Tags: Roubini | Eurozone | Divorce

Roubini: Eurozone Needs a Divorce

Tuesday, 03 April 2012 07:40 AM

Eurozone countries are stuck in a dysfunctional marriage and need to admit that it's time for a divorce, says New York University economist Nouriel Roubini.

The European Central Bank has flooded its banks with liquidity via low-interest loans, and while such monetary policy is easing credit conditions in Europe, it's not going to solve structural problems with the economy there.

Eventually, debt-ridden periphery countries including Portugal, Ireland, Italy, Greece and Spain will need to default and abandon the euro.

"Splitting up may be hard to do but it’s better than sticking to a bad marriage," Roubini writes in a Financial Times piece along with Arnab Das, the managing director at his firm Roubini Global Economics.

Countries that do leave will eventually enjoy the fruits of a cheaper currency, which will make their exports more competitive.

"Countries leaving the eurozone must rebalance away from growth led by debt, towards export- and income-led growth," Roubini and Das write.

"Members of a 'rump' eurozone should rebalance toward domestic demand. The E.U. free trade arrangement is critical to this end."

Debt-ridden European countries have accepted austerity measures such as tax hikes and public-sector layoffs in exchange for rescue funding, which has led to a lull in the crisis.

That lull could end, experts say, as the pain of austerity starts to hurt and populations demand politicians push back on reforms.

"There is a kind of resigned acceptance, but this resigned acceptance is not a stable equilibrium position," says Professor Erik Jones of Bologna's Johns Hopkins University, according to Reuters.

"People do get fed up with being made to feel guilty for their horrible situation."

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