Roubini: Eurozone Plagued with Austerity and Bailout Fatigue

Wednesday, 03 Apr 2013 11:39 AM

By Michael Kling

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The eurozone is showing signs of breaking down, economist Nouriel Roubini writes in an article for Project Syndicate.

Although the European Central Bank (ECB) reduced the risk of a euro break-up with its commitment to backstop sovereign debt last summer, the European Union's fundamental problems have not been solved, says Roubini, a professor at New York University and chairman of Roubini Global Economics.

"Moreover, the grand bargain between the eurozone core, the ECB and the periphery — painful austerity and reforms in exchange for large-scale financial support — is now breaking down," Roubini warns, "as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands."

Editor's Note:
This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser

Austerity fatigue in peripheral eurozone countries is “clearly evident,” writes Roubini, who recently traveled throughout Europe as well as Asia and the United States.

Success of populist parties in elections, enormous street demonstrations in Spain, Portugal and other countries and extensive anger over the botched Cyprus bailout all underline the population's growing exhaustion with austerity.

"Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus," he states, "is the latest symptom of bailout fatigue in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor 'bail-ins' are the way of the future."

Yet Europe's underlying problems — lack of growth, a deep recession, loss of competitiveness and large amounts of private and public debts — have not been resolved.

"Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania and Hungary," he explains.

"[A]mong advanced economies, the U.S. is in the best relative shape, followed by Japan, where Abenomics is boosting confidence. The eurozone and the U.K. remain mired in recessions made worse by tight monetary and fiscal policies," Roubini maintains.

"Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs [Brazil, Russia, India and China] need to turn away from state capitalism. While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide."

Europe's high unemployment, at about 25 percent in some countries, is "socially explosive," said Standard & Poor's Germany chief Torsten Hinrichs, according to Reuters.

Many nations may not follow through with reforms and severe austerity measures because of that high unemployment, Hinrich told the German newspaper Neue Osnabrucker Zeitung, Reuters reported.

"The high unemployment in Spain, Italy and France is socially explosive," Hinrichs told the newspaper. "There has to be a social consensus for saving measures. High unemployment … does not help."

The population in Mediterranean countries has so far been willing to bear the austerity burden, but, he said, "This cannot continue forever."

Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser

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