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Japan

Merkelnomics v. Abenomics: German Rigor Or Seductive Japanese Stimulus?

One writer outlines what German Chancellor Angela Merkel is doing right; and sees potential deep flaws in the economic policies of Japan's Shinzo Abe.

Shinzo Abe and Angela Merkel at the 2013 G8 Summit in Northern Ireland
Shinzo Abe and Angela Merkel at the 2013 G8 Summit in Northern Ireland
Laurence Daziano

-Analysis-

PARIS — “Abenomics” is the name given to the economic revival measures implemented by Japanese Prime Minister Shinzo Abe since December 2012. There are three main strands: a massive fiscal stimulus, large-scale monetary easing by the Central Bank of Japan, and structural reforms aimed at increasing the competitiveness of Japanese businesses. These measures have provided a significant boost to the Japanese Stock Exchange and caused a weakening of the yen that has benefitted Japanese exports and tourism.

Several months down the line, Abe has indeed managed convincing results. Japan’s consensus forecast — the average of all projections from research institutions and banks predicting Japan’s future growth — anticipates that it will hit 4% over 12 months, but unemployment figures rose to 3.9% in June of this year.

As Europe is stuck in a deep, ongoing economic crisis, this audacious economic policy has elicited significant interest, even seducing many political and economic decision-makers. But Abe's tactics could well be last-ditch measures. Several economists have taken this view, including Olivier Blanchard, chief economist at the International Monetary Fund and a disciple of Keynesian economics.

Of course, “Abenomics” considerably increases the money supply, but it also pushes up the public debt and public deficit. The country's deficit is currently 11.5% of gross domestic product (GDP), while public debt will soon surpass 200% of GDP. Japan has gambled on being able to turn its economy around quickly to reduce this debt, but the strategy is by no means a sure thing. Industrial production dropped 3.3% in June, and Japanese exports are still affected by the economic slowdown in Europe and BRIC countries — Brazil, Russia, India and China.

The success of Abenomics is intimately linked to the end of Japanese deflation. For this policy to succeed, inflation has to rise to reduce the real interest rate and, as a consequence, the debt burden. Thus investors would continue to lend at low rates, providing credit for the reform of public finances.

When two strategies diverge

But, if we take a closer look, the Japanese economic policy is the exact opposite of its German counterpart, which could be described as “Merkelnomics.” It requires balancing public finances, fiscal moderation, an orthodox approach to monetary policy and — this is the only point of convergence with Abenomics — structural reforms to improve competitiveness.

These measures were implemented at the start of the new millennium by former German Chancellor Gerhard Schröder, and Chancellor Angela Merkel has continued to follow this economic policy, very popular in Berlin, with the blessings of both the ruling Christian Democratic Union and Schröder’s Social Democratic Party.

Germany still remembers the long period of deflation in the 1930s and the failure of the recovery policies. After the war, Germany rebuilt itself using the simple idea that true legitimacy comes from society itself and that economic policy must be designed to achieve stability. The country operated under the belief that monetary policy cannot be used to play with prices and artificially create money supply, and that the independent central bank must guarantee this.

During the same period, following post-reunification shock, Schröder’s reforms decreased the weight of public spending, which was stabilized at 45% of GDP, a gap of 8 to 9 points compared with France. The tax burden rests mainly on households (72% of taxes) with just 28% coming from businesses. Moderate public spending allows a significant amount of earnings to remain within businesses, thus guaranteeing their competitiveness, which explains the trade surplus and the famous “Mittelstand” enterprises — the small- and medium-sized companies that some claim are behind Germany’s economic success. For example, the country has 335,000 export companies compared with France’s 110,000. Thanks to this rigorous economic policy, Germany has doubled its growth since 2000, which is measured at 2.4% for 2013.

So, Abenomics or Merkelnomics? At a time when the West, sunk deep in the sovereign debt crisis, desperately needs to return to an economy based on production, and rebalance its economic model by decreasing the weight of its consumer economy, Abenomics is a seductive short-term option. But it’s one that would prove dangerous in the medium term. It is Merkelnomics upon which we must base our economic policies: monetary neutrality, decreased public spending, pro-competitiveness reforms, redesigned business accounts, and the creation of Mittelstand exporters.

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FOCUS: Russia-Ukraine War

Wagner's MIA Convicts: Where Do Deserting Russian Mercenaries Go?

Tens of thousands of Russian prisoners who've been recruited by the Wagner Group mercenary outfit have escaped from the frontlines after volunteering in exchange for freedom. Some appear to be seeking political asylum in Europe thanks to a "cleared" criminal record.

Picture of a soldier wearing the Wagner Group Logo on their uniform.

Soldier wearing the paramilitary Wagner Group Logo on their uniform.

Source: Sky over Ukraine via Facebook
Anna Akage

Of the about 50,000 Russian convicts who signed up to fight in Ukraine with the Wagner Group, just 10,000 are reportedly still at the front. An unknown number have been killed in action — but among those would-be casualties are also a certain number of coffins that are actually empty.

To hide the number of soldiers who have deserted or defected to Ukraine, Wagner boss Yevgeny Prigozhin is reportedly adding them to the lists of the dead and missing.

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Some Wagner fighters have surrendered through the Ukrainian government's "I Want To Live" hotline, says Olga Romanova, director and founder of the Russia Behind Bars foundation.

"Relatives of the convicts enlisted in the Wagner Group are not allowed to open the coffins," explains Romanova.

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