Japan launched major yen-selling intervention on Oct. 31 in response to massive speculative yen-buying — the first such action since August. The ever-rising yen is threatening Japan’s export industry and can easily derail the eagerly awaited economic recovery from the March 11 shock. However, it remains unclear whether the recent yen-selling will have any lasting effect on the currency’s value.
This is first of all because of the debt crisis in Europe and the unclear future of the euro. Japan can only indirectly support Europe by continuing to buy bonds of the European Financial Stability Facility. It already is the biggest holder of EFSF bonds outside of the eurozone. But in the end, Japan’s fate -and that of the entire global economy — will depend on developments within Europe itself. So which course will the euro and the European Union take?
The crystal ball with a clear answer to this question has not been found yet. But there are more and more observers who agree that only a radical solution will lead Europe out of its current crisis. Either the euro system will implode or European nations have to radically accelerate their integration process and move to something resembling a United States of Euro Land or the euro will implode. There seems to be less and less room for a muddling through between these two scenarios.
Europe is facing a political crisis even greater than its debt crisis. Citizens and markets alike are losing their trust in the European idea, including its currency. Despite having approved €500 billion as gun powder to fight the crisis, trust remains elusive with no common political fundament and master plan in sight. Jean-Claude Trichet, president of the European Central Bank until last month, and often dubbed as “Monsieur Euro,” has even labeled the current situation in Europe “the worst crisis since World War II.”
Germany as Europe’s largest economy stands at the center of fighting this crisis. And it finally seems to be moving in a direction of giving up national sovereignty toward the goal of a United States of Euro Land, which is seen as the only way out. But what would be the conditions for such a model to become real? Here is what experts say:
First, national parliaments must give up their power for a Euro Land Parliament, which would represent individual countries according to their size. This would also allow a unified entity supervising financial markets — something still missing in today’s Europe.
Second, social and tax systems must be harmonized. Only when corporate tax ratios, social benefits and pension conditions are unified would real solidarity among different nation states be thinkable.
Third, Euro Land would need automatic stabilization systems. Due to the lack of national monetary instruments such as interest or exchange rates, systems are needed that provide balance automatically. For starters, just imagine a pan-European unemployment insurance system that automatically transfers income from booming regions to those suffering.
Finally, another precondition must be met. In this new world, rules must be obeyed. So far, the European Union has been too lenient in punishing those (e.g. Greece) for not sticking to the rules. Only if this attitude changes is there a realistic chance for a new solidarity system called United States of Euro Land.
At first sight, this list of conditions seems unrealistic. Will Germany and France really give up the implicit leadership role they have enjoyed so far? What will be the reaction of the other 15 euro countries? And what will be the stance of other noneuro European Union members, such as the United Kingdom. The recent quarrel between French President Nicholas Sarkozy and British Prime Minister David Cameron has again highlighted the deep rifts existing between the euro and noneuro states.
The biggest obstacle finally might be European citizens themselves. So far, the integration process of the European Union has been rather slow on purpose to ensure that Europeans buy into the European idea. It is a wide open question whether the current crisis can serve as a wake-up call toward faster integration.
Yes, the United States of Euro Land scenario might seem unrealistic. But likewise the implosion of the current euro-system appears yet unthinkable with all its political and economic repercussions in Europe and the world. This applies especially to Germany, which stands to lose the most if the euro and the European idea should fail. And this is exactly why political leaders not just in Berlin but also in Paris, Brussels and elsewhere will work even harder for a political solution to this crisis.
The final outcome for Europe and the world is yet unclear. However, there is already a clear lesson for Japan today. The combination of high public debt with a deep and ongoing political crisis is a dangerous one and will eventually result in the loss of trust — by citizens and by markets alike.
Japan continues to walk a thin rope of combining high public debt with a political crisis that has lingered on for years. If not addressed in a convincing way, the trust of the Japanese people in their country’s future might evaporate even faster than the yen can climb. Just look at Europe.
Jochen Legewie is president of German communications consultancy CNC Japan K.K. (See his blog: www.cncblogs.jp)