Japanization is shorthand for slouching toward that country’s noxious mix of low growth and high debt. Eurozone governments will find it tough to keep the ugly new word out of their lexicon.
Concern is mounting over a deterioration in Europe’s long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.
The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organisation for Economic Co-operation and Development (OECD) in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.
“A lot of countries are going to take a permanent hit to their trend rate of growth. This is not a ordinary recession and so we’re not going to see countries bouncing back to pre-crisis rates of growth,” said Philip Whyte, a senior research fellow at the Centre for European Reform, a London thinktank.
As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.
And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods — a danger stressed by US Federal Reserve Chairman Ben Bernanke at the Fed’s Jackson Hole symposium last month.
Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to GDP ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.
Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy — policies such as making it easier to hire and fire, promoting greater competition and investing more in training.
Far from it. OECD chief economist Pier Carlo Padoan says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.
“I see that measures are being announced. I would like to see them being implemented,” Padoan said.
With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change.
“This is a luxury that many countries cannot afford any more. The situation does not allow it,” he said.
The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the eurozone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.
“They’re going through some truly horrible times. I’m very worried about the whole southern European fringe, not just on an 18-month to two-year view, but looking out a decade or longer,” Whyte said.
Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.
“The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms,” European Central Bank President Jean-Claude Trichet said approvingly in Jackson Hole.
How much are countries missing out by not pressing the reform button?
Padoan says Europe’s trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation eurozone could almost double that rate with a supply-side jolt.
Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.
Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.
These policy prescriptions are well worn. Leaders of the EU enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.
“The Great Financial Crisis hasn’t been a great advert for free-market capitalism,” Whyte said.
His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. However, in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.
Europe is not doomed to go down Japan’s path of economic stagnation. Its potential growth rate is low, but stronger than Japan’s — estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.
However, the specter of a renewed recession is a reminder for governments that, even if they can spirit away the eurozone’s currency and debt woes, they have still to find the elixir for growth.
“I’m not saying politicians will implement reform, but they should,” Padoan said. “Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high.”
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
As former president Ma Ying-jeou (馬英九) wrapped up his visit to the People’s Republic of China, he received his share of attention. Certainly, the trip must be seen within the full context of Ma’s life, that is, his eight-year presidency, the Sunflower movement and his failed Economic Cooperation Framework Agreement, as well as his eight years as Taipei mayor with its posturing, accusations of money laundering, and ups and downs. Through all that, basic questions stand out: “What drives Ma? What is his end game?” Having observed and commented on Ma for decades, it is all ironically reminiscent of former US president Harry