Economy

Schwarzman: Europe could enter Japan-style stagnation if governments don't start spending

Key Points
  • Blackstone CEO Stephen Schwarzman echoed criticism from various top European banking executives of the European Central Bank's (ECB) negative interest rate environment.
  • The ECB's most recent policy decision saw the central bank launch a substantial package of quantitative easing (QE) and further reduce its main deposit rate by 10 basis points to -0.5%, a new record low.
  • The so-called "Japanification" in the euro zone refers to the possibility of replicating Japan's "lost decades" in the form of low growth and mild deflation.

The euro zone economy risks entering a period of prolonged economic stagnation similar to that experienced in Japan unless governments provide fiscal stimulus, Blackstone CEO Stephen Schwarzman has warned.

Speaking to CNBC's "Squawk Box Europe" on Monday, Schwarzman echoed criticism from various top European banking executives, most recently Société Générale CEO Frederic Oudéa, of the European Central Bank's (ECB) negative interest rate environment.

Oudéa became the latest banking CEO to wade into the monetary policy debate over the weekend, telling the Financial Times that the ECB's bond-buying program would support failing institutions and hinder consolidation in the European banking sector.

The ECB's most recent policy decision saw the central bank launch a substantial package of quantitative easing (QE) and further reduce its main deposit rate by 10 basis points to -0.5%, a new record low.

Schwarzman told CNBC that negative interest rates in Europe were making it increasingly difficult for financial institutions, such as insurance companies and depositaries, to make money.

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In a bid to alleviate some of the pressure from negative rates on bank balance sheets, the ECB at its policy meeting introduced a two-tier rate system, a measure encouraged by the heads of various major European banks during the latest earnings season.

"The reason that's important is that if those institutions aren't making money, they can't increase their capital," he said.

"If they can't increase their capital, then they can't make more loans to people and to companies. If you can't make more loans, you don't grow your economy. You need to have credit expansion to grow economies."

Schwarzman suggested that in Europe, negative rates appear to be seen as a "panacea," but argued that the euro zone economy was reaching a point where fiscal stimulus would be necessary, particularly in Germany.

"The alternative is what Japan did for 25 years. It basically didn't grow, and it froze. That could happen, that's not a good thing for people either," he said.

"Sometimes we live in a world of only bad alternatives, and I think that's sort of what we're looking at now."

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The comparisons between the current European economic climate and Japan have been broadly acknowledged in recent months. The so-called "Japanification" in the euro zone refers to the possibility of replicating Japan's "lost decades" in the form of low growth and mild deflation.

"Japan has experimented with various forms of QE, zero rates and negative rates since 1982, but without much evidence that this has had much effect on the Japanese economy," VTB Capital Global Macro Strategist Neil McKinnon explained in a note following the recent announcement of the ECB's new stimulus package.

"Defenders of QE and other 'unconventional' monetary policies will argue a 'counter-factual' i.e. that without such policies, things would have been far worse."

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