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Balanced Fare: We Report, You Deride

Thursday, June 05, 2003

Bananas Grow In Bunches

Paul Krugman has referred several times to the possibility that the US public finances will deteriorate to the point that we will be treated as a "banana republic". I have pointed out, in earlier posts, that problems in the US are probably less than those facing Europe and Japan. With that upbeat theme, here we go:

Gloom from Europe:

...Stephen S. Roach, the chief economist at Morgan Stanley and the lone American speaker at the meeting, went further. "Europe is the new weak link in the global growth chain," Mr. Roach said, "and Germany is its biggest, weakest link."

Does that mean we vote them off the island? Ooops, wrong show, I need to spend more time in front of the telly. The article presents the conventional wisdom on Europe's problems with rigid labor markets and the No-Growth and Instabilty Pact (sorry, I can't recall the correct name). It could do a better job of deriding Europe's hopeless demographics, but, whatever.

Also, end the suspense, the ECB does go ahead and deliver a half-point cut.

Now, because we are very Serious Minded People here, we present the news that Schroeder of Germany won the endorsement of his party for labor market reforms of the type that he promised when he was first elected years ago as a Man with a Plan:

Germany's Social Democratic Party Endorses Schröder

BERLIN, June 1 — Chancellor Gerhard Schröder's plan to enact economic reform by reducing Germany's vast network of social protections was approved today by 90 percent of the delegates at a politically crucial meeting of his Social Democratic Party.

The vote at a one-day party congress here endorsed what has come to be called Agenda 2010, which would reduce unemployment benefits and give added flexibility to employers to hire and fire workers.

The program has prompted a fierce debate in Germany, with leftist members of Mr. Schröder's governing coalition denouncing it as pro-business and unfair to working-class and poor people.

The party's resounding endorsement does not necessarily mean that the program will become law, because some members of Mr. Schröder's slim governing majority could vote against it when it is presented to Parliament in the weeks ahead. But the vote was a clear political victory for the chancellor, who threatened as the debate has raged to resign if he failed to win his own party's support.

For the punchline, here is news about strikes all over Europe as folks contemplate various reform efforts.

June 4, 2003
West Europe Is Hard Hit by Strikes Over Pensions

FRANKFURT, June 3 — A wave of strikes from France to Austria left much of Western Europe snarled today, as protesting workers shut down subway systems, ports, trains, toll roads and airlines.

In France, where leaders of the seven major industrial countries and Russia ended a summit meeting in the spa town of Évian-les-Bains, a strike by air-traffic controllers grounded 80 percent of the flights into and out of the country.

In Austria, the strikes were the biggest since World War II, leaving the capital, Vienna, without any public transportation or postal service. Protesters even blockaded the entrance to the airport.

Workers in both countries share the same grievance: government proposals to change the national pension systems, either by cutting retirement benefits or by making people work longer to qualify for them.

Smaller strikes also erupted in Italy and Germany. Flight attendants at Alitalia, the Italian airline, called in sick to protest job cuts, forcing it to cancel 285 flights. In eastern Germany, steelworkers picketed factories to demand the same 35-hour work week that their counterparts in western Germany have.

Note that the strikes in Germany were NOT connected to Schroeder's proposals I noted above. Those strikes will no doubt be forthcoming as that legislation moves through the system.

And, we turn west for Gloom from Japan:

Frugal Japanese Dig Into Savings

...For decades, the Japanese routinely socked away 10 to 20 percent of their incomes, earning a reputation as one of the world's most frugal people. In those years, Japan badgered the United States about its wasteful ways and trade deficits, even as Japanese companies benefited from selling Americans cars and electronics.

But a decade of recession here and a rapidly aging society are changing all that. Japan's household savings rate fell to a postwar low of 6.9 percent in 2001, the last year for which complete figures are available, from 11 percent in 1999 and 14 percent in 1990.

Based on preliminary data, the savings rate fell another two percentage points in 2002, economists said. Within a decade, if current trends persist, Japan's savings rate will hit 1.5 percent, according to HSBC Securities, pushing it below America's, which rose to 3.7 percent in 2002.

...Some of the erosion in Japan's savings rate was inevitable. In the postwar era, Japan benefited greatly from a young and expanding population, which helped to expand both growth and savings rates. Today, more Japanese are reaching retirement age and are dipping into their savings accounts to pay for everyday costs, a trend expected to continue.

By 2010, more than 22 percent of Japan's 127 million citizens will be at least 65 years old, up from 17 percent just three years ago. By 2015, the elderly will outnumber the young, because of a record low birthrate.

..."People are hanging on, not letting their hair down," Chris Walker, an economist at Credit Suisse First Boston in Tokyo, said, referring to the declining savings rate. "If things continue as they are, Japan will subside toward a middle-income country."

Mr. Walker's pessimism stems from Japan's national debt, which is 150 percent of gross national product, highest among the major industrialized nations. Though the government can issue bonds indefinitely, sooner or later it has to pay them back. Assuming the economy grows at 1.5 percent a year over the next decade, as the government expects, lawmakers will have to raise taxes, commandeering even more of the country's savings.

If the US is headed towards bananadom, what fruit basket do we put Japan in?

NOTE: Backup links for Europe, Japan

UPDATE: Prof. DeLong, economist and proofreader extraordinaire, finds more gloom at The Economist, and notices another Krugman Connection.

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