Thursday, August 18, 2016

Roubini does not think Trump will help blue collar workers

Monday, August 1, 2016

Changes needed in EU and EuroZone to prevent disintegration

The market reaction to the Brexit shock has been mild compared to two other recent episodes of global financial volatility: the summer of 2015 (following fears of a Chinese hard landing) and the first two months of this year (following renewed worries about China, along with other global tail risks). The shock was regional rather than global, with the market impact concentrated in the United Kingdom and Europe; and the volatility lasted only about a week, compared to the previous two severe risk-off episodes, which lasted about two months and led to a sharp correction in US and global equity prices.

Why such a mild, temporary shock?

For starters, the UK accounts for just 3% of global GDP. By contrast, China (the world’s second-largest economy) accounts for 15% of world output and more than half of global growth.

Moreover, the European Union’s post-Brexit show of unity, together with the result of the Spanish election, calmed fears that the EU or the eurozone would fall apart in short order. And the rapid government changeover in the UK has boosted hopes that the divorce negotiations with the EU, however bumpy, will lead to a settlement that maintains most trade links by combining substantial access to the single market with modest limits on migration.

Most important, markets quickly priced in the conclusion that the Brexit shock would lead to greater dovishness among the world’s major central banks. Indeed, as in the two previous risk-off episodes, central-bank liquidity backstopped markets and economies.

But the risk of European and global volatility may have been only briefly postponed. Leaving aside other global risks (including a slowdown in already-mediocre US growth, more fear of a Chinese hard landing, weakness in oil and commodity prices, and fragilities in key emerging markets), there is plenty of reason to worry about Europe and the eurozone.

First, if the UK-EU divorce proceedings become protracted and acrimonious, growth and markets will suffer. And an ugly divorce may also lead Scotland and Northern Ireland to leave the UK. In that scenario, Catalonia may also push for independence from Spain. And without the UK, Denmark and Sweden, which aren’t planning to join the eurozone, may fear that they will become second-class members of the EU, thus leading them to consider leaving as well.

Second, upcoming elections promise to be a political minefield. Austria will repeat its presidential election in September, the previous one having ended in a virtual tie, giving another chance to the far-right Freedom Party’s Norbert Hofer. The following month, Hungary will hold a referendum, initiated by Prime Minister Viktor Orb├ín, on overturning EU-mandated quotas on the resettlement of migrants. And, most important, Italy will hold a referendum on constitutional changes that, if rejected, could effectively jeopardize the country’s membership in the eurozone.

Italy currently is the eurozone’s weakest link. Prime Minister Matteo Renzi’s government has become politically shakier, economic growth is anemic, the banks are in need of capital, and EU fiscal targets will be hard to achieve without triggering another recession. If Renzi fails – as is increasingly possible – the anti-euro Five Star Movement (which recently did well in municipal elections) could come to power as early as next year.

Should that happen, the Grexit fears of 2015 would pale in comparison. Italy, the eurozone’s third-largest member, is too big to fail. But, with a public debt ten times larger than Greece’s, it is also too big to be saved. No EU program can backstop Italy’s €2 trillion ($2.2 trillion) of public debt (135% of GDP).

Moreover, elections in France, Germany, and the Netherlands in 2017 create additional uncertainties as weak growth and high unemployment in most of Europe boost support for anti-euro, anti-immigrant, anti-Muslim, and anti-globalization populist parties of the right (in the eurozone core) and of the left (on the eurozone periphery).

At the same time, Europe’s neighborhood is bad and getting worse. A revisionist Russia has become more assertive not just in Ukraine, but also in the Baltics and the Balkans. And the consequences of the continuing turmoil in the Middle East are at least twofold: renewed episodes of terrorism in France, Belgium, and Germany, which may over time dent business and consumer confidence; and a migration crisis that requires closer cooperation with Turkey, which itself has become unstable since the botched military coup.

