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Global perfect storm rolls in from every direction
By Nouriel Roubini |
June 27, 2012, Wednesday
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Print Edition
Print Edition
DARK, lowering financial and economic clouds are, it seems, rolling in from every direction. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.
For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery.
Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9 percent - well below potential. And job creation faltered in April and May, so the US may reach stall speed by year end.
Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption.
Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November's presidential election.
At the same time, the lack of structural reforms in emerging markets is hampering growth and will reduce their resiliency.
Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013.
These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending. Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries' income. Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling.
Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats).
Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises.
Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.
Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries.
After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others.
Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns' inability to absorb additional losses from their banking systems.
As a result, sovereign risk is now becoming banking risk. Indeed, sovereigns are dumping a larger fraction of their public debt onto banks' balance sheet, especially in the eurozone.
To prevent a disorderly outcome in the eurozone, today's fiscal austerity should be much more gradual, a growth compact should complement the EU's new fiscal compact, and a fiscal union with debt mutualization (Eurobonds) should be implemented. In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the eurozone.
And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy. Batten down the hatches.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University. Copyright: Project Syndicate, 2012.www.project-syndicate.org. Shanghai Daily condensed the article.
For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery.
Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9 percent - well below potential. And job creation faltered in April and May, so the US may reach stall speed by year end.
Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption.
Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November's presidential election.
At the same time, the lack of structural reforms in emerging markets is hampering growth and will reduce their resiliency.
Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013.
These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending. Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries' income. Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling.
Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats).
Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises.
Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.
Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries.
After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others.
Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns' inability to absorb additional losses from their banking systems.
As a result, sovereign risk is now becoming banking risk. Indeed, sovereigns are dumping a larger fraction of their public debt onto banks' balance sheet, especially in the eurozone.
To prevent a disorderly outcome in the eurozone, today's fiscal austerity should be much more gradual, a growth compact should complement the EU's new fiscal compact, and a fiscal union with debt mutualization (Eurobonds) should be implemented. In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the eurozone.
And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy. Batten down the hatches.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University. Copyright: Project Syndicate, 2012.www.project-syndicate.org. Shanghai Daily condensed the article.
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