Sunday, May 23, 2010

Economist Nouriel Roubini Summarizes the EU Crisis


EU: "These governments do not have credibility"

Economist Nouriel Roubini* recently was interviewed by BBC Radio and summarized the EU Crisis as "significant economic and financial trouble in the Euro Zone" that "Even money cannot resolve problems of insolvency in the Euro Zone".  The EU, ECB, IMF bailout package of almost $1 trillion, announced May 10, has not calmed the markets because investors are concerned about:
1) Some European countries being insolvent.
2) Problems in the EU financial system, including access to liquidity.
3) Economic growth in the Euro Zone.
4) Loss of competitiveness in the Euro Zone.

If the austerity packages by Greece, Spain, and other EU countries, i.e., raising taxes and cutting budgets, are actually implemented, Roubini thinks "the markets should stabilize".  However, he raises the concern as to whether the political will can persevere.  Because of the riots, violence, and strikes, do the governments of particularly Greece and Spain have the strength to do the fiscal austerity that will be "extremely painful"?  Investors' confidence on the duration, and therefore effectiveness, of the austerity packages is paramount.

These fiscal austerity packages, raising taxes and cutting government spending, create another problem, they lead to more economic contraction and more severe recession.  Can these fiscal austerity packages be continued for 2,3,4 years while output, income, jobs are falling?  There could be a political backlash against these fiscal austerity packages and be reversed - "and that's what the markets are worried about today".  "These governments do not have credibility".

Global Recession and Financial Crisis: "It's not over"

"In my view, it's not over".  "What we are facing right now in the Euro Zone is a second stage of the peaking of the financial crisis".  "In some sense, what we are seeing today in Greece is the tip of the iceberg".  Regarding the UK: too early to tell about the new coalition, "not yet tested", "we'll see when the tough decisions have to be made on revenues and spending whether the coalition will remain strong".

BBC Radio

The BBC Radio interview can be listened to here.

American professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm.


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