GO
Loading...

Why Europe Should Fear ‘Turning Japanese’

Japan's decades of economic stagnation after pursuing a low interest rate policy should be a warning to all central banks, particularly the European Central Bank, according to Satyajit Das, a former banker and author of "Traders, Guns and Money".

"The whole world is turning Japanese," Das told CNBC on Thursday. "Everyone should familiarize themselves with the hit single from the eighties called 'Turning Japanese.'"

The 1980s song by British band The Vapors is about youthful angst and turning into something you didn't expect – a risk facing central banks around the world, Das said, as they ponder how to scale back stimulus programs and combat government deficits and debt.

"The whole world is going to go Japanese, because what Japan shows us is that if you have a large debt bubble which unwinds, it's not that easy to get out of it," he said. Japan has one of the largest debt piles in the world, topping 200 percent of GDP in 2012, built up through years of low interest rates and currency strength.

(Read More: 'Semi-Rude' Draghi, 'Jump the Gun' Carney Criticized)

Das foresaw a prolonged period of stagnation ahead for Europe, similar to that suffered by Japan. He said the European Central Bank's (ECB) handling of the financial crisis was inadequate, and that European Union governments were failing to implement sufficient structural reforms.

"All the things we criticize Japan for, in terms of poor decision-making and lack of structural reform, is exactly the same in Europe. So give me a reason why Europe is going to be any different? Central banks are trapped between policy measures which have limited success on the one hand, and the risk of financial collapse if they withdraw measures," he said.

"It's difficult to see anything other than stagnation for a prolonged period of time."

(Read More: Carney Shows Markets Who's Boss; Sterling Falls)

Despite Das' pessimism, European stocks have risen over the past year, with the pan-European FTSEurofirst 300 up 7.72 percent, boosted by the ECB's pledge to do "whatever it takes" to save the euro zone. On Thursday, the ECB held its main interest rate at 0.5 percent, and central bank chief Mario Draghi said rates would remain at current or lower levels for an "extended period of time".

However, Das said that market confidence was misguided and driven by central bank "policy diktat."

"These markets are not normal markets. What people underestimate is the economic and political volatility that we're going to see. There's resistance to financial repression, there's resistance to austerity…We've just laid down a lot of foam in the way of fiscal and monetary stimulus," he said.

Das added that talk of a recovery in the euro zone economy - which Draghi forecasts will shrink by 0.6 percent this year – was laughable.

"I find all the discussion about Europe [and a recovery] mildly hilarious. We all know that there's going to be no improvement in the real economy – though there might be some stabilization –if you look at Europe now the only issue is how the problem transmits to the core economies France and Germany," Das said.

Contact Europe News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More

Europe Video

  • The FBI have stated that North Korea's government is responsible for the Sony attack. Neil Ashdown, deputy head of Asia analysis at IHS, weighs in, saying that it's difficult to "definitively attribute" a hacking attack to a particular group or state.

  • What were the main highlights of the EU Summit in Brussels? CNBC's Hadley Gamble gives you the lowdown.

  • Carnival Cruises earnings have beaten expectations in its fourth quarter, with lower fuel prices being a great help, says David Dingle, UK chairman of Carnival Cruises.