Henry Kissinger once joked that the best thing about being famous is that when you bore people, they think it’s their fault.
A similar rule appears to hold true for high-flying economists: if you’re brilliant, you can express your ideas in impenetrable paragraphs, devoid of the action verbs that breathe life into prose. You can write in a style that only heavily caffeinated economists can (or would care to) decipher.
Nouriel Roubini, it appears, has conformed to that rule in writing a pre-death autopsy report on the euro zone, in Tuesday's Financial Times.
Roubini — aka Dr. Doom for his often-grim, sometimes-prescient economic forecasts — proclaimed in 2005 that a mortgage meltdown would spark a global financial crisis. When that controversial prediction materialized, he became famous beyond economic circles, boosting his status on New York’s club circuit and enabling him to make cameos in Hollywood movies. Roubini is also well-placed to comment on Europe’s current pickle. He is a leading authority in the economics of developing countries, where debt crises are relatively common.
Today’s Financial Times analysis of the euro zone’s future, while provocative and insightful, is clotted with jargon on “delayed structural reforms,” “disorderly debt workouts,” and “a muddle-through approach.” And that’s only the first paragraph. That’s a shame for anyone who doesn’t speak that language. When decoded, the article is really about everyday things that matter, like government spending and workers who produce value versus those who don’t. And his predictions, if accurate, could have major implications for people’s well-being, similar to the way the mortgage meltdown affected us all.
Wouldn’t it be nice if we all could understand, beyond the technocrats who read the FT? The following is GlobalPost’s interpretation of Roubini’s key, need-to-know points.
Roubini starts bluntly, calling on officials to stop fooling themselves into thinking that lending billions to Greece, Portugal and Ireland (and possibly Spain) can solve Europe’s economic woes. He says that if they don’t recognize soon that the current policy is doomed, they’re going to lose control of Europe’s debt crisis, leaving the continent in financial shambles.
If that happens, honest investors who have loaned their savings to these countries could end up losing big-time. Worse yet, that could trigger a ripple effect, harming many other people (the same way the financial crisis that began in 2008 claimed collateral damage on the job market, for example).
Moreover, the weaker economies in the euro zone may end up mired in persistent economic stagnation, eventually forcing them to retreat back to the currencies they used before adopting the euro in 1999. That would be a highly disruptive event, best handled with care and planning. Those old currencies would be bound to depreciate in value versus the euro. In turn, that would pose serious problems for people who have lent money to those countries: if the euro, hypothetically speaking, suddenly becomes worth twice the Spanish peseta, Spain would have to come up with twice as many pesetas to repay its euro-denominated debt. Given that it already faces a difficult debt burden, where would it come up with the extra money?
Roubini says the real problem that officials need to face is that Europe’s heavily indebted countries are not economically compatible with the economies of Germany and France. Therefore, under the current European system, it makes no sense for them to be using the same currency. (A currency, after all, is essentially a moveable, collective contract that rises and falls in the global economic ecosystem according to a given society’s accomplishments and shortcomings; it typically doesn’t work when one culture uses the currency of another).
He cites two reasons why these peripheral countries don’t belong in the euro zone.
Greece and Portugal aren’t compatible because the governments there lack discipline. They spend far too much relative to the taxes they collect and the size of their economies. Until the financial crisis, the euro helped to hide that problem, allowing it to worsen, because investors (erroneously) assumed that lending money to Athens and Lisbon was about as reliable as lending it to Berlin.
In Spain and Ireland, Roubini notes that the euro caused a “build-up of asset bubbles,” exposing these countries as incompatible with the euro as well. Here’s why that happened: Before Jan. 1, 1999 when these countries started using the euro, assets (like real estate) there were relatively cheap. Because these economies were less wealthy, there was less money chasing such assets (the same way stuff tends to be cheaper in Mexico than in the United States).
But once Spain and Ireland adopted the euro, money rushed across the border. Germans and French, for example, took out low-interest euro loans and snatched up villas on Spain’s gorgeous Mediterranean coast; it was easy to do with the new currency union, just as New Yorkers can easily buy homes in Florida or Arizona.
