Wednesday, May 30, 2012

Europe: lessons from Japan

In my other blog (in portuguese), I have recently (19th April) posted a note about the japonese experience during last two decades and its potential lessons for the eurocrisis, based on the ideas of Richard Koo in his paper "Revitalizing the eurozone without fiscal union" to last INET Conference (Berlin, April 2012).
Today Krugman posted about Japan as "role model" and shows a plot of male employment rate, 15 to 64 years old, of Japan and USA from 1991 (only males in order to avoid eventual cultural bias). And he concludes that Japan has managed a "liquidity trap" situation much better than USA, avoiding a rise in unemployment under those adverse conditions:
  • For all its woes, Japan has never experienced the kind of employment collapse we’ve suffered. That’s the sense in which we’re doing far worse than the Japanese ever did.
I built a similar plot, but including Germany and EU17 data from 2000 (as available in OECD statistics):

Krugman post links to a nice piece of journalism: an interview of Krugman by Martin Wolf, published in weekend FT supplement (Lunch with FT: Krugman). In the interview Krugman has commented about the japonese experience:
  • “What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model. They never had as big a slump as we have had. They managed to have growing per capita income through most of what we call their ‘lost decade’. My running joke is that the group of us who were worried about Japan a dozen years ago ought to go to Tokyo and apologise to the emperor. We’ve done worse than they ever did. When people ask: might we become Japan? I say: I wish we could become Japan.”
"We", by Krugman, means USA, of course. It was this comment that suggested him his post. But our figure shows that EU17 performance is not better than USA. The inverse trends of German and EU17, specially after 2008 crisis, are striking: Germany employment is improving and meanwhile UE17 situation is degrading. 
Next figure compares Germany data with the southern countries in crisis (Portugal, Spain, Italy and Greece). Post 2008 crisis data for the four southern countries show a dramatic drop in male employment rate - softer in Italy but very hard for the other three countries. These lines show how the gap in economic environments between these countries and Germany is enlarging very fast, which may transform the situation into a very difficult one. The ghost of the Prussian may happen to return to Europe. (El Pais, the spanish newspaper, publishes today an article about the new Cold EuroWar with the division of UE into two different blocs).

More from Krugman interview to Martin Wolf, about the eurocrisis:
  • “No. I don’t think they can save Greece but they can still save the rest if they’re willing to offer open-ended financing and macroeconomic expansion.” But this would mean persuading the Germans to change their philosophy of economic life. “Well, the prospect of hanging concentrates the mind; the prospect of a collapse of the euro might concentrate their minds.”
  • Would he conclude that the European currency union was a mistake? “Yes, I think we’ve been asking, whose fault is this crisis? And I think it was basically fated, from the day the Maastricht Treaty was signed. Now, I think it might be rescuable with a higher inflation target, which is a poor second best to having a fiscal union. But no, the setup is fundamentally not workable.
  • What’s interesting is that the euro itself created the asymmetric shocks that are now destroying it [via the capital flows it engendered]. Not only have they created something incapable of dealing with shocks but the creation engendered the shocks that are destroying it.”
(Italics our responsibility)

Sources: data from OECD, Short term labour market statistics.

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