Nouriel Roubini: 'We try to create Europe which has not created enough Europeans'
RT: In 2006 you predicted the crisis, 6 years later we are still in it. Did you expect it to be so deep? Where we are now…in the middle or in the beginning? Do you see light in the end of tunnel?
NR:The crisis in 2006 was more of a problem of too much debt and leverage of the private sector – households, banks, financial institutions and corporations. Now as a result of the response to the crisis-fiscal stimulus, bailing out banks and others we have a massive surge of public debt and deficits and now there’s a risk of countries as opposed to individuals or banks going belly up. Sovereign risk and the faltering economy have already happened in Greece. And unfortunately when you have too much private and public debt, it takes a long time – up to a decade to do de-leveraging –which means to spend less, to save more- to reduce debt over time, that implies slow economic growth, higher unemployment rate and some degree of social and political instability. So I would say we are still mid-stream. The slow economic growth if not outright recession in the eurozone, the risk of defaults by governments is going to stay with us for a number of years.
RT: Do you think in the worst case scenario when Greece for example exits the eurozone, defaulting on its debt, and peripheral Europe follows suit, we might be going back to the so-called economic dark ages that we saw in 1930s?
NR:There’s certainly risk that the situation can become disorderly in the eurozone, like a disorderly default and exit by Greece, then contagion with a run on the banks in Italy and Spain when they lose market access, then they eventually have to restructure debts, and that’s not sufficient. They also exit the eurozone in which case the eurozone breaks up and this may lead to a European or a global turmoil, and then they may end up like Japan with a long-term stagnation if not another depression. It’s a risk all these things happening at the same time, which may be of still very low probability, but there’s a risk we have to concern for ourselves. There’s also a chance that Europeans get their act together. And while there will be a number of years of recession, bumpiness and fiscal condition, eventually we’ll have more integration, more of a fiscal union, more of a banking union, debt neutralization, political union, so instead the disintegration we will be moving towards a greater integration and eventually more stability for Europe and for global economy.
RT: Do you think that's actually possible because Europeans do no see much of a perspective in a political union, because let's say Greeks and for example Swedes they do not align themselves together, thinking of themselves as separate nations?
NR: It is one of the difficulties. We try to create Europe which has not created enough Europeans. Even if younger generations would travel and study abroad and work, becoming more European, certainly if the eurozone is to survive, monetary union is not sufficient. Fiscal union, common debt, common banking system and eventually a similar integrated political system… will the Europeans move in that direction? Well, some people are skeptical. Some people say they have no choice. Every time there’s a crisis in Europe, there will be gradually more integration, and here there’s no choice, because the disintegration will imply massive economic and financial damage. Even in Germany alone, or world economies with rising powers like China or India or Russia, or existing superpowers like the US, there could be economic and strategic midget. So Europeans have to stick together to have their own weight in global economic and political affairs.
RT: If you give a percentage of a chance of Greece exiting the eurozone, how much would that be and would it be good for Greece to leave the eurozone?
NR:I would say by next year, there’s at least 2 thirds probability that Greece exit the eurozone, even despite the election of a new government in June which will try to reform the country’s financial system, but the economic situation will become so unsustainable that they eventually will exit the eurozone. I would say it could be good for them, as long as the exit is orderly. It means there will be massive depreciation, they’ll become more competitive, they’ll restore growth, restore external balance, of course there will be damage for the banks, damage for people’s savings in the banks, and that’s why they need more funding to make sure it’s not a disorderly meltdown and the contagion to the rest of the Europe is milder. So if it’s done in a negotiated way and managed in a proper way, it’s a manageable kind of exit.
RT: One of the main downside risks in the global economy you mentioned a slow economic recovery. Where do you see the new tigers emerge and what is the present role of the BRICS nations?
NR: The strong growth economies in the world will be emerging markets until recently not just the BRICS, but there are also some other rising powers such as Turkey or Indonesia or Mexico. The concern is that emerging markets and the BRICS are all seeing a slowdown in growth – you see this in Russia, in China, in India, in Brazil. In part this is because Europe and the US are going down if not contracting, but in part this is because many of these countries moved away from market oriented reforms and towards a model of growth they refer to as state capitalism – too much government intervention in the economy, too much reliance on state owned banks, too much protectionism, too much resource nationalism. And over time that’s going to be negative – this can slow down potential growth. I’m worried about the BRICS going in the wrong direction. In a few years, that’s a risk we’ll have to consider.
