We will now analyze the influence this Japanese illness has been exerting on other economic areas, particularly following the last financial crisis and the Great Recession of 2008.
I am not going to expand too much on the United States. I have already mentioned that the fundamental difference between the Japanese and the American economies is that the latter is far more nimble and flexible. That is why, despite all of the errors and monetary aggression, the American economy has been realigned relatively rapidly. In other words, despite quantitative easing, it has come out of the recession because it has very significantly restructured and corrected many of the errors committed. Nevertheless, this has not been fully achieved: There are still very large companies and sectors in the American economy that remain heavily dependent on cheap money. In
any case, the Americans have dared to raise interest rates, though they have done so very hesitantly and later lowered them, which could mean they are in the typical starting phase of a new expansion of credit, which would, in turn, indicate the beginning of a new cycle within a few years. The obstacle is posed by Trump’s policy of protectionism, because if new tariffs are established, they would artificially force an erroneous allocation of productive factors toward a more closed economic and entrepreneurial structure, one that is, therefore, less productive and less open to foreign trade. This added uncertainty has been used by the Federal Reserve precisely as an excuse to temporarily suspend or even reverse its policy of monetary normalization. On the slightest pretext, central bankers are always ready to justify lowering interest rates, but they find it extremely difficult to start raising them. However, though the US economy is the largest in the world, let us not dwell any more on the United States, with its particular problems. Instead, let us focus on the economic area closest to us and currently of the most interest to us.
The case of the European Union is far more interesting. To begin with, the policy of the European Central Bank has gone through two very distinct stages. There was a prior stage, in which the European Central Bank intervened, more or less like the Federal Reserve did, but still without taking the step toward aggressive quantitative easing. During this first stage, which lasted until the year 2015, the euro served to discipline the most spendthrift European governments, above all those of the periphery countries. As there were public deficit obligations to meet, a crisis of sovereign debt (not of the euro) emerged in certain countries, including Spain, and the European Central Bank used this crisis to force the implementation of the necessary reforms in various countries, including Spain. The ECB even intervened in the economies of several countries, among them, Ireland, Greece, and Portugal. In the countries where reforms were put into effect, economies were restructured and eventually overcame the crisis. This is the case of our own country, Spain, in which the government, with great difficulty, in a very lukewarm manner, and committing the grave error of emphasizing tax increases more than reductions in public spending, took several steps in the right direction by undertaking certain structural reforms our economy needed.
The most serious problem has arisen during the second stage, when the ECB introduced needlessly (since M3 growth was already close to 4 percent at the beginning of 2015) its ultra-lax monetary policy of lowering interest rates to zero (and even less than zero), and especially when it implemented its own, very aggressive quantitative easing. In fact, the ECB actually purchased sovereign and corporate debt at a pace of eighty billion euros a month, which meant almost one trillion euros of newly created money (or increases on the ECB’s balance sheet) per year. This was equal to 10 percent of the GDP of the Eurozone for almost all of four long years – 2015, 2016, 2017, and 2018, when the program was temporarily suspended and then reintroduced amid strong controversy and with the express opposition of Germany, France, Holland, and other countries in November of 2019 (at a pace of twenty billion a month).
This second stage of the ECB has been disastrous. At the very moment this ultra-lax monetary policy was initiated, as the case of Spain illustrates, all of the policies of structural reform, reductions in spending, and liberalization that the very rigid European economy needed were suddenly suspended. Clearly, compared with Japan, Europe is composed of a heterogeneous set of economies. While Japan comprises a very uniform economy and society, the economic variety in Europe is much greater. Some of Europe’s economies were already on a relatively sound footing, for other historical and political reasons, as in the case of the German economy. Other economies are very rigid, and in a certain sense more Japanized, despite their wealth, and these are the truly “diseased economies of Europe”: France and, particularly, Italy. These economies have a very long list of pending structural reforms, and they have implemented practically none of them, especially since the ECB started purchasing their public debt. Finally, another group of countries had launched structural reforms in the right direction; some of these countries – like Ireland and Portugal, and even Greece – have already nearly completed them; while others – like Spain – are only halfway there. The countries that have managed to complete their reforms are very fortunate. But in Spain, all subsequent reforms – those which had been planned but were still pending – were suspended. If we are not careful, this will have a very high social and economic cost, especially if populism is strengthened, based on the increases in taxes, subsidies, and public spending the socialist administration has announced.
In many ways, the German economy is paradigmatic. To begin with, it is an export power. But how has it come to export so much? It exports so much, because it produces very high-quality products. And why does it produce products of outstanding quality? Because traditionally, the German entrepreneurial culture has developed in a very difficult trade environment; that is, with a currency, the German mark, that has steadily appreciated, thus making it harder and harder to export anything. And in this context, the only way to export products is to produce the best ones in the world. In other words, under such circumstances, the Germans had no choice but to discover, innovate, produce, and introduce the very best products in the world – whether vehicles, precision instruments, machinery, etc. So, in spite of all the false logic of the competitive monetary depreciation advocated by Keynesians and monetarists, Germany became one of the strongest export powers in the world. This flies in the face of the protectionist analysis of Keynesians and monetarists. It is a strong currency, and not a weak one, which in the long run fuels entrepreneurial success and triumph as an exporter. But most analysts are conceptually impaired by their mathematical models, in which competitive depreciation appears to be the ideal recipe, since it immediately leads to an apparent, short-term prosperity which derives from the fleeting increase in exports that every depreciation makes possible. This prosperity is “bread for today, hunger for tomorrow.” It is fundamentally deceptive and short-lived, and it involves the unavoidable cost of dampening the creative and innovative entrepreneurial spirit, the drive to make things better and better. Why should we make an effort, if, with a weak currency, our products sell themselves?
Remember my “best test of a good economist”: Monetary and fiscal manipulation will never produce sustainable economic prosperity, but the opposite. However, most of my colleagues would fail my exam; the proof of that lies in the fact that they constantly praise quantitative easing whenever it is launched in Europe. Without a doubt, this policy depreciated the euro, and the euro’s loss in value has permitted Germany, in the short term, to export products much more easily, and consequently, it has neglected, relatively speaking, its traditional competitive advantage based on perpetual improvements in quality. The depreciated euro has acted like a drug. It has generated fat instead of muscle on the German economy and, to a certain extent, has allowed it to rest on its laurels. As a result, Germany is now obliged to at least recover its lost muscle, if the country does not actually go into a recession.
France and Italy are horses of a different color. Their economies are extremely rigid, and it is practically impossible to carry through a single reform in them. Take, for instance, Macron, with all of his promised reforms, practically none of which he has accomplished. Adopt reforms in France? Never! It is practically impossible, and so France, which is a very wealthy country, is rapidly approaching Japanization and the illness of indefinite lethargy.
Italy’s situation, though more picturesque, is even worse than that of France. And as for the rest of the periphery countries, we have already discussed them, especially our own country, Spain. All signs point to a slowing down of the economic growth Spain has enjoyed due to the timid reforms in the right direction adopted in the past and to a number of tailwinds that are tending to disappear. This situation certainly does not bode well, especially if, as the socialist administration is announcing, taxes and public spending are raised and regulations are tightened (minimum-wage increases, the regulation of the rental market, the obligation for workers to clock in at work, etc.).