Lessons from the European Sovereign Debt Crisis to …..."Lessons from the European Sovereign Debt...
Transcript of Lessons from the European Sovereign Debt Crisis to …..."Lessons from the European Sovereign Debt...
"Lessons from the EuropeanSovereign Debt Crisis to Japan"Sovereign Debt Crisis to Japan"
Takatoshi ITOUniversity of Tokyo
Presentation in Ossesrvatorio Asia, Rome, ItalyFebruary 29, 2012
Outline
• Introduction
• European Debt Crisis
• Japanese Debt Crisis (in future?)
• Demographic problem• Demographic problem
• Puzzle. Why is the interest rate so low?
• Japan’s fiscal consolidation efforts
• Italy and Japan: common challenges
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Introduction
• Italy and Japan, similarities and differences– Similarity: High debt-GDP ratio
• Fiscal deficits and debt-to-GDP ratio
• Japan is now much worse now
– Similarity: Demographic Problem– Similarity: Demographic Problem• Low fertility
• Demographic deficits
– Difference: Exchange Rate• Italy in the Euro Area
• Japan independent float
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Gross Government Debt-GDP ratio Japan
used to be respectable, not anymore. Japan is muchworse than Italy now
150
200
CAN: Canada
DEU: Germany
FRA: France
GBR: UnitedKingdomITA: Italy
JPN: Japan
USA: United States
Japan
Italy
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0
50
100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
United KingdomUSA
CanadaFrance
Germany
Net Debt-GDP ratioSimilarly, in the “Net” measure
90
110
130
CAN: Canada
DEU:GermanyFRA: France
GBR: UnitedKingdomITA: Italy
JPN: Japan
Japan
Italy
Canada
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-10
10
30
50
70
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
United Kingdom
USA
Canada
France
Germany
-4
-2
0
2
4
6
8
(Percent of GDP)
Italy
Canada
France
General Government primary surplus (G7)A key indicator for sustainability. Italy is not bad at all
-12
-10
-8
-6
-4
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: International Monetary Fund, World Economic Outlook Database, September 2011.
JapanGermany
United Kingdom
United States
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European Debt Crisis
• Started with the Greek crisis– Critical points of time: October 2009; May 2010; May 2011; July
2011; and December 2011– Why couldn’t Greece, EU and IMF solve the crisis quickly?
• Crisis spread to Ireland, Portugal, Spain, and Italy– But very different fundamentals among the Five– But very different fundamentals among the Five
• Italy has primary surpluses; Spain has low debt-to-GDP ratio
– Why couldn’t EU, IMF & ECB prevent contagion?
• Classic view: Can we separate the fundamental crisis andcontagion? Let the former default if debt overhang is toomuch; and assist the latter with Lender of last resort– In sum, ring fence Greece, when Greek debts go default– Why has this not been applied in Europe?
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-5
0
5
10
(Percent of GDP)
ItalyIceland
GreecePortugalSpain
Projection
General Government, primary surplus (EuroArea countries with large debts)
-30
-25
-20
-15
-10
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: International Monetary Fund, World Economic Outlook Database, September 2011.
Ireland
Spain
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Japan
• Trend of the government finance: 1990s and 2000s– Expenditures continue to rise– Tax revenues fell in the 1990s and 2000s
• Income tax and corporate income tax fell• VAT (consumption tax) stable
• Last three years:• Last three years:– 40% of Expenditure is financed by new bond issues– New bond issues exceeds tax revenues– Not sustainable as is Needs fiscal consolidation
• Current government plan– VAT 5% 8% in April 2014;– and 8% 10% in October 2015– A step in the right direction
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Revenue and expenditure
46.850.8
54.9 54.1
49.447.2
50.747.9
45.6 44.349.1 49.151.0
60.159.8
54.451.0
51.953.952.1
81.484.9
89.0
84.4
78.578.875.9
73.675.1
70.570.569.3
65.961.5
57.753.653.051.550.6
47.246.9
82.483.7 81.8
85.584.889.3
84.7
92.3
101.0
52.060
80
100
120(Trillion yen)
Total Expenditures
1.0
23.7
29.0
38.241.9
46.8 47.2 47.945.6
5.37.2 7.2 6.7
9.5
18.5
34.037.5
31.3
44.344.3
38.737.4
15.713.8
17.3
43.8 43.3
32.430.5
34.9
21.9
26.9
47.246.943.4
38.8
34.1
29.124.5
20.9
7.3
35.035.335.5
27.525.4
33.2
9.6
13.514.212.9
14.013.5
12.812.39.411.3
6.6
21.2 21.7
30.033.0
10.7
16.2 16.5
(20)
0
20
40
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(FY)Total Expenditures
(Note ) FY1975-2009: Settlement,FY2010: Initial budget
Tax Revenues
Government Bond Issues
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Tax Revenues by category, VAT is a best bet
Individual income tax
16.817.4
18.0
21.4
26.026.7
23.223.7
20.419.5
19.019.2
17.0
18.817.8
18.4
20.0
25.0
30.0
(trillion yen) Various TaxesIncome
Corporate
Excise
Consumption
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Corporateincometax
Consumptiontax
Excise Tax5.5
6.2 6.6
7.8
9.3
10.8
12.012.8
13.614.1
15.4
16.817.4 17.0
15.4
14.813.9
14.715.6
14.1
16.1
15.0
12.912.6
4.14.8
5.6
7.97.4
8.9 8.8 9.19.8
11.312.0
13.1
15.8
18.419.0
18.4
16.6
13.7
12.1
12.4
13.714.5
13.5
11.410.8
11.7
10.3
9.5
10.1
11.4
13.3
14.9
14.7
10.0
6.4 6.0
0.8 0.8 0.9 1.1 1.2 1.2 1.3 1.4 1.4 1.6 1.6 1.7 2.0 2.2
3.3
4.6 5.0 5.2 5.6 5.6 5.8 6.1
9.310.110.4
9.8 9.8
9.8
9.7 10.010.610.510.310.0 9.8 9.6
