Nouriel Roubini
Can you explain for us the origins of the European debt crisis?
Well, the origins of the European debt crisis are multiple. The proximate cause was that
recently many countries have had a large increase in budget deficits, and their stocks have
plummeted to levels that are unsustainable. In some countries, this was due to bad fiscal
behavior – too much spending, too little taxes – like in Greece. But in other parts of the
Eurozone, like Spain or Ireland, there was a bubble in real estate and housing. The countries
went into a recession. When you’re in a recession, your deficit increases, then you have bailout
banks, financial institutions, and the private losses get institutionalized. Then you have a surge
of public debt.
How much of the blame for the Euro debt crisis should go to Brussels as opposed to the
individual policies of the nations?
Well the individual nations made mistakes – those who had the debt bubble in the private
sector, those who had the loose fiscal policy. But those were a flaw in the design of the
monetary union. Historically, when you have a monetary union in a country, you also have a
fiscal union, you have a banking union, you have a broader economic union, you have a political
union. In the case of the Eurozone, they created a monetary union with the same currency, but
all the other elements of the union were not present, and right now I think it is becoming
increasingly obvious that unless the Eurozone moves to a greater union integration – meaning a
fiscal union with common spending, revenues, public debt that is shared, a banking union with
European-wide deposit insurance, an economic where the recession is stopped and there is
economic recovery. Of course, if you do all these things, you also need a political union to give
more democratic legitimacy to the fact that the nation-states are going to give up some
sovereignty on fiscal banking and economic affairs. So either go towards union integration, or
otherwise the current model [inaudible] that is an unsustainable equilibrium is going to apply a
progressive process of fragmentation, disintegration, disunion, where more countries are going
to market access, more countries are going to have to restructure their debt and start increase.
Countries will exit the Eurozone and, if enough of them exit the monetary union, then there’s a
breakup. So it’s either union or breakup.
What are the fundamental differences between the 2006 crisis in the U.S. and the European
debt crisis?
There’s some similarities and some differences between the U.S. crises and the European. The
similarities are that in some of the European countries, both in the Eurozone and outside the
Eurozone, there was a real estate and housing bubble that went bust, and cleaning up the mess
implied a massive increase in deficits and public debt. Within the Eurozone that happened to
Ireland and to Spain; within Europe, that happened to Iceland and the United Kingdom. The
differences are that the U.S. so far –despite a large budget deficit and rising public debt – have
not had a sovereign debt crisis. But in the case of the Eurozone, you already have five or six
countries – Greece, Ireland, Portugal, now Italy and Spain – that either have lost market access
and need an international bailout, or like Italy and Spain, are on the verge of needing such a
bailout.
Could the economic crisis in Europe derail the United States’ potential recovery in 2013?
Yes, if things were to become disorderly in Europe, the shock not just to Europe, but to the
global economy could be comparable to the disorderly default of Lehman Brothers in the fall of
2008. Even a small Greece that is only 2% of the Eurozone GDP, could cause a mini-Lehman
crisis – let alone if larger countries like Italy and/or Spain were to observe a significant fiscal,
financial and banking distress. In this globalized world where countries are interdependent –
no country is an island – there are trade links, there are financial links, there are commodity
links, equity market links, confidence – you name it. What happens in one part of the world
affects other parts of the world. In the same way that the collapse of Lehman implied global
shocks, a disorderly situation in the Eurozone is going to impact the United States, China, and
many other parts of the world that could be very severe and very extreme.
What are European and international bodies doing to mitigate the crisis?
There has been a huge amount of intervention by policy makers within Europe and
internationally, trying to stem the Eurozone crisis, but there has been a domino effect: Greece,
then Ireland, now Portugal, Italy, Spain, [and] even small countries like Cyprus and Slovenia that
share a similar kind of problems. The European Central Bank has started to help; Germany and
other members of the core have provided (to these institutions) bailout money to the country
in distress. In some cases, like Greece, Ireland, and Portugal, the help has come not only within
Europe but also from the international community – the International Monetary Fund. The
problem is that providing loans to countries in trouble, and telling them, “we give you the
money, and you do austerity, you do reform,” works only if the country with that help and time
and effort can be made solvent and sustainable. But in some cases like Greece, the amount of
debt and deficit was so large, that the restructuring of their debt was necessary, and the
problems of Greece are such that, even with international support, by 2013 may exit the
Eurozone. So there are problems that are so deep and ingrained that cannot be solved by
money or kicking the can down the road. They have to be done by more radical surgery, like
restructure of debts after defaults and/or exit the monetary union. So some countries are not
going to make and will eventually have to default, restructure their debts, and exit the
monetary union.
Where is the funding coming from for the current bailouts?
Well, the funds are coming from different places. Initially, there was too much private debts, so
when those losses were socialized, they were taken over by the national governments in
Ireland, Spain, Italy and Greece. Then when some of these countries had too much debt, you
had the bailout by international organization – like the ECB, like the IMF, and you name it. But
you cannot go from private debt to national debt to super-national, and keep on kicking the can
down the road. Because some of these countries are insolvent, nobody is going to come from
the moon or Mars to bailout the IMF, or the ECB, or these institutions – ESF, ESM – that have
been created to bail countries out of trouble. At some point, you cannot consider that every
problem has been just a problem of a lack of cash and liquidity; some countries are bankrupt,
meaning they’re insolvent. You have to restructure their debt; in some cases, you have to let
them exit the monetary union as a way of restoring external balance, growth, and
competitiveness.
