Roubini: Europe’s Day of Reckoning Delayed, but Not Avoided

Tuesday, 18 Dec 2012 01:17 PM

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Calming Italian and Spanish government debt markets and a renewed flow of bailout aid into Greece are merely a lull in a storm that will eventually rock the eurozone, said New York University economist Nouriel Roubini.

Europe, mired in crisis earlier this year, is enjoying clearing skies these days.

Borrowing costs in Italian and Spanish debt auctions have fallen now that the European Central Bank stands ready to intervene and buy government debt if need be.

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

Meanwhile in Greece, the country has pushed through austerity measures and has bought back sovereign debt in order to tap fresh bailout funds, while European paymaster Germany has even hinted it might consider taking a haircut on Greek debt.

Economic fundamentals, however, still paint a picture of poor European health and eventually, defaults and possible expulsions from the eurozone will be likely.

“[T]he eurozone periphery shows little sign of recovery: [gross domestic product] continues to shrink, owing to ongoing fiscal austerity, the euro’s excessive strength, a severe credit crunch underpinned by banks’ shortage of capital and depressed business and consumer confidence,” Roubini wrote in a column for Project Syndicate.

“Moreover, recession on the periphery is now spreading to the eurozone core, with French output contracting and even Germany stalling as growth in its two main export markets is either falling (the rest of the eurozone) or slowing (China and elsewhere in Asia).”

While the eurozone shares a common currency, each country runs its own tax and spending policies, the root of the crisis today given that countries like Greece broke through deficit ceilings that were never fully enforced.

Eurozone countries are taking steps to integrate themselves fiscally such as creating a banking overseer, though eventually, fiscal integration in the long run entails one country telling another how much it can tax and spend, which will create tensions, possibly resulting in exits from the currency bloc.

“The tail risks of a Greek exit from the eurozone or a massive loss of market access in Italy and Spain have been reduced for 2013. But the fundamental crisis of the eurozone has not been resolved, and another year of muddling through could revive these risks in a more virulent form in 2014 and beyond,” he wrote.

“Unfortunately, the eurozone crisis is likely to remain with us for years to come, sustaining the likelihood of coercive debt restructurings and eurozone exits.”

Meanwhile, European policymakers have expressed confidence that a single banking supervisory body will help navigate the continent out of the crisis by promoting more lending.

European ministers agreed to give the European Central Bank (ECB) authority to supervise the currency bloc’s banks beginning March 2014.

“The single supervisory mechanism will contribute to restoring confidence in the banking sector across the euro area. It will help revive interbank lending and cross-border credit flows, with tangible effects for the real economy,” ECB President Mario Draghi told the European Parliament’s Economic and Monetary Affairs Committee, according to Reuters.

The supervisory body will oversee about 150 European financial institutions, a sliver of the currency bloc’s 6,000 financial institutions, in line with Germany’s request that the monetary authority back off its banks and focus more on those in troubled countries.

The ECB can, however, prop up banks everywhere if crises arise, smaller banks especially.

“The national supervisors’ role gets bigger as the banks get smaller, but all national supervisors will be subject to the single rulebook as regulated from the center. The ECB will retain power to call in any bank under its domain,” Draghi said, Reuters added.

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

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