Nouriel Roubini and his frequent partner Ian Bremmer sat down for an interview with Foreign Policy discussing a range of geopolitical and economic issues.Not surprisingly, Roubini is still sceptical of the US recovery, noting that some numbers, such as durable goods orders have come in soft lately. Europe is still a slow-motion train wreck, though he acknowledges that some tail-risk is off the table for now.
A big topic is Iran, and on this Bremmer is not sold in the idea that war is inevitable, especially given the political calculations of The White House.
It is true that in the second quarter, we will see an effort to ramp up sanctions that have been already been put in place but need to be implemented, and a real effort at negotiations. But you’ve also seen recent successful parliamentary elections in Iran that were not preceeded by demonstrations. We’ve seen [Ayatollah] Khamenei come out and say almost unprecedentedly positive things about the Obama administration and the United States. So clearly, they’re going to give a few months of negotiations a chance — and that means that right now, in the short term, the geopolitics of Iran is being hyped more than it should be.
Over the longer term, the Obama administration does not want to engage in military strikes against Iran — and they sure as hell are going to resist it, no matter what — before the elections. The Israelis don’t want to engage in strikes either. There was a recent poll in Haaretz that came out just yesterday: 58 per cent of Israelis oppose unilateral strikes against Iran. Netanyahu has to deal with that, however popular he is. And remember: Netanyahu hasn’t made a decision that he is going to attack. What Netanyahu understands is that the best thing for him to do is pretend that he’s going to attack. Then, at the very least, he has to be talked down from the ledge by the Americans and he’s in a better position to demand concessions if he doesn’t attack — because it’s such a horrible thing for Israel and so on.
But if there were a war, then the economic ramifications would be significant, according to Roubini:
The worse-case scenario is a protracted conflict. If there’s an effect on the supply of oil and gas from the Gulf, and production and exports from Iran go for a while to zero, oil could go to $170,$180, $200 a barrel.
The reality is that if you think about the last three major global recessions, there were all caused by a geopolitical shock in the Middle East that led to spike in oil prices. The Yom Kippur War in 1973 led to the global recession from 1974 to 1979; the Iranian revolution in 1979 led to spike in oil prices and the 1980-1982 recession; and even in 1990, the Iraqi invasion of Kuwait brought a temporary spike in oil prices that led, among other factors, to a U.S. and global recession.
So if the conflict is severe and protracted and the increase in oil prices in significant, I would say we’re talking about not just a U.S. recession but a global recession. And this time around, we’re also coming out of a global financial crisis where now we have a huge amount of private and public debt in many advanced economies, like we did not have in 1973 or 1979 or 1990. So the global economy could not take a kind of protracted oil shock coming at a time where there’s already a painful process of deleveraging, with fragility in the balance sheets of governments and the private sector as well.