Roubini At Davos

Nouriel Roubini is at the Davos World Economic Forum meeting this week, and in a Bloomberg interview he gives a dire warning about the future of the Euro and the Eurozone, particularly Spain and Greece.

“Down the line, not this year or two years from now, we could have a breakup of the monetary union,” Roubini said in a Bloomberg Radio interview from the World Economic Forum’s annual meeting in Davos, Switzerland. “It’s a rising risk.”

Roubini’s concern contrasts with the view of European Central Bank President Jean-Claude Trichet who said it’s “absurd” to imagine that the 16-nation euro area could splinter. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.

“The euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union,” said Roubini, who predicted the recent financial crisis a year before it began. “This is the very first test” of the single currency bloc.

Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said. Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said.

And that means they crash and burn.  The question is whether or not they crash and burn forcefully enough to take the EU down with it.

Roubini said for all the focus on Greece, Spain may eventually pose a bigger threat to the euro zone because it’s the region’s fourth-largest economy and has higher unemployment and weaker banks. Spain’s jobless rate is more than 19 percent, almost twice the EU average.

“If Greece goes under that’s a problem for the euro zone,” he said. “If Spain goes under it’s a disaster.” 

The basic problems that created the global recession have yet to be addressed.  The symptoms were treated with more money, but the root causes remain.  And hey, Japan's still in trouble too.

After Standard & Poor’s yesterday lowered its sovereign credit rating outlook on Japan, Roubini said he was “worried” about the world’s second-largest economy as its debt mounts, deflation returns and population ages. While it can currently finance itself thanks to domestic savers, at some point they may “flee the yen,” pushing up borrowing costs and crippling the economy, he said.

That's right, Japan's credit rating is now in trouble. The U.S. may be better at hiding the problem, but the rest of the world is hurting badly.  The world has a long way to go to get out of this mess, and the next decade is going to be painful.