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Deciphering Nouriel Roubini, on why the euro will fail.
Henry Kissinger once joked that the best thing about being famous is that when you bore people, they think it’s their fault.
A similar rule appears to hold true for high-flying economists: if you’re brilliant, you can express your ideas in impenetrable paragraphs, devoid of the action verbs that breathe life into prose. You can write in a style that only heavily caffeinated economists can (or would care to) decipher.
Nouriel Roubini, it appears, has conformed to that rule in writing a pre-death autopsy report on the euro zone, in Tuesday's Financial Times.
Roubini — aka Dr. Doom for his often-grim, sometimes-prescient economic forecasts — proclaimed in 2005 that a mortgage meltdown would spark a global financial crisis. When that controversial prediction materialized, he became famous beyond economic circles, boosting his status on New York’s club circuit and enabling him to make cameos in Hollywood movies. Roubini is also well-placed to comment on Europe’s current pickle. He is a leading authority in the economics of developing countries, where debt crises are relatively common.
Today’s Financial Times analysis of the euro zone’s future, while provocative and insightful, is clotted with jargon on “delayed structural reforms,” “disorderly debt workouts,” and “a muddle-through approach.” And that’s only the first paragraph. That’s a shame for anyone who doesn’t speak that language. When decoded, the article is really about everyday things that matter, like government spending and workers who produce value versus those who don’t. And his predictions, if accurate, could have major implications for people’s well-being, similar to the way the mortgage meltdown affected us all.
Wouldn’t it be nice if we all could understand, beyond the technocrats who read the FT? The following is GlobalPost’s interpretation of Roubini’s key, need-to-know points.
Roubini starts bluntly, calling on officials to stop fooling themselves into thinking that lending billions to Greece, Portugal and Ireland (and possibly Spain) can solve Europe’s economic woes. He says that if they don’t recognize soon that the current policy is doomed, they’re going to lose control of Europe’s debt crisis, leaving the continent in financial shambles.
If that happens, honest investors who have loaned their savings to these countries could end up losing big-time. Worse yet, that could trigger a ripple effect, harming many other people (the same way the financial crisis that began in 2008 claimed collateral damage on the job market, for example).
Moreover, the weaker economies in the euro zone may end up mired in persistent economic stagnation, eventually forcing them to retreat back to the currencies they used before adopting the euro in 1999. That would be a highly disruptive event, best handled with care and planning. Those old currencies would be bound to depreciate in value versus the euro. In turn, that would pose serious problems for people who have lent money to those countries: if the euro, hypothetically speaking, suddenly becomes worth twice the Spanish peseta, Spain would have to come up with twice as many pesetas to repay its euro-denominated debt. Given that it already faces a difficult debt burden, where would it come up with the extra money?
Roubini says the real problem that officials need to face is that Europe’s heavily indebted countries are not economically compatible with the economies of Germany and France. Therefore, under the current European system, it makes no sense for them to be using the same currency. (A currency, after all, is essentially a moveable, collective contract that rises and falls in the global economic ecosystem according to a given society’s accomplishments and shortcomings; it typically doesn’t work when one culture uses the currency of another).
He cites two reasons why these peripheral countries don’t belong in the euro zone.
Greece and Portugal aren’t compatible because the governments there lack discipline. They spend far too much relative to the taxes they collect and the size of their economies. Until the financial crisis, the euro helped to hide that problem, allowing it to worsen, because investors (erroneously) assumed that lending money to Athens and Lisbon was about as reliable as lending it to Berlin.
In Spain and Ireland, Roubini notes that the euro caused a “build-up of asset bubbles,” exposing these countries as incompatible with the euro as well. Here’s why that happened: Before Jan. 1, 1999 when these countries