EDITORIAL: Euro crisis and Japan

The marble steps leading to the Parthenon in Athens are slippery at times. In summer months, the climb can be sweaty work. It's as if each foot forward brings you closer to the sun.

The temple stands on the Acropolis, a steep plateau that rises 156 meters above sea level. It is the pre-eminent monument of ancient Greece. The magnificent edifice commands a panoramic view of a city awash in white buildings.

Pericles, a fifth-century B.C. statesman who fostered Athenian democracy, was responsible for the Parthenon being built. This was during the city's so-called Golden Age some 2,500 years ago, when great philosophy, arts and culture flourished in the birthplace of democracy.

Greece is now the focus of international attention because of its debt crisis, which caused share prices to fall around the world. The crisis threatens global economic recovery.

Chain reaction of anxiety

Anxiety about state finances in Greece did not just undermine international confidence in the euro. It also raised serious concerns about the financial health of banking institutions in Europe, throwing financial markets around the world into turmoil.

Greece joined the euro zone in 2001. Like the other members, it promised to abide by a common obligation to keep its budget deficit below a certain level. But Greek officials falsified financial data to make the budget deficit look smaller than it actually was.

Unaware of this fraudulent act, foreign investors and banks--assuming there was no risk--bought government bonds at low rates.

By that time, Greece had been mired in economic problems for many years.

The country had too many government employees who were entitled to fat pension benefits. Politicians are corrupt. Government regulations lack transparency. Tax evasion is rampant. Industries are idle.

Because the Greek authorities failed to push through the reforms needed to fix these problems, the funds raised overseas by the government were used mostly to pay the salaries and pension benefits of public servants.

International confidence in Greece nosedived last autumn, when the government revised its budget deficit figure sharply upward.

Leading EU members initially hesitated to provide financial aid. Their failure to agree on a united response to the debt crisis in Greece shook confidence in Europe's ability to overcome the crisis, triggering a massive sell-off of the euro.

Now, concerns are growing about the possible repercussions on key European banks. This, in turn, has shaken the world economy and depressed stock markets across the globe.

Democracy and fiscal discipline

Financial markets were gripped by doubts and fears. Investors began to realize that other European nations could default on their debts. They also started to wonder if individual banks had sufficient funds to pay back debts.

This contagion of fear caused economic activity to shrink, resulting in rising joblessness and triggering social instability.

What can be done to end this vicious cycle of mutual distrust? For starters, recovering confidence in the world economy is crucial.

In economic powerhouse Germany, a swelling chorus arose among the people about giving a helping hand to Greece. Why, they wanted to know, should they bail out a country that is in trouble because of its own profligate spending?

The crisis laid bare the fundamental inconsistency in the system underpinning the euro; that it is a currency not backed by any government. The member countries share a currency and monetary policy but adopt independent and diverse fiscal policies.

This innate inconsistency in the euro regime didn't surface previously for the simple reason that European economies were in good shape.

Soaring housing prices in Spain and Ireland triggered a financial bubble. Other countries in the region, notably Germany, reaped the benefits of healthy economic expansion powered by export growth.

Now, however, the euro zone countries have no choice but to endure years of painful measures to reduce their budget deficits.

The new coalition government in Britain, which inherited dire fiscal conditions, immediately took steps to slash the budget deficit. Its actions symbolize the formidable challenge facing Europe.

European nations must work together more closely on policy if confidence and stability in the euro is to be restored. That is the only way to prevent the crisis from rattling the world economy further.

More important than anything else is the need for them to demonstrate their commitment to promoting integrated economies, including fiscal policies. They also need to show political unity based on ideas that transcend national frameworks.

They should, for instance, create a European Monetary Fund that can provide effective support to regional efforts to rescue countries in crisis and contribute to fiscal policy coordination among nations in the region.

They should also create a system that can effectively impose fiscal discipline on member countries.

Establishing rules and systems to ensure that fiscal health prevails among member countries underpinned by regional democracy will be a first step toward overcoming the euro crisis and pushing forward with the economic integration of Europe.

Lesson for Japan

Greece and Japan share much in common. Both are saddled with huge public debt. They also share the problems of corrupt politicians and opaque government regulations.

There are also many significant differences between the two countries. Japan has an enormous pool of private savings and boasts strong and competitive industries. Japan is running a trade surplus and doesn't depend on foreign investors for financing its deficit as most government bonds issued to date are held by Japanese.

But Japan's population is aging rapidly. This means its savings rate is bound to decline gradually. There are serious concerns about the future competitiveness of Japanese industries.

The nation's economic future will be imperiled if the government continues with its massive debt financing.

A Japanese working in the City of London offered an interesting insight into Japan's debt problem.

When you make a chart showing chronological changes in a country's outstanding public debt relative to the size of its economy, the person pointed out, it usually reveals ups and downs when the country is industrialized. That's because industrial countries with growing debt generally make serious efforts to reduce borrowing.

But Japan's public debt has been growing steadily, both during the prolonged rule by the Liberal Democratic Party and since the change of government last year.

"What is the most worrisome is a spreading perception that Japan is a country incapable of carrying out necessary reforms despite being aware of its problems," said the Japanese. "In this respect, Japan resembles Greece."

Greece has started taking painful steps to regain the trust of the international community. It has raised taxes and cut pension payouts, among other things. These measures are bound to hurt the Greek economy and lower the standard of living, at least for the time being.

Greece is bracing for the immeasurable effects of massive unemployment and social strains caused by its efforts to regain fiscal health.

But sooner or later, it has to pay the price of its reckless fiscal policy in the past. The longer the problem is left untouched, the bigger the eventual price will be.

If Japan becomes the ground zero of a debt crisis, there will be dire consequences for the world.

The primary lesson Japan should glean from the crisis in Greece is its urgent need to have a responsible government that doesn't drag its feet on tackling the problem of the gargantuan fiscal deficit.

--The Asahi Shimbun, May 26