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

Europe, says star economist Nouriel Roubini, needs to take immediate action to shore up the euro. In an interview with SPIEGEL, Roubini said Germany must provide more money to defend the common currency and allow the European Central Bank to loosen monetary policy. Otherwise, disaster could be looming.

SPIEGEL: Mr. Roubini, when you recently acquired a new penthouse in Manhattan for $5.5 million observers on both sides of the Atlantic hailed it as a sign: The man who predicted the financial crisis had regained confidence in the US housing market and in the US economy.

Roubini: There's a bit of good news -- and a lot of bad news. In 2011, the US economy will likely grow by 2.7 percent. That's a robust rate of growth. The risk of a second slump has dropped considerably. The US Federal Reserve's policy of buying government bonds and the middle-class tax benefits of the Obama administration are already having an effect. That's the good news.

SPIEGEL: And the bad news?

Roubini: The persisting housing crisis, the implications of this on the financial condition of banks and, above all, the high public debt and deficit, both at the federal and state levels. The US is in a dilemma. In the medium term, there is no getting around budget consolidation, otherwise the country will be threatened by a debt crisis such as Europe is currently experiencing. However, given the weak recovery so far, the US must do all it can to boost economic growth.

SPIEGEL: Tax cuts for the super rich, which are part of President Barack Obama's tax package, are hardly going to create additional growth.

Roubini: And that's the heart of the problem. The plan is a complete waste of money. It's going to increase the deficit without doing anything to kick-start the economy. And, unfortunately, I don't see any chance of this fiscal stalemate changing significantly before the presidential elections in 2012. The White House and the Republican majority in Congress block each other's proposals, and there is no such thing as bipartisan crisis management in the US. I'm sure that the public debt of the US will eventually make the markets very nervous in the next few years.

SPIEGEL: Although the situation is actually better in the euro area, the euro is the target of attacks and not the dollar.

Roubini: The condition of the over-indebted states on the periphery of the euro area is similar to that of the US federal states, from California to Illinois. But there are also clear differences: Even if California were to go bankrupt, nobody would think that the US monetary union would collapse because of this. The debt problems that Greece and Ireland are currently experiencing, could, in contrast, actually lead to a collapse of the euro area. What's more, the US can always finance its debt by printing more money. Greece and Ireland are dependent on the European Central Bank, the ECB, to relax its monetary policy against the will of Germany. There is simply more discordance than agreement in the euro area.

SPIEGEL: Americans and Germans differ widely in their views on how to make the economy pick up again. The US is trying to boost the economy with tax cuts and by having the Fed buy government bonds, while Germany wants to stringently cut expenditures.

Roubini: The cost-cutting measures, the ECB's tight monetary policy, the current high value of the euro -- that's all fine for Germany and the heart of the EU. But what's good for Germany is by no measure good for the countries on the periphery of the EU. The economic output of Greece, Ireland and Spain is shrinking, and there is hardly any growth in Portugal and Italy. To get these countries back on track for recovery the ECB should do what the Fed is doing and increase the money in circulation to stimulate growth.

SPIEGEL: The public debt of member states such as Greece or Portugal is what caused the euro crisis in the first place. Why should Germany now backtrack on its cost-cutting strategy?

Roubini: Europe needs growth to prevent a disorderly collapse of the euro area. The stringent cost-cutting measures that the EU and the International Monetary Fund are imposing on countries such as Greece and Ireland are, in principle, the right way to get a handle on their debt. However, these measures also strangle an economy. Higher taxes mean people have less money to spend. If the government cuts spending it cannot make investments to stimulate growth. This creates huge difficulties for the governments concerned: If people cannot see the light at the end of the tunnel they will start to withdraw their support for reforms. In the interests of Europe as a whole, Germany should do all it can to bolster growth -- at home and in Europe. Germany should, therefore, postpone its austerity strategy.

SPIEGEL: Last year the German economy grew by 4 percent, due primarily to exports. The US and France harshly criticize Germany for this and say that Germany should reduce its trade surplus. Should Germany be punished because its companies are so competitive?

Roubini: The German growth model will not work in the medium term, not for Germany, nor for Europe. Germany's economy relies too heavily on exports. At the beginning of the financial crisis the German slump was higher than in the US, where the crisis originated. Even if domestic demand is now gathering pace, Germany must do more, such as liberalize the service sector and stimulate consumption. And this would kill two birds with one stone: it would reduce Germany's dependence on exports and cut its trade surplus, which causes other parts of Europe to slide further into the red.

SPIEGEL: In essence, you are accusing Germany of acting selfishly, to the detriment of its European partners. This criticism was voiced loudly in the past few weeks when Germany insisted on private-sector creditors participating in the future crisis mechanism for the euro area. Was this justified?

Roubini: First off, the participation of private-sector creditors is right, in principle. But the Germans have made the crisis worse with their idea and their timing. I have worked on debt restructuring for a number of years and have not been able to identify any really workable proposals from Germany for helping countries such as Greece and Portugal to emerge from the debt trap. If you don't mind me saying so, the idea of an international insolvency law is absurd, as orderly restructuring of sovereign debt doesn't require a new legal framework.

SPIEGEL: Why shouldn't government bonds include clauses in the future that regulate a procedure for the worst case scenario, in which private-sector creditors have to accept losses?

Roubini: Let's take the example of Greece. In the best case, i.e. according to their current austerity plan, Greece's public debt will still be at 160 percent of GDP in two years. Who is going to lend the country new money in 2013 if they know that they will definitely face losses if the country goes bankrupt? Greece will have to restructure its debt in any case.

SPIEGEL: The permanent crisis mechanism agreed by the euro states for 2013 at their summit this December requires the participation of private-sector creditors.

Roubini: What the euro countries decide for 2013 is completely inconsequential. Forget 2013! The important thing is what will happen in the next three months in Portugal, Spain, Italy, and France. I can't fathom how the EU member states can hold a summit entirely preoccupied with what will happen after the present rescue package runs out, without once mentioning what they intend to do now to help Portugal and Spain.

SPIEGEL: But the summit did, at least, signal a willingness to increase the size of the euro backstop fund currently worth €750 billion.

Roubini: Europe must make more money available to defend its currency and sovereign states under stress. Which tools it uses to do this is of secondary importance. Of course, the EU can continue to rely on the ECB to do its dirty work and buy up the government bonds of distressed states. But it would be better to drive a proactive strategy and increase the bail-out funds, introduce euro bonds, or even set up a European monetary fund. All solutions have one thing in common: the German taxpayers' money will be used to stop the debt crisis in other countries. In Germany's place, I would opt for increasing the bail-out package…

SPIEGEL: … which is already insufficient if Spain needs help too.

Roubini: The fact alone that everybody knows this increases the risk of a run on Spanish banks. If the rescue package isn't increased soon the ECB will have to buy Spanish government bonds. The German taxpayers will ultimately have to foot the bill for this, too, as the ECB will need more capital.

'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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