Eurozone: can sluggish social performance explain a poor macroeconomic dynamic? The example of the Japanization Process
Current debates about the future of central banking in the advanced economies, and the (im)possibility to normalize the monetary policy could be enlightened by an ESG approach. Taking the example of the euro area, current poor macroeconomic dynamic and the blocking situation within a Zero Lower Bound (ZLB) framework can be explained by a “Japanization” process. That refers to the situation where the central bank policy is in the ZLB, a high debt-GDP ratio and important central bank’s balance sheet. Such process started in the 1990s in Japan, and then has prevailed in the Eurozone since the European debt crisis from 2010 onwards. The origin of this situation can be partly explained by a sluggish social performance.
Figure: From Stagnant Wages to Low Interest Rates
Indeed, as highlighted by the above figure, the dynamics of real earnings per employee have been weakening since 2011. This comes partly from a progressive distortion of value-added sharing -to the detriment of employees- and from high structural unemployment, reflecting a sluggish social performance in the Eurozone. This leads to weaker households’ consumption which, combined with a low inflation rate, pushes the European Central Bank (ECB) to decrease short-term interest rate towards the ZLB. While the monetary policy is stuck in the ZLB, responses to macroeconomic fluctuations are led by fiscal policy, leading to an increasing indebtedness. Finally, due to this increase in the debt-GDP ratio, and in order to maintain fiscal solvency, the central bank had to target the long-term interest rates also by increasing its balance sheet. As highlighted by the above figure, 10-year bond yields stand currently around 0 for Germany.
Thus, considering an ESG point of view helps to enrich the debates about the future of monetary policies. Indeed, improving social performance in the Eurozone could be a key point to address in order to exit the “Japanization” process.
Thomas Lorans, Economist
Source: Beyond Ratings, Oxford Economics, Datastream
 The notion of an effective lower bound on policy interest rates that is lower than zero has become a concrete concern for monetary policy : see for instance the May 2015 speech by Benoît Cœuré, Member of the Executive Board of the ECB https://www.ecb.europa.eu/press/key/date/2015/html/sp150519.en.html