Tags: Roubini | euro | europe | debt

Roubini: Some Countries Will Leave the Euro

Monday, 16 April 2012 02:41 PM

Europe managed to stave off a disaster in the past few months, led by the debt debacle in Greece. But it won’t get away with it again, and the problems will worsen and spread, reaching into the heart of the economic union to France and Germany, warns economist Nouriel Roubini.

Expect more restructuring, and for some countries to opt to leave the monetary union, predicts the chairman of Roubini Global Economics.

The eurozone injected huge amounts of liquidity via the European Central Bank, forcing austerity on the so-called “pigs” of Southern Europe. And it worked, Roubini writes in a recent Project Syndicate column.

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“But the ensuing honeymoon with the markets turned out to be brief. Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along,” he writes.

“And, inevitably, the recession on the eurozone’s periphery is deepening and moving to the core, namely France and Germany. Indeed, the recession will worsen throughout this year, for many reasons.”

The problem is “front-loaded fiscal austerity,” which is accelerating the economic slowdown.

“Thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity,” Roubini warns.

It would take euro-dollar parity — the euro trades above $1.30 now — to restore European competitiveness, Roubini estimates. Yet elections in France and Greece suggest that rejection of the rescue package and even default remain real outcomes.

“The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels,” Roubini argues.

“Moreover, the social and political backlash eventually will become overwhelming.”

Meanwhile, a Societe Generale analyst predicts the euro will fall, and soon.

“It’s matter of time before we break through these levels. Relative rate spreads, euro versus the U.S., suggests euro-dollar should be around the 1.26 level,” Lauren Rosborough told CNBC-TV18 in an interview.

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Monday, 16 April 2012 02:41 PM
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