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The National Interest
Frog in the Pot
by Adam S. Posen
Japan's decade of decline is the worst fate suffered by an advanced economy since the Great Depression. Contraction in Japan, however, is not only Japan's problem-it is also a drag on the global economy. Japan's withdrawal of capital from Asia and a weakening yen contributed heavily to the Asian financial crisis of 1997-98. Since then, Japan's continuing slump has limited export earnings for emerging market countries, thus strengthening the backlash in Asia and Latin America against globalization and the "Washington Consensus." It is also exacerbating rather than offsetting the current global slowdown. . . .
As it happens, there are four determinants of Japan's negative economic model: incomplete financial liberalization; macroeconomic policy division and deflationary bias; financially and politically passive households; and a lack of openness to trade or capital flows or foreign ideas. Of all the OECD countries, Germany increasingly shares Japan's political-economic profile. It already evidences the first three parts of the Japanese model, and the recent approach to EU enlargement taken by Germany and other EU members-elevating the power and interests of the incumbent nation-states vis-ˆ-vis Brussels and the accession countries-threatens to provide the fourth.
All of this is happening gradually, however, so much so that, as in Japan, there is little significant pressure for painful and politically difficult changes. Germany, like Japan, is coming to resemble the proverbial frog slowly heating in the pot, and is in danger of a fatal consequence if it doesn't soon recognize its predicament. In a world economy in which sole reliance on the U.S. economy as the engine of growth since 1995 has created major imbalances-and where transatlantic relations are already under stress-the world can ill-afford a Germany following Japan down the path to economic perdition.1
A deepening of Germany's current economic weakness would not just compound the drag from a declining Japan; it would also deprive the United States of a critical partner in the promotion of economic liberalization and in the integration of developing democracies into the global economic system-a role Japan never played. It would also render even more improbable a significant increase in defense spending by the second-largest member of NATO. . . .