Nouriel Roubini: eurozone austerity is making things worse
The austerity in the eurozone, in the absence of policies to boost growth, will make the crisis worse rather than fix it, Roubini said
The eurozone peripheral countries need "less front-loaded fiscal austerity" while Germany should start a fiscal stimulus programme to kick-start growth, Roubini, who became famous after predicting the financial crisis, said during a conference at the International Monetary Fund in Washington.
"Today in the eurozone there is absolutely no talk about a growth agenda" while there is plenty of discussion about banking and fiscal union, and in the absence of economic expansion, "you'll have eventually social and political backlash against austerity," he said during an IMF conference under the title"Rethinking Macro Policy II: First Steps and Early Lessons."
In the eurozone "we have an outright recession, and that is not going away," Roubini, who was dubbed "Dr. Doom" by the media and by market participants because of his pessimistic outlook on the economy at the onset of the financial crisis, said.
He pointed out that if gross domestic product keeps falling, the ratio of debt to GDP will keep on rising: "it's leading to the situation getting worse rather than getting better."
The debate on growth versus austerity has been wide open in the eurozone since last year when it pitted heavyweights France and Germany against each other.
The IMF has repeatedly argued that boosting growth should be a priority but analysts say that German Chancellor Angela Merkel is worried about an electoral backlash in her own country if austerity measures are not imposed on countries in the periphery of the eurozone, where debt levels have become unsustainable.
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German officials and analysts have also said that widening budget deficits could make the bond vigilantes target the "core" eurozone member states, not just the peripheral countries.
But Roubini argued that if Germany were to apply fiscal stimulus to boost growth and pull the rest of the eurozone out of the recession with it, its credibility in the markets would not suffer at all.
"Spreads are so low in Germany that if they were to do a fiscal stimulus... I don't think they would lose any credibility," he said.
"I am talking about a short-term fiscal programme to boost economic growth."
Countries that are undertaking structural reforms such as laying off staff in the civil service as part of measures to get their public finances under control should be allowed higher budget deficits than stipulated under the European Union rules for a short period of time, he argued.
"There has to be a trade-off that if a country does structural reforms, you have to give them more fiscal flexibility," Roubini said.
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