Roubini wrong about the eurozone break-up

28. January. 2010
ArabMoney (Peter Cooper)

New York University’s Nouriel Roubini has not had much luck with his pessimistic forecasts since correctly calling the sub-prime crisis. His repeated calls for the bear market rally in stocks to end are only just now being heeded by global financial markets.

Now he is launching a broadside against the European monetary union, telling Bloomberg that Spanish economic problems could be its undoing ‘down the line, not this year or in two years from now’.

At the moment Greece looks the more immediate problem nation with a 12 per cent budget deficit and debts due to exceed 120 per cent of GDP this year. However, European Central Bank president Jean-Claude Trichet said it is ‘absurd’ to imagine the break up of the 16-nation currency bloc.

Even the Greek central bank governor George Provopoulos said it will be ‘unequivocally easier to solve’ his country’s problems inside rather than outside the eurozone.

For Roubini to be proven right then nations like Greece and Spain would have to be ejected from the euro, something that is not even being considered or actually politically or legally possible. California might be running a big state deficit but that will not result in the biggest US state issuing its own currency. How could it?

More likely in the humble opinion of ArabianMoney is that other beleaguered European nations will eventually seek shelter under the euro umbrella. Recession-hit Britain would be a prime candidate if it was not for national pride and chauvinism. Joining the euro with the pound undervalued would be great real politique and excellent economics.

Austerity

What the eurozone nations in trouble – Spain, Portugal, Ireland and Greece – will have to face up to are cutbacks in public spending and higher taxation. They do not have much alternative.

Imagine how Greece would fare in issuing bonds in a new currency. Would anybody buy them except at fantastic interest rates? Even then it would be very risky given the Greek record for overspending and the potential for devaluation.

It is indeed absurd to talk about a break up of the eurozone, and perhaps only something that an American professor looking for a headline might come up with. Why does he not stick with his call for an end to the bear market rally, just as it is coming right?