The International Monetary Fund doesn’t want to say it outright, but its latest World Economic Outlook shows more stagnation of the European and Japanese economies, and the possibility of a third EU recession since 2008.
Could the EU become another Japan with its 20 years of downward spiraling deflation and slow economic growth that caused its economy to fall from second to forth in size, behind the U.S., Euro area, and China? We think so, if its austerity policies aren’t reversed. Instead of reducing deficits, more public spending should be allowed when private sector businesses and households are saving more and spending less.
EU GDP growth shrank -0.7 and -0.4 percent in 2012, 2013 respectively and the Euro Area is projected to grow just 0.8 percent in 2014. IMF chief economist Olivier Blanchard said in his blog that “Growth in the euro area nearly stalled earlier this year, even in the core. While this reflects in part temporary factors, both legacies (ie, debt), primarily in the south, and low potential growth, nearly everywhere, are playing a role in slowing down the recovery.”
And “Japan is growing, but high public debt inherited from the past, together with very low potential growth going forward, raise major macroeconomic and fiscal challenges,” said Blanchard. Japan’s economy grew 1.5 percent in 2012 and 2013, and is projected to grow 0.9 percent in 2014, according to the IMF. This is when U.S. GDP is projected to grow 2.2 percent in 2014 and 3.1 percent in 2015, according to the IMF.
Why the stagnation when Europe and Japan are now the second and fourth largest economies in the world, as we said? Much of it has to do with their own economic policies that underestimated the depth of their respective asset bubbles causing major recessions when they burst. And so both economies suffered in their own way from misplaced austerity policies.
Japan’s malaise has been ongoing since 1995, due in large part to its kieretsu system of interlocking industry ownerships that kept policymakers from writing down bad debts in a timely manner. Good money was thrown after bad debt in an attempt to rescue ailing companies and industries. This resulted in decades of downward spiraling deflation that only now is being addressed by their new Prime Minister Abe with massive public spending that is finally curing the deflation, at least.
Yet the EU has still not reversed their austerity policies of public spending cuts, though EU Central Bank head Mario Draghi has announced a program of Quantitative Easing, much like the Fed’s QE programs.
As Nobelist Paul Krugman said on the Bill Moyers Show ( and many other times),“ “The only obstacles to putting people to work, to having those lives restored, to producing hundreds of billions, probably 900 billion a year or so of extra valuable stuff in our economy, is in our minds. If I could somehow convince the members of Congress and the usual suspects that deficit spending, for the time being, is okay, and that what we really need is a big job creation program, and let’s worry about the deficit after we’ve had a solid recovery, it would all be over. It would be no problem at all… All the productive capacity is there. All that’s lacking is the intellectual clarity and the political will.”
That is of course what happened with the New Deal, though it took World War II to put everyone back to work. But European policymakers seem to have ignored the lessons of the Great Depression, and the truths in Thomas Piketty’s Capital in the Twenty-First Century, in which he opines that the wholesale transfer of wealth to the wealthiest that has been ongoing over the past 30 years is a major reason for the slow recoveries. The top 1 percent spend very little of their record earnings, and wealth taxes have been severely reduced, limiting governments’ ability to spend on public necessities and create more jobs.
The U.S. Federal Reserve is doing the right thing in staying the accommodative path, according to just released FOMC minutes of last month’s meeting. It agreed to keep the wording that interest rates would stay low “for a considerable time” as forward guidance, and sure enough, stocks had a huge rally after the announcement.
As if to echo the IMF report, the Guardian’s Economics Blog also announced that the experiment – German designed, German engineered and German exported – with austerity has failed. “The eurozone is not cutting its way back to prosperity. It is cutting its way towards being the new Japan.”
Harlan Green © 2014
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