Nouriel Roubini Transcript

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; inter-bank 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.