Our Great Recession has been compared with several crises of the past, but Japan’s lost decade is perhaps most relevant. This is not because of the way the two crises developed – we do not yet know what will happen to us – but because of our failure to learn from Japan’s mistakes. Otto von Bismarck said only fools would learn from their own mistakes, while he preferred to learn from the mistakes of others. We are mostly fools.

I am particularly struck by the similarity of the policy responses in Japan then and Europe today. Adam Posen, deputy director of the Peterson Institute in Washington, made the following observation in a book* he published in 2000 about the parallels between Japan’s lost decade and US policy during the savings and loan crisis. He wrote: “Bank regulators issued a litany of announcements meant to be reassuring about the extent of the bad loan problem and the adequacy of Japanese banks’ capital, each of which was correctly disbelieved by other financial firms, foreign banks, and by Japanese savers as understating the problem.”

This is exactly what is happening in Europe today. Governments are not coming clean on the scale of the crisis. Süddeutsche Zeitung, the German newspaper, recently revealed an internal memo from Bafin, the country’s banking regulator, showing the estimated scale of write-offs would be more than €800bn ($1,061bn, £712bn), about a third of Germany’s annual gross domestic product. By comparison, the entire capital and reserves of its monetary

and financial institutions were only €441.5bn in February. If the leaked number is true, it would mean the German financial system is broke.

Bafin was outraged by the leak, and launched legal action. Senior officials tried to play down the significance of the number. This is what Dr Posen described in his critique of Japan.

Robert Glauber, now at Harvard University, wrote in the same book that “the government’s timidity in informing taxpayers of the full cost to resolve the crisis produced a large, unnecessary delay. The delay in both cases turned a relatively small cost into a staggering large one”. Again, this is happening today. Both the Geithner plan in the US, and the recently announced, but not yet detailed German financial rescue plan, pretend that the rescue can be largely cost-free to the taxpayer.

Japanese governments also made several attempts to resolve the crisis during the 1990s, but these plans were too timid. Japan’s lost decade ended only in 2002 after Heizo Takenaka, minister for financial services under Junichiro Koizumi, the former prime minister, forced the banks to write down bad debt, and to accept new capital from the government. Just like the Japanese, the US and European governments will do the right thing eventually. But just like the Japanese, they are determined to do all the wrong things first.

What could we learn from Japan’s fiscal policy? The purpose of increased government expenditure during a severe financial crisis is to break down the toxic feedback loops between the real economy and the financial sector. In that respect, the European stimulus programmes are much less satisfactory than US policy, not so much in terms of the gross headline numbers, but in terms of their net effect on economic growth. Just like Japan in the 1990s, the eurozone cannot deliver effective fiscal stimulus, in our case due an inflexible rule-based system of economic governance, heavy bureaucracy and an astonishing lack of co-ordination. I would not be surprised if the total economic effect of the US stimulus ended up twice as large as the total of the various European programmes.

The only European institution that seems to have grasped the need to learn from Japan’s experience is the European Central Bank. European money market rates are close to zero, and while one can always argue about the finer details of monetary policy, central banks on both sides of the Atlantic are close to having exhausted their freedom of manoeuvre. The ECB will this week cut official interest rates again, probably by another quarter point, but even further rate cuts will not make much difference to real world interest rates.

I consider myself agnostic about the benefits of quantitative easing, both in terms of its effectiveness in shifting long-term interest rates, and in terms of the difficulties central banks might encounter in the future. From the evidence I have seen from Japan, it was the resolution of the banking crisis more than the adoption of quantitative easing by the Bank of Japan that finally did the trick.

All this leaves Europe with a policy mix only slightly better than Japan’s in the 1990s. Yet, Europe faces an additional problem. While Japan had its crisis when the rest of the world was booming, Europe has no such luck. I see nothing in our situation or our policy response to persuade me that it will take less than a decade to get out of this.

*Japan’s Financial Crisis and Its Parallels to US Experience, edited by Adam S. Posen and Ryoichi Mikitani, September 2000, www.petersoninstitute.org