SPIEGEL Interview with Economist Nouriel Roubini 'Europe Needs Growth to Prevent a Collapse of the Euro'


Part 2: 'It Comes Down to a Deal'

SPIEGEL: The Germans are fed up with being the biggest payer among the Europeans. Could they avoid the burden of the bankrupt countries by splitting up the euro area into a north euro and a south euro?

Roubini: No. There has never been a monetary union with only weak members. It would be more likely for Portugal, Italy, Spain or Greece to revert to their national currencies. The debt problems of the weak countries would increase if the monetary union is split up. The weaker countries would have to continue paying back the majority of their debt in hard euros while their new national currencies sharply depreciate. And they would be very hard-pressed to do so. This would trigger a financial crisis and default for sure and German creditors would incur big losses.

SPIEGEL: This is also why going back to the deutsche mark is not an option.

Roubini: This would force the weaker states to devalue their currency, and they would also have problems repaying their debts in German marks. Greece and Portugal are already unable to pay back their debts within the monetary union, and they certainly wouldn't be able to if the monetary union collapsed.

SPIEGEL: If splitting up the euro area or withdrawing from the monetary union is not feasible, is stronger integration the solution? Does the euro area need a common economic government?

Roubini: What it comes down to is a deal: If the Germans agree to relax the ECB's monetary policy and provide more money to defend the euro and the weaker states, then they should, in return, get regulations that automatically punish countries flouting budget rules. Overly indebted states would then have to accept a loss of their autonomy in fiscal issues. This would be a hairy deal but could avoid the collapse of the euro area.

SPIEGEL: And the premiums on German government bonds have recently risen.

Roubini: I can understand the Germans' concerns, that using their fiscal discipline to backstop and bailout the weaker periphery members could eventually reduce Germany's creditworthiness and ratings. Therefore, any additional bailout funds for the periphery should come with strict rules to enforce fisal discipline. There is fiscal discipline in Germany, so there is no risk of a default by Germany.

SPIEGEL: The euro area's problems and the relaxed monetary policy of the US are causing large inflows of capital into emerging countries. Is this the beginning of the next dangerous bubble?

Roubini: The interest rates in the developed economies are at zero percent, and there are concerns about the stability of their currencies. Emerging countries such as Brazil are consequentially being flooded with cash. And this capital seeks investment options even in places where there aren't any good opportunities. It's difficult for emerging countries to stem this tide of capital. If they let their currency rise in value they loose their competitiveness.

SPIEGEL: The Chinese yuan, in particular, is causing strife. The US is accusing China of keeping its currency artificially low in order to reap the benefits in its export markets. This could lead to a currency war.

Roubini: I wouldn't call it a war, but there is tension. To even out global growth a little better there is no other option than to weaken the dollar and increase the value of the yuan. Nobody would call on China to increase its currency by 20 percent in one go. But the 2 percent that the Chinese have brought themselves to implement in the past few months is not enough. A midpoint -- at around 6 percent per year like in the 2005-2008 period -- would satisfy all sides.

SPIEGEL: Given the fact that not everybody can afford an apartment in Manhattan like you, what would be your advice to investors? Are commodity securities a good investment in view of the rising oil and gold prices?

Roubini: My advice is simple: diversify! Don't buy anything that's overpriced! The global economy is on the right path, but there are risks along the way. Growth in the euro area is still dependent on that of the US. Policy mistakes in China or in emerging countries could strangle growth. On top of that, we have oil price levels which will soon no longer be viable for industry. North Korea and Iran still represent dangerous trouble spots. 2011 is set to be a risky year for investors even if the global economic outlook is improving.

SPIEGEL: Mr. Roubini, we thank you for your time.

Interview conducted by Peter Müller

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