Roubini: Eurozone Turbulence Could Return

Wednesday, 02 Oct 2013 08:30 AM

By Michael Kling

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A new round of financial turbulence may strike the eurozone and weaken its fragile economic recovery, warns economist Nouriel Roubini in an article for Project Syndicate.

"The calm that has prevailed in eurozone financial markets for most of the past year would turn out to be only a temporary respite between storms," writes Roubini, a professor at New York University and chairman of Roubini economics.

That's because the eurozone has not solved its underlying problems, although it now faces less risk of breaking up, he says, listing those issues.

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Growth has been weak and will remain weak, meaning unemployment will stay high. Private and public debt is high and rising, so medium-term sustainability is still unresolved.

In addition, the fiscal drag on growth may be smaller, but it is still a drag. And an ongoing credit crunch in the periphery magnifies its impact, as banks deleverage by selling assets and shrink loan portfolios.

Significantly, the union's all-important effort to create a banking, fiscal, economic and political union has been too slow.

"Indeed, there has been no progress whatsoever on the latter three, while progress on the banking union has been limited," Roubini notes.

Germany, fearing it will end up permanently subsidizing peripheral countries, is reluctant to agree to the risk-sharing features, such as common deposit insurance, and other banking union features. A fiscal union, it fears, may become a "transfer union."

The European Central Bank (ECB) is not undertaking any sort of quantitative easing program. Interest rates are too high and the euro is too strong to encourage a recovery, Roubini argues.

"Moreover, the ECB is unwilling to be creative in pursuing policies — like those embraced by the Bank of England — that would ameliorate the credit crunch."

So far, the eurozone's been holding together, he notes. However, austerity fatigue and political pressures are increasing in peripheral countries, while bailout fatigue is emerging in Germany. Political strains, he warns, "may soon reach a breaking point, with populist anti-austerity parties in the periphery and populist anti-euro and anti-bailout parties in the core possibly gaining the upper hand in next year’s European Parliament elections."

A political crisis in Italy poses the latest threat to the region's financial stability.

Former Prime Minister Silvio Berlusconi withdrew his ministers from the government over an increase in sales tax, putting the government at risk of collapse, reports Europe Online.

"We do not expect this to trigger a re-emergence of the euro area debt crisis," says Frank Oland Hansen, senior economist with Danske Bank, according to the website. "Although we are all reminded about how hostile the political climate in most peripheral countries is to belt tightening and structural reforms."

Editor’s Note: New Video Exposes a ‘Great Retirement Heist’

Related Stories:

UK Telegraph: Eurozone Crisis Isn't Over

German Government to Stay Course in Euro Crisis

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