Fascinating discussion from Bloomberg Briefings:


The ECB appears to be understating the similarities between the weak growth outlook in Japan after its domestic asset bubbles popped in the early 1990s and that for the euro area in the present crisis. The performance of the Japanese economy 20 years ago was better than that of the euro area more recently. The Nikkei 225 peaked at the start of 1990. GDP was 7 percent higher 4.5 years later, according to the IMF’s measure in constant prices.

The Euro Stoxx 50 peaked in the second quarter of 2007. Economic output was about 1 percent lower 4.5 years later and about 2 percent below its peak of 2008. The superior performance of the Japanese economy relative to that of the euro area occurred during a period of less fiscal deterioration. The gross government debt-to-GDP ratio of the Asian country increased by 10 percentage points – during the four years after its stock market collapsed – to 77.3 percent in 1993 from 67.3 in 1989. The experience of the euro area has been much worse. Its aggregate debt-to-GDP ratio rose by 21.7 percentage points to 88.1 percent at the end of 2011 from 66.4 percent at the end of 2007.

As Mark Twain reportedly quipped: “History doesn’t repeat itself but it does rhyme.” ECB economists, in their analysis of the Japanese experience in the central bank’s monthly bulletin for May, published yesterday, wrote: “As banks struggled with bad debt for years, they curtailed lending to new firms, which led to distortions in the allocation of credit and ultimately exacerbated the financial crisis and postponed a sustainable recovery.” That description would fit the euro-area situation if the words “bad debt” were replaced with “raising capital”.

European policy makers have failed to implement some of the reforms that also proved elusive in Japan. The staff economists stated: “The strong emphasis traditionally placed on job security in Japan may have reduced flexibility by hampering sectoral adjustments in the economy.” This time, only one word needs to be changed to describe the euro area. That is “Japan”. The fiscal problems are also comparable. The analysts in Frankfurt said “deteriorating revenues and rising social security spending also contributed to the increase in the fiscal deficit in the early 1990s. To consolidate public finances, the government raised value-added taxes in 1997 with the onset of the Asian crisis, which some observers regard as having postponed the recovery.” Demographic similarities are striking as well. The authors of the analysis wrote: “The Japanese economy faced unfavourable demographic developments from the 1990s onwards, as the working-age population reversed its previous growth trend and started to decline.” The staff economists should report their findings to the Governing Council. They concluded: “Despite initial room for maneuver before reaching the lower zero bound of interest rates, monetary policy responded slowly to the crisis, partly because – even two years after the stock market crash – the central bank (had not) anticipated a protracted slowdown of the economy. As inflation expectations also remained low…credit contracted. During this period, the effectiveness of the monetary transmission mechanism may have been impeded by the underlying problems in the private sector, which were not tackled by regulatory authorities.”

 

Click to enlarge:

Source:
Bloomberg BRIEF
Economics – News, Analysis & commentary

Category: Bailouts, Credit, Really, really bad calls

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5 Responses to “ECB: EU Economy Strikingly Similar to 1990s Japan”

  1. RW says:

    “Despite initial room for maneuver before reaching the lower zero bound of interest rates, monetary policy responded slowly to the crisis, partly because – even two years after the stock market crash – the central bank (had not) anticipated a protracted slowdown of the economy. As inflation expectations also remained low…credit contracted. During this period, the effectiveness of the monetary transmission mechanism may have been impeded by the underlying problems in the private sector, which were not tackled by regulatory authorities.”

    Hey! We resemble that remark!

  2. PrahaPartizan says:

    Christ on a crutch, why are any of the central bankers anywhere still drawing a salary from anybody. They should be living on the street in a box while covered by old newspapers highlighting their persistent failure in producing any sort of policy which is bedeviling the global economy. Current policies have failed, crashed and burned, augured in. They still don’t get it. Will it take more direct action against the elites to get them to understand the depth of their failures?

    Europe’s problem isn’t that it’s hampered “sectoral” adjustment. It’s problem, like Japan’s, is that it’s not addressed the problems in the financial sector alone. Allowing a sole sector to seize out earnings for its elite workers while providing zero in societal benefits has proven definitively to be counter-productive. Japan still hasn’t addressed that problem Europe seems to have been going down that same road to ruin, but for the fact that Europe is much less homogenous than Japan. Some of the European economies will break with this insanity, forcing a general reevaluation. Nothing like that can happen in Japanese society, to their detriment.

  3. philipat says:

    The US would look any different?

  4. constantnormal says:

    philipat Says: “The US would look any different?”

    That is certainly The Question.

    It need not be so, as we have a few differences which could be changed to alter the picture for us …

    1) We have a somewhat better demographic picture (I think), with a population that is not yet falling … We still have a substantial cohort of the young that could propel this nation forward. However, we are rapidly flushing that generation down the drain, with few opportunities and little hope of changing things. The Boomers, having utterly failed to prepare themselves for retirement, promise to drain our economy of every last cent, and will ultimately end up scrabbling with the 1% for the remaining crumbs, leaving the young with nothing.

    2) We have IMMENSE budgetary mis-allocations that could be re-directed to address our fiscal and developmental issues. We spend about as much on our bloated military as we do on our pampered senior citizens. We allow corporations that are publicly owned/funded to be looted by CEOs via criminal compensation schemes. These are things that could be easily addressed legislatively, except for the fact that we have a system of government that is as corrupted as that of any (other) banana republic.

    3) There is plenty of evidence that we are the most under-taxed developed nation on the planet. Our wealthy enjoy ridiculous tax breaks (and our middle classes are no slouches in this department, but they lack the imagination and corps of lobbyists to reward themselves in the ways that the wealthy do), our corporations are little more than tax dodges for the wealthy, paying a pittance in taxes and funneling tax-advantaged profits via capital gains and dividends to those that own the vast majority of their stock.

    But the real test, just as it was with Japan and is also with Europe, is whether we are willing to allow/force our busted banksters to be forcibly de-leveraged via bankruptcy, whether we will return to rational accounting standards and reasonable regulation of our financial industry. Our track record on this is not hopeful, with few understanding the need to let dead corporations die, fewer still who can tell the living from the dead, and no political power resting anywhere but with the rich corporations and the 1% that own them.

    So we likely will slide down the drain with Japan and Europe. The hope for Mankind lies with the emerging nations, not with the developed world. The developed nations seem to have contracted a disease that eats away at our imagination and will, I believe it is known as Success.

    Few survive encounters with Success.

  5. mathman says:

    The whole of human-designed, evolved “civilization” is on it’s last legs: economically, socialogically, environmentally, psychologically, and with regard to “resources” like potable water and food production. We had a long run of it up until we stopped learning from our mistakes (after the so-called “Enlightenment”), overpopulated the planet with consumers with big appetites and no regard for each other, polluted the shit out of the only fishbowl we live in, clung to fictitious worldviews based on “money,” rigid and goofy ideas based on competition rather than cooperation, and as so-called “problem solvers” make killing each other a priority over coming to reasonable consensus that benefits all. We’re so lost we don’t even know which way is up any more, so don’t expect us to get out of this on-going collapse before most of humanity is gone. There is no fixing the situation we’ve gotten ourselves in to.