Peter Tasker

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A song for Europe, please Morrissey...

Eurogeddon – the Japanese Perspective


by

Peter Tasker

by

Peter Tasker

Published in the Nikkei Asian Review 8/7/2015

Amidst the acres of verbiage about the Greek crisis that have appeared in the global media over the past few weeks, some of the most sensible comments have come from a senior Japanese politician.

Economy Minister Akira Amari pointed out that Greece is “cutting expenditure and raising taxes, and as a result tax revenue has fallen further.” Ramming the point home, he declared that “you can’t fix finances by just raising taxes and cutting spending without increasing tax revenues by restoring the economy.”

It sounds like simple common sense, but that is a rare commodity today amongst Europe’s powers-that-be, whose continuing efforts to squeeze blood out of a stone have driven the Greek public further into the embrace of the once marginal party of the radical left, Syriza, and shaken the foundations of the EU itself.

Some of Syriza’s specific policies – such as the re-employment of civil servants without sufficient money to support their salaries – are indeed counter-productive in the long-term, but on basic macro-economic issues such as the hike in value added tax demanded by the IMF, it is the anti-austerity approach of Syriza leader Prime Minister Alex Tsipras that is more realistic.

These are strange days when the economic thinking of Japanese conservatives such as Amari, his boss Shinzo Abe and Abe advisors such as Yale Emeritus Professor Koichi Hamada are more in tune with the ideas of radical Greek leftists than with the nostrums favoured by the IMF, German Chancellor Angela Merkel and Europe’s technocratic elite.

Yet successful conservative politicians are always empiricists, not idealists. It is by trial-and-error and close observation of the triumphs and disasters of others that Japan’s Liberal Democratic Party has managed to stay in power for longer than any other political party in the democratic world over the last sixty years.

JAPOCALYPSE NOT NOW!

The Greek economic disaster has special resonance for Japan. To put it simply, without Greece there would be no Abenomics. To understand why, you have to go back to 2010 and the first Greek bail-out by the ”troika” of the European Central Bank, the IMF and the European Commission.

At the time there was widespread concern about the debt problems of what were, somewhat impolitely, known as the PIIGS – Portugal, Italy, Ireland, Greece and Spain. The most visible sign of distress was the action in the financial markets, where the yields on government bonds issued by these countries soared to double digit levels. The rise in Greek yields, from 5% to 35%, was by far the most spectacular.

Globally there was a strong political reaction. Fiscal hawks were empowered everywhere. Sober-suited politicians, the ratings agencies and renowned economists such as Kenneth Rogoff warned that disaster was looming for all countries with excessive levels of public debt. By the commonly used measure of outstanding debt relative to GDP, there was one country with a seemingly outrageous debt burden, several hundred percent higher than even Greece’s. That was Japan.

At the time, the LDP was enduring a brief period out of power, having decisively lost a general election to the middle-of-the-road Democratic Party of Japan. The DPJ owed its success to its programme of fiscal expansion, including – in an attempt to stimulate procreation – generous handouts to families with children.

All this was derailed by the Greek crisis, which turned then-Prime Minister Naoto Kan from a fiscal expansionist to a doom-mongering tax-hiker. Unless fiscal policy was tightened drastically, he warned, a Greek-style denouement was inevitable, leading to a disastrous situation in which “even how we use chopsticks” would be controlled by the IMF. Voters were not impressed with the DPJ’s volte face and it was a crucial factor in the electoral wipe-out of 2012 and the return to power of Abe.

The one major player who disagreed with the “Japocalyspe Now” scenario was the most important player of all – the bond market itself. Long before Bank of Japan Governor Kuroda embarked on his programme of quantitative easing in 2013, Japanese bond yields, far from heading skywards, continued to grind steadily lower.

How could the great and good of the financial world get things so wrong? Easy – they saw what they were predisposed to see and missed an essential new factor, which was what was happening on the other side of the balance sheet. Savings in the private sector ballooned as companies slashed investment and started paying down borrowings. Relative to this new demand, safe assets like government bonds were actually in short supply.

Until 2008 this seemed like a peculiar Japanese syndrome. It has now gone global.

NEW ANTHEM REQUIRED

But isn’t Greece a completely different plate of sushi from Japan? Due to a structural insufficiency of savings, most of its debt is held externally, not by the Greek public. Furthermore, it has no ability to set its own monetary or fiscal policy.

All that is true for Greece seen in isolation, but it is not true for the Eurozone as a whole, which, like Japan, is self-financing and sets its own monetary policy. Fiscal policy could also be loosened – eg. by the issue of “Eurobonds” – if the political will was there. But it isn’t.

All nations have areas of structural surplus, from where capital is recycled to areas of structural deficit – from, for example, the South East of England to South Wales or from Tokyo to Niigata Prefecture. Unified polities are defined by the fact these transfers take place smoothly and without controversy. The fact this is not happening in Europe today is highly damaging not just to Greece or the Eurozone, but to the fabric of the EU itself.

For all the high-minded rhetoric of solidarity, common values and “ever closer union,” for all the symbolism of flag, parliament and anthem, the EU remains a dysfunctional patchwork of independent nations. Perhaps a contemporary musician, such as gloomy British singer Morrissey, should write a new anthem for the EU – instead of Schiller’s Ode to Joy, an Ode to Distrust.

The Japanese example shows that what appear to be high debt levels are no barrier to economic reflation in a self-financing unified polity. Unfortunately Europe does not constitute such a polity and in all likelihood will not by the time the next global recession comes around. The markets will take this on board and the hunt for the next Greece will begin.

 

2 Responses to Eurogeddon – the Japanese Perspective

  1. Very well put. I get more out of these posts than almost everything I read in the press…unsurprisingly I suppose!

    One question: isn’t the risk in Japan “what happens to JGB yields when/if the governance code has its intended effect and all that corporate cash is put to better use? ” This is what I have been thinking for a while,- in fact, every since I proposed the code.

    • If the intended effect of having better governance is to have assets managed more efficiently, you can have increased output and therefore, higher tax revenues without higher inflation. One of the more plausible unintended effects might be that corporations collectively throw all their excess cash down a giant rat-hole, but it’s not clear to me how that would be bad for bonds.

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2 Responses to Eurogeddon – the Japanese Perspective

  1. Very well put. I get more out of these posts than almost everything I read in the press…unsurprisingly I suppose!

    One question: isn’t the risk in Japan “what happens to JGB yields when/if the governance code has its intended effect and all that corporate cash is put to better use? ” This is what I have been thinking for a while,- in fact, every since I proposed the code.