eurozone.

Mr Draghi was seeking to tackle that possibility when he said that the European Central Bank needed a "safety margin" when tacking deflation. We learn today whether there is any significant shift in ECB policy in response to this danger.

At the moment the eurozone is still some way from outright deflation. The latest figures, for November, show annual inflation for the region as a whole at 0.9 per cent, up a touch from 0.7 per cent in October. But while in Germany inflation on the harmonised basis was 1.6 per cent, in Spain it was only 0.3 per cent (after zero in October). But you can understand the concern, particularly for the highly indebted periphery, which need some inflation to help reduce the real value of their debts. In any case the whole region is well below the ECB ceiling of 2 per cent, so it has room to move.

However, while deflation is naturally the aspect of Japan's economic predicament that the ECB focuses on, there are other ways in which Europe is coming to resemble Japan, of which the most obvious is demography. Or rather parts of Europe: I have shown in the graph the most recent UN projections for the population of Japan through to 2050, plus those of Germany, France, the UK and Italy. Japan is projected to fall from 127 million at present to 108 million. Germany is rather similar, falling from 83 million to 72.5 million. But Italy is projected to stay at around its present 60 million – though the age structure will be very different, while France and the UK are both projected to increase from around 63 million to 73 million – ie to become about the same size as Germany.

Now these are just projections. A lot can change. Strong job markets suck in people looking for work, while weak ones force them overseas.

In the case of the UK we seem already to be well past the 64 million mark, a level we were not expected to reach until 2016. France, too, is well past 64 million, at least if you add in Corsica.

So in population terms Europe is not the new Japan. Germany is, or at least will be unless its relative economic success sucks in large numbers of immigrants. Italy may become it if, as seems to be happening now, large numbers of young people leave for jobs elsewhere.

But France and the UK are heading in the other direction.

There is, however, a third dimension to Japan's relatively stagnant economy: the lack of structural change. That takes many forms. In Japan the issue is partly regulation, from restrictions on the retail trade and immigration, to protection of farmers and other special interest groups.

But it is also something deeper and very understandable: a desire to protect a lifestyle. Japan is safer and cleaner than just about any other country in the world and it is perfectly adequately prosperous. Why change?

If you look at Europe through Japanese eyes, you can see elements that are familiar particularly in Germany. There are also examples of the desire to protect what is seen as a special lifestyle, for example in France. But if you take Europe as a whole, there are certainly places that look outward rather than inward, with Switzerland, Scandinavia, Ireland and the UK at the top of the list.

The UK in particular differs sharply from Japan both in its attitude to immigration and its relationship with the rest of the Anglosphere. We are also very capable of generating inflation, perhaps rather too capable in that regard.

I think the central point here is that what has happened in Japan is largely the result of a choice of the Japanese people. There was an out-of-control property boom, the aftermath of which was bound to be a drag on growth for a decade. Policies were ineffective and there is a debate about why.

I personally feel the huge fiscal deficits and the ultra-low interest rates, while appropriate in the very short-run, actually inhibited what would have been a decent medium-term recovery.

But the real reason why the country has stagnated is because it did not want to make the structural reforms. It was a micro-economic failure rather than a macro-economic one.

Apply that thought to Europe. The region is a kaleidoscope. Some of the structural changes needed to make for a more competitive economy are being taken by countries on the periphery, notably Ireland.

But there are places where not a lot is happening – Italy for example. Germany, having pioneered labour market reform in the middle of the last decade, may now be relaxing again. The business mood there is quite cool to the grand coalition.

France? Hard to know, for the Hollande government is probably an interlude and the next government will take a different direction. The rigidities of the single currency and single interest rate don't help, but you cannot blame everything on the euro or the ECB.

If you focus on the narrow issue of deflation, there can be little doubt that the ECB has both the tools and the will to avoid the Japanese experience.

But this is not just a monetary matter, nor even a European Union matter – though a competent EU will be more conducive to growth than a bureaucratic one.

It is really a question of what people in Europe want. Do they want comfort and stability at the expense of growth? There is nothing wrong with that.

Or do they want something more exciting?

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Collections Agent

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive + incentives + uncapped comms: SThree:...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future