Roubini on Europe: We Are Kicking the Can Down the Road

posted by Nima

May 10, 2010 · Posted in Global Economics 

From Yahoo’s Tech Ticker:

With a $1 trillion bailout package for Greece and the other sick men of Europe, the EU and IMF spurred a huge global rally in stocks Monday, with the Dow rising 405 points, its biggest gain since March 2009.

The massive bailout prevented “another systemic seizure of the global financial system” and, “in the short run, markets are happy we’re not going to have another global meltdown like Lehman,” says NYU professor Nouriel Roubini, co-author of Crisis Economics.

But in the long run, Europe has just “kicked the can down the road,” Roubini says, agreeing with our earlier guest Richard Suttmeier.

Even $1 trillion isn’t enough so solve the “fundamental questions” facing Europe, the economist says, citing the following:

* — Even in Europe, There’s No Free Lunch: All of the bailout money is conditional on countries approving what Roubini calls “massive fiscal consolidation,” i.e. big austerity packages like Greece’s parliament just passed. Such measures mean fewer public sector jobs (and lower salaries for those who remain) and higher taxes in countries where a lot of people work for the government and already pay relatively high tax rates. “Politically can they do that…or will there be riots and strikes that are going to limit” fiscal austerity measures, Roubini wonders.
* — Tough Love Hurts: Raising taxes and cutting government spending should help alleviate the short-term debt crisis in Europe’s so-called PIIGS but will also likely lead to recession, if not outright deflation. “That will make it harder to force austerity” on the public, he says. There’s already violence and rioting in the streets of Athens. “The question is: Will we see the same thing in, for example, Lisbon, Madrid [and] throughout the euro zone?”
* — No Easy Way Out: One reason the European Union is in this mess is because few of its countries are able to compete in a global economy, especially since they lack the ability to deflate their currency, the economist says. Considering it took Germany 15 years to restructure its private sector so unit labor costs came down low enough to compete globally, nations like Greece, Portugal and Spain face a long, hard slog even if they embark upon such painful programs immediately.

So what does all that — and the political pressure against more bailouts in Germany — mean for the future of the euro and the EU itself?

In late April, Roubini said “in a few days, there might not be a euro zone for us to discuss,” at the Milken Conference.

In the accompanying clip, the founder of Roubini Global Economics says he was “just joking” about that dire prediction, which potentially contributed to the recent rout in Europe. But expect “volatility in economies and markets” is going to be with us for the foreseeable future, Roubini says, offering cold comfort (and an odd sense of humor).

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