Until the coming round of elections is over, the EU is unlikely to take any steps to complete its unfinished monetary union by introducing more risk-sharing and accelerating structural reforms to encourage faster economic convergence. Given the current slow pace of reforms (and population aging), potential growth remains low, while actual growth is on a very moderate cyclical recovery that is now threatened by post-Brexit risks and uncertainties. At the same time, high deficits and debts, together with eurozone rules, constrain the use of fiscal policy to boost growth, while the European Central Bank may be reaching the limits of what even unconventional monetary policy can do to sustain the recovery.

The eurozone and the EU are unlikely to disintegrate suddenly. Many of the risks they face are on a slow fuse. And disintegration can of course be avoided by a political vision that balances the need for greater integration with the desire for some degree of national autonomy and sovereignty over a range of issues.

But finding ways to integrate that are democratic and politically acceptable is imperative. Muddling through has resulted in an unstable equilibrium that will make disintegration of the EU and the eurozone inevitable. Given the many risks Europe faces, a new vision is needed now. 

via ProjectSyndicate

Monday, July 25, 2016

Turkey coup could lead to more authoritarian leadership

Monday, July 18, 2016

Nouriel Roubini joins ACGM as Chief Economic Advisor

Nouriel Roubini has joined ACGM, the investment banking boutique as its Chief Economic Advisor. ACGM has released a press release on this announcement. 

Based in New York, Nouriel will provide his highly prized economic insights to the firm and to investment banking clients and investors.
His extensive research focuses on International Macroeconomics, Fiscal Policy, Political Economy, Growth Theory and European Monetary Issues; the knowledge and experience he has developed over the course of his distinguished academic and policy career will be invaluable to ACGM and its clients. Nouriel's global outlook and wide-ranging work on Emerging Markets make him an excellent fit for the role; ACGM focuses on three special areas of expertise: Emerging Markets, Financial Institutions and Restructuring & Special Situations.
During his distinguished career, Nouriel has earned many notable accolades, but he is perhaps best known for foreshadowing the U.S. housing market crash of 2007-2008; he first warned of the crisis in an IMF position paper published in 2006. Nouriel's policy experience is extensive: from 1998 to 2000, he served as the senior economist for international affairs on the White House Council of Economic Advisors, working during the administration of President Bill Clinton, and then the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department, alongside Timothy Geithner, helping to resolve the Asian and global financial crises, among other issues. The International Monetary Fund, the World Bank and numerous other prominent public and private institutions have drawn upon his consulting expertise.
In May 2016, he sold Roubini Global Economics, an independent, global macroeconomic and market strategy research firm, which he cofounded and where he continues to serve as Chairman. The firm's website,, has been named one of the best economics web resources by Bloomberg Businessweek, Forbes, The Wall Street Journal and The Economist. Nouriel's views on global economic issues are widely cited by the media, and he is a frequent commentator on various business news programs. He has been the subject of extended profiles in The New York Times Magazine and other leading current-affairs publications. The Financial Times has also provided extensive coverage of his perspectives. In 2011 and 2012, he was named one of the Top 100 Global Thinkers by Foreign Policy magazine. In 2013, Nouriel was awarded the Award for Excellence in Global Thinking by the Global Thinkers Forum. He has appeared before Congress, the Council on Foreign Relations and the World Economic Forum at Davos.
Upon announcing the appointment of Nouriel as Chief Economic Advisor, Carlos Abadi, ACGM's CEO, highlighted the invaluable expertise which is now available to ACGM's clients and professionals.
"We are honored to welcome Nouriel to our team; his research-driven insights and real-world policy experience will be highly valued by ACGM and our clients, as we seek timely, quality information to inform decision making."
Nouriel received his undergraduate degree from Bocconi University in Milan, Italy, and his Ph.D. in Economics from Harvard University in 1988. 

Monday, July 11, 2016

Solutions to contain backlash to Globalisation needed

The United Kingdom’s narrow vote to leave the European Union had specific British causes. And yet, it is also the proverbial canary in the coalmine, signalling a broad populist/nationalist backlash — at least in advanced economies — against globalisation, free trade, offshoring, labour migration, market-oriented policies, supranational authorities and even technological change.

