Peter Praet: Japan and the EU in the global economy – challenges and opportunities Speech by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the conference “Japan and the EU in the global economy – challenges and opportunities”, organised by Bruegel, the Graduate School of Economics, Kobe University, and Fondation France-Japon de l’EHESS, Brussels, 7 October 2013. *  *  *  I would like to thank Stephan Fahr, Georgi Krustev and Ana Lima for their contributions to this speech; all views expressed remain mine. Ladies and gentlemen, It is a pleasure to be able to share some thoughts on the challenges and opportunities Japan and Europe are facing in the global economy. Since the beginning of the financial crisis, there has been no shortage of challenges along the road back to what I would call the “normal functioning” of our economies. One of the biggest challenges I see is still to be addressed: that of how to grow in an era of deleveraging. Deleveraging can occur in an orderly fashion or it can be chaotic. It may drag our economies down or it can place them on a stronger footing. Which of these will be the case depends to a large extent on how we manage the process. Today, I will focus my comments on the policy challenges faced by our two economies, especially as regards how to manage the deleveraging process in the euro area, keeping in mind the Japanese experience during the 1990s.
While common monetary policy has been successful, the crisis has shown that we need more solid common institutions in other policy areas. In particular, a common monetary policy requires a common regulatory framework for the financial sector to be able to adequately repair the financial system, thereby securing a durable recovery in the euro area. The adverse impact of “zombie banks” and the evergreening of loans in Japan serve as a stark warning signal. Given the challenges ahead, we should not relax our efforts to put the euro area economies on track to strong and sustainable growth. That way, we can turn the current challenges into opportunities – as the title of today’s event suggests. Further managing the deleveraging process will be key, especially balancing the speed of adjustment and reforming euro area governance. Let me elaborate on these two aspects in turn. Managing the deleveraging process To overcome debt overhangs, we have basically two options. We can consolidate or restructure debt to address the nominal debt stock; or we can implement growth-enhancing structural reforms that make our economies fitter to grow out of the debt burden. Or we could opt for a combination of both. A third theoretically possible option allowing for higher inflation to reduce the real value of the debt would go against the core mandate of central banks. In recent years, we have seen some consolidation in Europe.