Eurozone - Like Japan, not the US

The quarterly Flow Essentials booklet looks at the US, Eurozone, Japan and China, which encourages me to compare regions. When I do, it rapidly becomes apparent that in its delayed reaction to the crisis of western financial institutions of 2008/09, the Eurozone looks strikingly similar to Japan, rather than the US.

In both cases we see:

• Return on capital recovering very slowly since mid-2009, but so far to a level far below that which preceded the crisis of western financial institutions – in contrast to the US, where the ROC indicator is far higher now than in 2007.
• Although Eurozone real labour productivity (adjusted for changes in capital per worker) is now growing by around 1% a year, this barely scratches the surface of the problem, since this measure of labour productivity fell 4.3% in 2008, and 5.4% in 2009. In both the US and Japan, the loss of labour productivity seen in 2008/09 has subsequently been recouped. We should therefore expect Eurozone labour markets to be systemically more challenging for longer.
• International terms of trade in the Eurozone have fallen back to the worst lows of 2008, just as they have in Japan. In the US, they have fallen, but only to around the levels seen at the end of 2007, not the nadir of mid-2008.
• The Eurozone's banks are rapidly building up colossal net holdings of foreign assets, just as Japan's did in 2010, and 2011 prior to the March 11 disasters. It's a dramatic change, with net foreign assets jumping Eu467 billion between October 2010 and September 2011. Quite apart from anything else, this shift represents a massive net capital outflow from the Eurozone managed by its banks. What's responsible? Almost in equal measure, the withdrawal of foreign liabilities (foreign deposits, and lending to the Eurozone's banks) and pro-active build-up of foreign assets. I have previously drawn attention to how we're seeing the corollary to this in the US (see this). My reading of this is both that banks outside the Eurozone are protecting themselves as far as possible from the Euro Doomdsay machine; and that banks inside the Eurozone are protecting themselves from threatened expulsion from international interbank markets.

• They can do this because, like Japan (and the US) the Eurozone continues to run a major (but declining) private sector savings surplus, equivalent now to around 4.9% of GDP. This is down from a 1Q2010 peak of 6.5%, but continues to deliver a net positive flow of savings into the Eurozone's commercial banks. Or Germany's anyway.
• Finally, the Eurozone's relationship with money its is remarkably stable: both monetary velocity and liquidity preference have barely moved for 18 months.

What this adds up to is an underlying statis which is difficult to reconcile with the financial crisis which is slowly engulfing the Eurozone. Gallons of ink have been spilled comparing the likely trajectory of the US now to Japan post-1990 – wrongly in my view (see this, and this). For the Eurozone, though, the financial and economic response to what happened in 2008/09 are too similar to ignore.

Bigger conclusion: does anyone really expect the Eurozone to grow its way out of its debt problems?