Japanese spirituality and how the French left misunderstands the 1930sby John Plender / January 20, 1998 / Leave a comment
You have to hand it to the Japanese-it takes genius for the world’s biggest creditor nation and largest capital exporter to plunge itself into a liquidity crisis. Yet after the collapse of Hokkaido Takushoku, Japan’s 10th largest bank, and the closure of Yamaichi Securities, depositors have been out in force demanding their money back. Taken together with the rash of competitive devaluations in southeast Asia, it looks suspiciously like a regional re-run of the 1930s, with the markets scenting a spillover into global deflation.
It is untrue that people learn nothing from history. The collective memory of central bankers has saved the world from more than one slump since the Depression. Even the Bank of Japan had the nous to open the monetary sluice gates and pump liquidity into the system after Yamaichi’s demise. Yet the real problem is one of solvency-the legacy of crippling bad debts left over from the 1980s, and the historical memory of the Japanese ministry of finance is selective. Officials are haunted by the huge budget deficits of the 1980s-which is why they crazily knocked recovery on the head with premature tax rises earlier this year.
The right prescription for an economy weighed down by debt is a determined fiscal expansion, combined with a scrap-and-build programme for the banking system to ensure that the weak cannot jeopardise the solvent. Asia’s wider problems require the IMF to propose tough structural reforms while recognising that its standard prescriptions for a single troubled country could prove dangerously deflationary when applied across a whole region.
Whether the IMF under Michel Camdessus is up to the challenge is a big question. The IMF’s instincts are inherently deflationist, as are those of French central bankers. As for the Japanese, a visiting dignitary from Tokyo told me last month that the key to getting a grip on the problem was a return to spirituality. Dear God! The odds are still on the world muddling through, but it can’t be done on a wing and a prayer. And come to think of it, if the real threat is deflation, is it helpful to have such a pronounced Scottish Presbyterian bias in the British Treasury team?
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one senses blank incomprehension in Tony Blair’s government over the obtuseness of Lionel Jospin’s labour market policies. Why should a country suffering from high unemployment make hiring workers more expensive by cutting the working week? History has the answer.
L?on Blum’s Popular Front is sanctified in France for having introduced in 1936 a statutory three-week holiday, a 40-hour week and higher wages. It also rescued the economy from the savage deflation which resulted from sticking to the Gold Bloc through thick and thin. A devaluation of the franc was enough to offset the damage to French competitiveness done by the change in the cost of labour. The trouble is that people still confuse the relative impact of these two very different policies.
The confusion is understandable; devaluation was not an explicit part of the Popular Front’s programme. (Indeed, the communists were dogmatically opposed to it.) Did Blum himself understand the reasons for France’s recovery? A striking feature of French exchange rate policy over the past century is how often success has been the product of accident, not of design.
If Jospin’s government is recalcitrant over the labour market it is not just a misunderstanding of history. Like much of northern Europe, France confronts its problems from a very high level of per capita income. So while the people have been afflicted by morosit?, the sense of crisis which pervaded Britain in 1979 is absent. The French feel no need for a Margaret Thatcher.
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the membership of the 1930s Gold Bloc was much the same as that of the Latin monetary union of the 19th century, a French-inspired forerunner of Emu. British economists, including Walter Bagehot, were worried about being left out in the cold. Plus ?a change.
Do the political costs of being out of Emu really outweigh the risks of being in a monetary union with Italy? The Italian political debate on Emu is predicated, after all, on meeting the Maastricht fiscal criteria, joining Emu and then going back to normal. Normality means running up huge fiscal deficits.
The doctrine of unripe time is the best, but also the most uncomfortable policy for Tony Blair in the light of past history with Europe. In moments of doubt he should read the words of the British delegate to the conference on monetary union called by the French in 1867: “So long as public opinion has not decided in favour of a change of the present system, which offers no serious inconvenience… and until it shall be incontestably demonstrated that a new system offers advantages sufficiently commanding to justify the abandonment of that which is approved by experience and rooted in the habit of the people, the English government could not believe it to be its duty to take the initiative in assimilating its coinage with those of the countries of the continent.”
There’s confidence for you-and the cost-benefit analysis is right.