For a little while, it looked like Europe’s had turned around. Greece avoided its technical default, a new fiscal compact was agreed on, and the eurozone firewall increased. But the market’s respite didn’t last long.
in a new editorial for Project Syndicate, doomsayer Nouriel Roubini says the eurozone recession is moving to the core and is only going to get worse this year.
The biggest catalysts of the recession are likely to be the austerity program, high oil prices, capital shortage, and the euro-USD exchange rate:
“The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming.
That is why interest-rate spreads in the eurozone periphery are widening again now. The peripheral countries suffer from severe stock and flow imbalances. The stock imbalances include large and rising public and private debt as a share of GDP. The flow imbalances include a deepening recession, massive loss of external competitiveness, and the large external deficits that markets are now unwilling to finance.
Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen. And, without resumption of growth – not years down the line, but in 2012 – the stock and flow imbalances will become even more unsustainable. More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.”