Europe Needs Its Own Koizumi; Timing is critical. Japan first pushed financial reform, which forced labor reform. In Europe, labor reform came first, inciting mass protest.

Byline: Angel Ubide (Ubide is a fellow at the Center for European Policy Studies in Brussels.)

Only a few years ago leaders of the European Union bubbled with confidence about their economic future, and Japan looked like a lost cause. Now, as Japan's recovery gains momentum, some forecasters expect its economy to grow faster than 3 percent, or faster than Europe and the United States, in 2006. It's time for Europe to ask what it can learn from Japan. The answer: a lot.

The first lesson is that timing is everything. Japan got reform right by cleaning up its debt-burdened and politically connected banks first. A more independent and vibrant financial sector forced corporations to streamline, and to press reforms on workers, including an end to promises of lifetime employment. Yet there was no popular revolt, because the emerging recovery was bringing Japan back, making reform respectable. In Europe, where leaders first pushed labor and welfare reform, the result has been no improvement in growth, and massive street protests against declining benefits and job security.

The second lesson: it's the politics, stupid. Prime Minister Junichiro Koizumi has transformed his ruling Liberal Democratic Party from a coalition of powerful factions defending conservative rural interests into a modern party bent on reform. Europe, meanwhile, remains caught in a political trap, as powerful interest groups defend an inefficient system: farmers fight for massive agricultural subsidies; older workers for generous pensions.

The seeds of Japan's recovery lie in Koizumi's decisive moves to cut the government-backed ties between banks and their corporate clients. This made it clear to companies that they had to reform or die. Thousands of zombie companies closed down. Excess capacity was eliminated. The result is an increasingly broad-based recovery, with wages rising alongside employment, and the strongest labor income growth since the late 1990s. The improving labor market is anchored by rising corporate profits, with margins at historic highs. Stronger income growth is mirrored in a U-turn for asset prices. Stock prices have doubled from the lows of early 2003. Land prices are rising in large cities. The consumer price index is starting to edge higher, signaling the imminent demise of deflation.

Koizumi capped this revolution by fighting the September 2005 general election on his promise to privatize Japan's post ...