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Europe Will be the Next Japan: Barings CIO

The scale of Europe’s recession could be as bad as the decade-long slump suffered by Japan during the 1990s, Marino Valensise, chief investment officer of Barings, told CNBC.com.

A slow reaction from the European Central Bank, uncoordinated economic stimulus packages, euro strength and an ageing population all collude to darken the outlook for the region, Valensise said.

“You have all the ingredients (in Europe) that could lead to a new Japan,” Valensise said.

“One of the killers of Japan was the BoJ (Bank of Japan) kept raising rates as the economy was slowing down,” he said.

- Watch the interview with Marino Valensise above for his views on the outlook for stock markets.

'Intellectual Terrorists'

The ECB raised interest rates in the summer of 2007, when many of the world’s central banks were switching their focus to sharp cuts to offset the worst of the global recession, Valensise pointed out.

The ECB’s late move to raise rates could yet exacerbate the slowdown in the same way as Japan experienced in the 1990s, according to Valensise.

Map of Europe
CNBC.com
Map of Europe

“The ECB has been a disaster,” Valensise said, and likened the central bank to “intellectual terrorists.”

Apart from interest rates, the economic stimulus packages in Europe look set to fall short of the level of intervention needed to right the economic slump, according to Valensise.

He questioned how much of the proposed government stimulus will materialize as actual injected cash.

Meanwhile, research suggests that the euro zone region has an ageing population, which as Valensise said, often acts as a drag on an economy’s growth potential.

Adding to the problems facing Europe, the recent surge in the cost of the euro, compared to the dollar and pound, will dent the export potential of the region, Valensise said.

Export-driven economies like Germany could suffer the most if the single currency remains strong.

The yen has seen a similar rise on the foreign exchange markets during the current global economic turmoil, causing problems for Japan’s exporters, as the country returns to its second recession within a decade.

“The strong yen is killing the Japanese economy,” Valensise told CNBC.com.

Japan suffered a so-called ‘lost generation’ during the 1990s, which was made worse by ineffective fiscal and monetary policies.

“The trend level of growth (in Europe) will be much lower that what we had anticipated,” Valensise said.

But the prospects for recovery in the US and UK are better, he added.

“In the United States we are going to see, sooner or later, sort of a V-shaped recovery because of the money that the authorities are throwing at the problem,” Valensise said.

The UK government “got it right” in letting the pound weaken, he added.

Contact Europe: Economy

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