The ABC’s (Australian Broadcasting Corporation) online periodical, THE DRUM, commissioned me to write an article comparing and contrasting the policy responses to the Crisis of Japan and of the Eurozone. Click here for the ABC’s website. Or read on below…
The Japanese and eurozone economies are very different, but their current predicaments are eerily similar. Yanis Varoufakis compares the radically different recovery experiments each economy is undertaking.
In the long, unending wake of the global financial crisis, desperate governments and central banks are trying their hand at experimental economic policy mixes. Japan and the eurozone offer a glimpse of how radically different anti-crisis experiments can be.
Recently, Japan has been making the news with reports that its new leaders – the new prime minister and the new governor of the Bank of Japan (BoJ) – have joined forces to stop their nation’s so-called ‘lost decade’ from turning into three lost decades.
Shinzō Abe’s government has committed to a stimulus package (an impressive 2 per cent of national income in 2013 alone) that will attempt to rekindle the real economy. Mr Haruhiko Kuroda – Mr Abe’s choice of BoJ governor – has audaciously declared that the BoJ will fight deflation by purchasing financial titles (e.g. government bonds, mortgages) to an extent and at a pace never seen before in economic history (in fact doubling the country’s monetary base in two short years).
Quite clearly, the two men are aiming their double-barrelled shotgun at the great foe of deflationary negative growth which, like a rogue samurai, is slashing into Japan’s capacity to reproduce itself as an advanced, prosperous social economy.
What makes the escapade remarkable is not just the size of their commitment but also their starting point: Japan’s national debt is by far the highest in the civilised world, making the decision to allow the budget deficit to rise to more than 11 per cent in 2013 the boldest Keynesian move since Ronald Reagan’s expansionary fiscal policies in the early 1980s.
Similarly, the BoJ’s decision to spend $1.5 trillion in order to accomplish in two years what Ben Bernanke’s Fed did during the past six years of ‘quantitative easing’ (and without controlling the world’s reserve currency) is perhaps even more daring.
Turning to the eurozone we are faced with another audacious experiment. In an aggregate economy that is in recession, the deepest austerity is being imposed upon the fastest shrinking national economies (that make up the eurozone), while the European Central Bank (ECB) is watching idly, too neutered by Berlin, and too constrained by its charter, to follow ECB president Mario Draghi’s instincts.
Total eurozone debt is less than 100 per cent of the eurozone’s annual income (compared to Japan’s 230 per cent), the aggregate budget deficit is running below 6 per cent (about half that of Japan), while the ECB is exposed to a molehill of paper assets (when compared to BoJ’s already mountainous ones).
Clearly, of the two economies, the eurozone is the one that has significantly more room within which to accommodate expansionary fiscal and monetary policies. And yet, it is Japan that is taking the plunge, firing both its barrels at its stagnation nemesis.
One possible justification of the two diametrically opposed policy settings in Europe and in Japan might be that these two advanced economies are facing different challenges. Europe’s leaders like to imagine that, unlike Japan, Europe is not facing a long-lasting recession, let alone deflation. For them, there is no need for eurozone governments to loosen up the purse strings, or for the ECB to flood the financial markets with digital euros. What matters to them is that the crisis is utilised to force upon the eurozone’s laggards (the Club Med nations in particular) the reforms that will help them regain their ‘competitiveness’.
While the two economies are very different, their current predicaments are eerily similar. If I am right, this means that Europe’s leaders may be deluding themselves in thinking that the eurozone’s crisis is fundamentally different to Japan’s.
Japan’s and Europe’s crises began when their financial sector imploded following the burst of gigantic bubbles caused by earlier capital inflows into the money and the real estate markets. In both economies, governments tried to keep the banks afloat with injections (capital and liquidity) that failed to restore their capacity to borrow and to lend.
Both in Japan and in the eurozone, the zombification of the banking system was ‘bought’ at the cost of taxpayers and to the detriment of the real economy; the result being a fall in the incomes from which the banking losses and the public debts had to be repaid.
In both realms politicians had too cozy a relationship with bankers and did not dare expropriate them, cleanse the banks and sell them back to the private sector (as Sweden did in 1992 or South Korea in 1998). The result of these political failures, both in Japan and in the eurozone, have been a carbon copy of one another.
Put differently, Japan and the eurozone are in different phases of the same type of crisis, with Japan at a more advanced stage of this common disease courtesy of having had an earlier start.
The eurozone is unique in world economic history in that it comprises governments with no central bank (to back their economic policies) and a European Central Bank with no government to work with. In this sense, the eurozone is a very different kettle of fish, when compared to Japan.
These differences reveal deep weaknesses that the eurozone has and Japan is free of. The eurozone’s complacency in the face of stagnation means the ‘Japanese disease’, which is now spreading throughout Europe, is going to do even more damage to Europe than it did to Japan over the past two decades.
Moreover, when the time comes for Europeans to reach the same conclusions that Mr Abe and Mr Kuroda have now turned into policy, the eurozone will lack the institutions to put them into practice. The most likely result will be the eurozone’s disintegration; a development which, ironically, will undoubtedly damage Japan’s recovery – just as it will damage the rest of the global economy.