This real estate rush prompted Spanish developers to borrow heavily (once again, at cheap euro interest rates) to build more homes. Then, when the 2008 financial crisis began, the flow of money from other countries slowed, leaving the developers with homes that they couldn’t sell and big loans that they couldn’t pay back. All these non-performing loans, in turn, hurt Spanish banks, which leaves the government vulnerable to potentially expensive bailouts. A real mess indeed.
To recap, Roubini explains that the following developments are what caused the debt crisis: reckless governments in Greece and Portugal, and a flood of euros artificially blowing asset bubbles in Spain and Ireland.
Now that the problem exists, here’s the quandary faced by euro zone members: Normally when a country ends up with a stagnant economy and too much domestic debt, it can stimulate growth by depreciating its currency, thereby making its goods cheaper to the rest of the world. That’s much harder to do when you don’t control the currency you’ve borrowed in. Consider Spain, which is burdened by a 20.7 percent unemployment rate. It can’t depreciate because it uses the euro, which is controlled by the European Central Bank in far-off Frankfurt, Germany — and the ECB’s decisions are driven by concerns larger than Spain’s (namely, it needs to fight inflation in Germany by raising interest rates, even though higher interest rates make it even more expensive for the outlaying countries to keep up with their debt).
Therefore, Roubini argues that the euro zone, as it currently exists, is doomed unless Europe is willing to make major changes in the way it governs itself.
One change would be that taxpayers from richer countries would have to send much more of their money to a central European government to adjust for economic imbalances. Roubini appears to be saying that the euro zone won’t work unless the countries in it become more like the United States, where tax dollars flow across borders from New York and California (Germany and France, in Europe’s case) to Mississippi and Louisiana (Greece and Portugal). In truth, that’s unlikely to happen. Industrious Germans are not eager to send their earnings to olive-eating, ouzo drinking, island dwelling Greeks (as GlobalPost has noted).
A second change: Euro zone countries would need to cede much more of their political control to a central authority. Currently, the economies of certain peripheral countries like Greece are inefficient, for example, because of labor regulations intended to make life easier for workers, at the expense of employers. When the euro was adopted, the hope was that such “structural inefficiencies” would vanish, raising productivity levels in the peripheral countries. But as we now know, Greeks are still Greeks, and Germans are still Germans, and productivity levels haven’t changed much.
Neither of those changes will happen any time soon. They will certainly not arrive quickly enough to spur the kind of growth miracle it would take to raise the money needed to pay back the debt the peripheral countries owe over the next few years.
So now, there are 2 minutes left in the game, and three options available in the playbook, assuming officials want to keep the euro zone intact. The first: a steep depreciation of the euro to help breathe life back into the indebted countries’ economies; that, Roubini says, simply won’t happen because Germany’s massive export machine won’t let it. The second play — the one advocated by Berlin — would involve reforming the stricken economies in an effort to spur growth; this couldn’t possibly happen quickly enough, however, and the Germans' current plan for doing so (austerity, labor reform) would likely backfire in the short term. The third: Europe could essentially do nothing, live with the stagnation, and allow prices to drop until the economy picks up. The latter scenario, however, would cause deep, enduring pain and is unlikely to solve the problem.
Having eliminated all the other antidotes, Roubini says the only solution for the peripheral countries is to “leave the euro, go back to the national currencies and achieve a massive [currency] depreciation.” Cheaper currencies would in turn stimulate the economies and employment markets of Portugal (unemployment: 12.6 percent), Greece (14.1 percent), Ireland (unemployment: 14.7 percent) and Spain. The shift would be painful, he concedes, hampering trade within Europe and causing creditors from richer countries to lose money. But he sees no other real option.
Roubini’s ultimate prediction sounds like counsel for a friend enduring a nasty marriage: Eventually, he concludes, “the benefits of staying in [the euro zone] will be lower than the benefits of exiting, however bumpy or disorderly that exit may end up being.”
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