RT: What about Russia’s specific role? You said sometime that Russia shouldn’t be considered as a BRICS nation and it will never be included into the G8.
NR:As to the G8 your President decided not to attend the G8 summit saying he was too busy creating his own cabinet – that was a bit of a strange thing to do – like a snub. In the case with the BRICS Russia has an annual growth of 3.5% based on the statements from the country’s central bank, while China and India until recently were growing 8-9%, now they are slowing down. You have a country where you have a lot of potential growth, where there is not as much market oriented or structure reform, you have aging of population, there’s certain amount of lack of transparency, there’s certain amount of corruption, there are some authoritarian tendencies in the political system, there’s institutional weaknesses…There’s also strength – resources, good skilled labor force, it’s a large country that could play an important role in the global economy but I think that important role and its success is conditional on moving away from state capitalism and moving towards market oriented and private sector development and openness to trade and to foreign direct investment, greater rule of law, less corruption and so on…We shall see in which direction the policy of the country will go in the next few years.
RT: What about the main economic power – the US? You said that economic growth would slow down in the US to 1-1.5%. Do you think the US has the risk of seeing the same situation as in the eurozone?
NR:For now I don’t think there will be a fiscal crisis in the US. Their deficit and debt are large and rising in part because the US can print money to finance its deficit, something the Europeans and their banks are unwilling to do, in part because the US dollar is still a reserve currency, so the foreign demand of China and the rest of emerging markets is financing the large US fiscal and current account deficits. Now, no country should be complacent. Over time, if the US were not to deal with their fiscal problems, if it’s not going to deal with its still low competitiveness, eventually we could see a fiscal train wreck, a sudden stop of capital. And then financial turmoil could happen in the US. Whatever is the result of the election next year, whoever is going to be a president, starting a plan to build a fiscal discipline, a fiscal consolidation, is part of what the US has to do in order to avoid the risk of something bad happening. This can happen later in the US than in other countries, but it can happen eventually.
RT: Do you expect the US dollar to maintain its position and its role, and what’s you take on the euro? Last year you said you wouldn’t bet your money on the euro and you were right.
NR:People are unhappy with the role the US dollar has as a reserve currency – it’s still the most important one. The trouble is that there’s no good alternative to the US dollar. The euro, the pound or the yen are also weak for other reasons. Emerging market currencies will have to reform their economies, liberalize their capital account before the ruble or the real could become a major reserve currency. Gold is not going to be a major reserve currency again. SDR is just a basket and if you add some of the emerging market currencies into it it’s not going to be anything more than a unit of accounts. There’s a general unhappiness with the US dollar between the US current account and fiscal account deficit, but the reality for now is that there’s no alternative to the US dollar, that’s why people are still in this limbo.
As to the euro, last year it was close to 1.50, now it’s close to 1.25. I would say the overall fiscal and financial problems, the risk of exit, even of a breakup suggest that the euro should weaken and is likely to weaken. The only thing that could stop this weakening of the eurozone is either the US economy becoming so weak that the dollar weakens and the Fed will print money and then weaken the dollar, or that finally the Europeans get their act together and take measures to strengthen the eurozone including a banking union, fiscal union, debt neutralization and restoring growth and other things that will restore hope that Europe will stay together. In this case the euro could start to rally again.
RT: How much is Europe to blame for the current crisis, and what’s Brussel's role in it?
NR:The problems of the eurozone are mixed – it’s not just one type of crisis. In Ireland and in Spain, it was a bit like in the United States: a real estate boom and bubble that went bust – and therefore excesses of private sector debt that led to too much of a bubble in asset prices, and then they bust and they crashed. Outside of the eurozone within Europe, the same thing happened in the United Kingdom and Iceland where there was also a housing boom and bust. Sometimes people tend to say the eurozone problems are because of a lack of fiscal discipline, of fiscal recklessness. That applies literally only to Greece. There were lies about a deficit of 15% of GDP and the deficit blew up and that led to the fiscal crisis. But in Spain or Ireland there was the private sector debt that eventually led to the problems of having to bail out the banks. We can’t generalize. There were different types of crises within the eurozone – not all of them were necessarily driven by excesses in the public sector, though several of them were driven by excesses in the private sector because of poor regulation and provisions in the banking system that created a real estate and asset and credit bubble.