Will there be long-term changes to the European banking system because of this crisis?
Well, the European banking system is getting fragmented, disintegrated and vulcanized – there
is not anymore common banking system. Cross-border lending between banks is gone; interbank lending between banks is gone; financing at the wholesale level rather than using retail
depositors of the banks is gone. There is already a run by wholesale depositors of banks by
larger depositors – it’s clearly been reaching Greece – retail depositors. So the European
banking system is getting vulcanized. Instead of financial integration, we’re right now financial
disintegration – and that already is the risk the Eurozone is disintegrating in the financial realm.
What can US policy makers do to limit the impact of the Eurozone crisis?
Well, the United States is in significant economic challenges on its own. Growth has been
slowing down throughout the year. There is a risk of a fiscal cliff coming up in 2013. The
external shocks – whether they come from the Eurozone or the risk a Chinese hard landing, or
war in the Middle East, the risks are significant – and US policy makers are, in some sense,
running out of policy bullets. We’ve cut the policy rate to zero, quantitative easing in QE1, QE2,
and maybe QE3, but what’s going to be the effect of that on the economy? We’ve done so
much fiscal stimulus, and we’re going to do more stimulus, which will probably be politically
and otherwise unfeasible, even if short-term fiscal stimulus may be necessary to help an
economy that is weakening, but the politics is underway against it. And our ability to backstop
and bailout banks if trouble were to begin again because we ourselves are running out of
money and politically, another bailout of traders and bankers will become very difficult. So the
trouble around the world including the United States, is that we’re running out of policy bullets
because we’ve been using these policy bullets. Policy makers are running out of policy rabbits
to take out of their magicians hats, so therefore, compared to 2008, if there was a recession or
if markets start to fall sharply, in ’08 we had all the policy bullets and policy rabbits, so things in
a negative scenario could be worse in 2013 than they were in 2008, 2009.
What is the economic threat posed by Iran?
The economic risk steaming from Iran is that the price of oil is very sensitive to geopolitical risk
in the Middle East. In 1973, there was the Yom Kippur war between Israel and the Arab state.
There was an oil embargo, oil prices tripled, there was a global recession with high inflation.
And I think in ‘79, following the Iranian revolution, we also had another restriction to the
supply of oil that also lead to a global recession in ’80, ’82. Even the recession of 1990, 1991,
was probably triggered by the Iraq invasion of Kuwait in August of 1990 that also lead to a
global recession. So if the tensions between Israel-U.S. and Iran on the issue of nuclear
proliferation were to reach a level of military confrontation, it’s likely that oil prices could even
double in price in a matter of weeks, and that could kick the U.S. and the global economy into
another recession. So if negotiations are going to fail, if sanctions are going to fail, to prevent
Iran from credibly not developing a nuclear bomb, there’s a possibility that Israel or the U.S.
may take military action with the consequences on spiking oil prices.
Bearing that in mind, if you were advising U.S. policy makers, what would you advise them to
do to avert the situation?
Well, policy makers will have to make a decision whether the costs of going to war will
outweigh the benefits. Anything that avoids a military intervention while, at the same time,
convincing Iran to give up on the bomb, will be beneficial. If a military confrontation was
unavoidable, there are military measures that could be taken to try and avoid that Iran cannot
block the straits – and therefore the flow of oil is not hampered for too long. Some of these
Arab states have already created that pipeline in the Emirates in Saudi Arabia that bypass the
Strait of Hormuz and other supertankers. We and other countries have a strategic petroleum
reserve that could be used for a few months in case there is a supply shock. So a number of
economic actions could be taken, including maybe Saudi Arabia and other countries that still
have some excess capacity to ramp up production, even if the main constraint is not the
production one, but rather can you ship the oil if there is a war in the region to the consuming
countries?
How can the U.S. remain competitive while avoiding conflict with China in Africa?
Many people have discovered that Africa is a potentially high growth region of the world as
economic and political conditions have stabilized. The U.S. has been somehow asleep at the
wheel while either European corporations and institutions or other countries like China, are
making massive investments in the region—a region that has a lot of natural resources. The
U.S. sees the involvement of China in Africa as being a potential threat. In the point of view of
the countries receiving the loans, aid, and investment project, the Chinese involvement can be
quite beneficial. The issue is not to start another great game on resources in Africa, but
realizing that we have to care about almost a billion people being in an utter state of poverty –
if not malnutrition and other diseases. So the international community should be investing in
Africa; China can do it, other emerging markets can do it, Europe and the U.S. can do it, the IMF
and the World Bank can do it. Instead of trying to grab a piece of Africa for ourselves or from
the Chinese, we should think of what is good for Africans in terms of policies that foster the
integration of these countries into the global economy, and give hope to hundreds of millions
of people that were, in the past, were on the verge of starvation, and today are very poor and
behind.
What opportunities does democratizing Myanmar provide to the U.S.?
The fact that Myanmar is democratizing and opening up, provides an opportunities for the U.S.
and many other countries. It’s a large country – we have a large population, there’s a large
domestic market, there’s a lot of opportunities to sell goods and services. There’s opportunity
of doing FDI. So everybody today has discovered Myanmar, from the U.S., to Europeans, to
Chinese, to other Asians. There’s a geopolitical dimension of it as well. Myanmar is closer to
China, and that is an opportunity for the West and the U.S. to have an influence on political
affairs of this important and strategically located country. So it’s not just a game of economic
and business opportunities, but also a broader geopolitical influence on an important country in
the Asian region.