Roubini: In the short run, there are positives: the risk of a breakup, of a Greek exit, of Italy and Spain losing market access has been lowered, thanks to Draghi’s “whatever it takes” speech. Thanks to the OMT [Outright Monetary Transactions], the ESM [European Stability Mechanism], the beginning of a banking union, the fiscal austerity, some of the reforms, and the recovery from recession to positive growth. So those are the positives.
What are the negatives of the periphery of Eurozone? The potential growth is low because the reforms are occurring too slowly, the recovery is going to be so anemic and uneven, the unemployment rate, 25% in Greece or Spain, 50% among the young, is not going to fall anytime soon. Debt to GDP ratios in the private and public sector are still rising because nominal GDP is not growing, and therefore the issue of medium-term debt sustainability remains.
You have the issue of competiveness that has not been resolved in many of these countries. Trade balances have improved mostly because of compression of imports in the recession. You need to restore external competiveness, you still have a credit crunch, these AQR [Asset Quality Review] and stress tests are going to take all year long until finally you figure out how much the banks need in capital, the euro is too strong, and inflation is too low and falling given tight monetary policy.
Now, one of the policies that has been debated is whether the ECB is going to do more. I think they’re going to do more. I think they are going to decide they have to do an aggressive round of monetary easing with inflation now well below one percent. I have the view that there is still a meaningful chance that they’re going to do quantitative easing as opposed to just credit easing or going through other unconventional policies like a negative deposit rate.
But traditionally the ECB is known to always do too little, too late, too slow, and maybe this time around they’re going to do eventually what’s right but they’re going to do it too late. So that’s another risk. And finally in the Eurozone, you have now austerity fatigue in the periphery, you have bail out fatigue in the core, you have these EU parliamentary elections where populist parties of the right and the left, where anti-euro, anti-Europe [parties] became very popular. So also the political dynamic of Europe is becoming a little bit more tense.
Again, in the short run, things are actually going in the right direction. But think about two years down the line, three years down the line, some of the fundamental problems of the periphery remain still open.
OR: Do you think we’ll see a return to tension between the core and the periphery?
Roubini: Well, tension between the core and periphery may reemerge in a year or so if, for example, in Italy [Prime Minister Matteo] Renzi were to fail and then you have somebody less market-friendly coming to power or if in Greece, the current coalition would fall in the next election and Syrzia, this radical party of the left, comes into power. That’s one source of risk. And then within Europe, there is also the looming potential that the United Kingdom might decide to exit the European Union. Of course, they’re not members of the Eurozone but the Conservatives have suggested that after the general election next year, there might be a referendum about exit in the next couple of years.
OR: Do you think the UK will exit the EU?
Roubini: I would say the chances that the UK is going to vote to exit the European Union is still low but that’s a risk that you have to keep in mind. I think eventually people are going to look at their pocketbooks and the Brits are going to realize they are better off within the European Union. But you cannot rule out that their politics are going to move into a different direction.
OR: Do you think the euro will survive longer term?
Roubini: Experience suggests that once you have a common currency, you need also, first of all, a full banking union, you need a full fiscal union, you need a full economic union. And once you have given up national sovereignty on banking, fiscal, economic affairs from your nation state to the center, Brussels or wherever, then you also need a political union because otherwise, there is an issue of democratic legitimacy of giving up this national power without having some accountability.
So the process implies that, however slowly, for a monetary union to succeed, banking, fiscal, economic and eventually political union have to occur. The beginning of a banking union has started right now but is at most half-baked; most elements of a banking union are not yet there. There is really no talk about a fiscal union right now because the Germans worry that anything that is a risk sharing becomes a “risk shifting” and becomes a transfer union. A greater economic integration is going to occur very slowly and, of course, unless there is a change in treaty, there is not going to be any political union. And the political appetite in Europe for greater political integration is also very low.
So I would expect that the change in treaty that would lead to a greater economic, fiscal, banking and political integration is not going to occur before 2020 at the earliest. So you’ll have to have elections in Germany and France in ‘17 and after that negotiation to have a change in treaty and then it has to be voted by every parliament or referendum. So, that’s the window at the earliest. So what’s the chance in the next six years that some of the tensions between the core and the periphery or some of the fragility of the periphery reemerges in a way that puts at risk again this European project. I would say it’s a risk.
Dr. Nouriel Roubini is the co-Founder and Chairman of Roubini Global Economics.
