Thursday, May 15, 2014

Roubini: Three problems with Euro Zone

The risks of a break up, Greek exit or Italy and Spain losing market access are lower, thanks to the "Whatever it Takes" policy (In July 2012 Mario Draghi, President of the European Central Bank pledged to do "whatever it takes" to protect the Eurozone from collapse), the adjustment of austerity, the gradual economic recovery and other things.

However, I worry that over the long term the problems on the periphery of the Eurozone remain unresolved. 

Firstly, potential growth is low because the structural reforms are coming in slowly.

Secondly, the recovery is going to be so anaemic that the unemployment rate is going to remain very high in the peripheral Eurozone. 

Thirdly, the public debt in terms of GDP is still high and rising - in Spain, Italy, and Portugal and it eventually may become unsustainable.

And on top of everything else now there is austerity.

The Eurozone is not out of the woods yet, even if financial markets are all excited and spreads for the periphery have fallen sharply. For the medium term the fundamental problem is that the periphery remains unresolved.