All these trends reduce wages and employment for low-skilled workers in labour-scarce and capital-rich advanced economies, and raise them in labour-abundant emerging economies. Consumers in advanced economies benefit from the reduction in prices of traded goods; but low- and even some medium-skilled workers lose income as their equilibrium wages fall and their jobs are threatened.

In the Brexit vote, the fault lines were clear: Rich versus poor, gainers versus losers from trade/globalisation, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. The same fault lines are appearing in other advanced economies, including the United States and continental Europe.

With their more flexible economies and labour markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. Job creation has been robust, with the unemployment rate falling below 5 per cent, even if real wages are not growing much.

Donald Trump has based his campaign on "Making America Great Again" by getting jobs back in USA
Yet in the US, Mr Donald Trump has become the hero of angry workers threatened by trade, migration and technological change. In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services.

In continental Europe and the eurozone, however, economic conditions are much worse. The average unemployment rate hovers above 10 per cent (and much higher in the eurozone periphery — more than 20 per cent in Greece and Spain) with youth unemployment over 30 per cent. In most of these countries, job creation is anaemic, real wages are falling and dual labour markets mean that formal-sector, unionised workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits.

Politically, the strains of globalisation are twofold. First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalisation, are being challenged by populist, nativist/nationalist anti-establishment parties. Second, establishment parties are being disrupted — if not destroyed — from within, as champions of anti-globalisation emerge and challenge the mainstream orthodoxy.

Establishment parties were once controlled by globalisation’s beneficiaries: Capital owners; skilled, educated and digitally savvy workers; urban and cosmopolitan elites; and unionised white- and blue-collar employees. But they also included workers — both blue- and white-collar — who were among the losers from globalisation, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because centre-left parties were formally supporters of unions, workers’ rights and entitlement programmes.

After the 2008 financial crisis, globalisation’s losers started to organise and find anti-establishment champions on both the left and the right. On the left, the losers in the UK and the US, especially young people, found champions in traditional centre-left parties: Mr Jeremy Corbyn in the UK’s Labour Party and Mr Bernie Sanders in America’s Democratic Party.

The deepest fault lines emerged among centre-right parties. These parties — the Republicans in the US, the Tories in the UK and centre-right parties across continental Europe — confronted an internal revolt against their own leaders. The rise of Mr Trump — anti-trade, anti-migration, anti-Muslim and nativist — is a reflection of an uncomfortable fact for the Republican establishment: The party’s median voter is closer to those who have lost from globalisation. A similar revolt took place in the UK’s Conservative Party, with globalisation’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party.

In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden and elsewhere.

But, despite the growing number, organisation and mobilisation of globalisation’s losers, globalisation itself is not necessarily doomed. For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalisation are a large — if at times silent — majority. In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalisation and technological innovation.

This is also why populist and anti-establishment parties are still a political minority. Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity and painful structural reforms, moderate, pro-European forces remain a majority.

Even in the US, Mr Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. Whether he can win the presidential election in November is highly doubtful.

This is also why pro-European centre-right and centre-left coalitions remain in power in most of the EU. The risk that anti-EU parties may come to power in Italy, France and the Netherlands — among others — is rising, but still remains a distant possibility.

Finally, economic theory suggests that globalisation can be made to benefit all as long as the winners compensate the losers. This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits and portable pensions).

For workers to accept more labour mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems.

The backlash against globalisation is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs. Only by enacting such policies will globalisation’s losers begin to think that they may eventually join the ranks of its winners.

Monday, June 27, 2016

Brexit is the beginning of the breakup of EU

I don’t expect a global recession or another global financial crisis. I think the impact of Brexit is significant but not of the same size and magnitude of the one we had 2007 to 2009. 

However, I would say it is a major, significant financial shock, as the reaction of the markets on Friday suggested. It creates a whole bunch of economic, financial, political and also geopolitical uncertainties.

At some point in the future, the Scots might decide to go for another referendum and it may be the break-up of the United Kingdom. Then the Catalans in Spain might say ‘me too’ and that might lead to the break-up of Spain.

Some of the Nordic members of the European Union might say ‘without the UK the European Union is mostly the Euro-zone, so what’s in it for me?’