New York University professor Nouriel Roubini said Greece and other “laggards” in the euro area may be forced to abandon the common currency in the next few years to spur their economies.
A “real depreciation” in the euro is needed to restore competitiveness in nations including Spain, Portugal and Italy, he said in an interview on Bloomberg Television yesterday.
The euro will remain the currency for a smaller number of countries that have “stronger fiscal and economic fundamentals,” Roubini said.
The EU and IMF last week approved a 110 billion euro (US$139 billion) lifeline for Greece to arrest the country’s fiscal crisis and stop the turmoil from spreading. Europe’s debt woes may push it into a “double-dip” recession, growth in advanced nations will be “anemic” and China’s overheating economy risks a slowdown, Roubini said, adding that Greece may still eventually need to restructure its debt.
“The challenge of reducing a budget deficit from 13 percent to 3 percent in Greece looks to me like mission impossible,” Roubini said. “I would not even rule out in the next few years one or more of these laggards of the euro zone might be forced to exit the monetary union.”
Greece agreed to the package on May 2, pledging 30 billion euros in wage and pension cuts and tax increases in the next three years to tame the euro-region’s second-biggest deficit.
Greek Prime Minister George Papandreou had revised up the budget deficit for last year to more than 12 percent of GDP, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.
The fiscal changes Greece needs to undertake as part of an international bailout will be an “ugly” process that will only get worse, Roubini said.
Public opposition to the plan sparked riots in Athens last week that led to three deaths.
“They are not going to be able to raise taxes and cut spending that much,” he said. “As you raise taxes and cut spending in the short run, output is going to fall even more. The IMF expects another two to three years of recession in Greece. How much austerity and recession can a country take?”
The 16 euro nations, jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, this week agreed to offer financial assistance worth as much as 750 billion euros to countries under attack from speculators. The European Central Bank said it would counter “severe tensions” in “certain” markets by purchasing government and private debt.
The lending plan is just “another nail in the coffin” for the currency, which is at risk of being “dissolved,” investor Jim Rogers said in a Bloomberg Television interview in Singapore yesterday.
“This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency,” the chairman of Rogers Holdings said. “You have all these countries spending money they don’t have and it’s now going to continue. Nobody is minding the economics behind the necessities to have a strong currency.”
Paul Krugman, a Nobel Prize-winning economist, said Europe’s US$1 trillion bailout plan won’t resolve the continent’s sovereign debt problems.
“Europe will continue having difficulties,” Krugman said yesterday while speaking at a conference in Toluca, Mexico. “All they’ve done is postpone the problem.”
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