0.0
5.0
10.0
15.0
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
(年度)
Demography
• Demography matters– Pension system sustainability– Growth potential is adversely affected
• Contents of government expenditure changes– More medical; More pension
• How to affect debt dynamics• How to affect debt dynamics– Social security payments increase– Effective kind of taxes change
• Intergeneration transfer becomes a key– Pay-as-you-go pension systems are quite unfair to younger
generation– If relied on income tax, the baby boomer will escape taxation for
sustainability Unfair to the younger generation
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2010
MaleMale Female
Baby boomer generation isabout to retire
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Population, 10,000
No third baby boomSecond Baby boomer generation,
sons and daughters of the first
Demographic deficits
• Both Japan and Italy faces
– a sharp decline in the working age populationratio
– A sharp increase in the retired population ratio– A sharp increase in the retired population ratio
• Japan will also faces the rapid decline in totalpopulation
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Total population; Italy and Japan
100000
130000
Total
ITALY
JPN
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40000
70000
1950196019701980199020002010202020302040205020602070208020902100
30.0%
40.0%
50.0%
60.0%
Working age population ratio:age 20-59 / total population
Italy
Japan
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0.0%
10.0%
20.0%
30.0%
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat,World Population Prospects: The 2010 Revision
25.0%
30.0%
35.0%
40.0%
45.0%
Retired population ratio:Ages 60 and over/Total population
Japan
Italy
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0.0%
5.0%
10.0%
15.0%
20.0%
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat,World Population Prospects: The 2010 Revision
How to restore fiscal sustainability
• Europe– Positive Element of the Euro Zone
• Bond rate convergence (until October 2009)• Discipline by the Euro Area, the “troika”
– Negative Element• Cannot depreciate the currency, difficult to restore growth• Cannot depreciate the currency, difficult to restore growth• Discipline by the Euro Area, or the “troika”
• Japan– Long-time complacency motivated by
• Low JGB interest rate• Room of maneuver
– Taxes have to be increased, quickly• Intergenerational inequity, getting worse• Not much room for expenditure cut, except social security
expenditure cut
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Japanese Debt Crisis (to come)
• Very bad situation (worse than Italy and Spain)– Deficit/GDP ratio
– Debt-to-GDP ratio,
• Puzzle: Then, why no crisis yet? (JGB yield < 1%)Puzzle: Then, why no crisis yet? (JGB yield < 1%)– Japanese residents hold 95% of JGBs
– Japan has current account surpluses (although tradeaccount turns negative recently)
– Vast room for tax increases
• The sooner the better– Demographic change is very adverse
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Puzzle, Debt and interest rate
5
6
7
8
400
500
600
700
JGBdebt JGBrateTrillion yen %
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0
1
2
3
4
0
100
200
300
400
A solution by Tax increase in Japan
• Increase VAT (consumption tax) rate from 5%to 25% will solve government deficit problem– New Bond issues: 44 trillion yen
– 20% point increase in VAT will generate 45-50trillion yen
– 20% point increase in VAT will generate 45-50trillion yen
• Personal income tax increase will miss babyboomer generation to be taxed.
• Corporate income tax increase will hastenhollowing out—bad for growth
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Italy and Japan, common challengesfiscal crisis
• What did Italy learn from the EuropeanSovereign debt crisis?– Is it just a bad spillover from Greece?
• Italy got hit despite its primary budget surpluses
– Does it need “discipline” from outside?• Why it took so long and so much for Italy to convince
investors that Italy is sustainable (assuming it is).
– Can the “technocrats government” do a better jobthan politicians?
• Why do politicians fail to make right decisions?
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Italy and Japan, common challengesfiscal crisis
• What can (should) Japan learn from the currentEuropean crisis?– When a crisis happens, it gets worse quickly
– What takes to calm the market once the crisis occursrequires much more austerity than restoringrequires much more austerity than restoringsustainable path during the non-crisis time
– Hence, it is much more desirable to adopt austeritywhile the sovereign bond market is calm
– Once the crisis occurs, political disputes (politicking) isvery costly. Grand coalition or a technocratgovernment with broad mandate is the best
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Italy and Japan, common challengesGrowth Policy
• Growth policy. Growth is better than austerity.– Where are growth engines?
• Japan: agriculture, bio-medical-health care, education?
• Italy: What is a consensus among Italians?
– Take advantage of “globalization”: Skill premium– Take advantage of “globalization”: Skill premium
– EU-Japan FTA will be a key for growth in botheconomies
• Low fertility rate– Japan, Korea, Hong Kong, Singapore and Italy?
– Will immigration be an answer?
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