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Roubini Says Greece May Lead Euro Exodus, China Faces Slowdown May 17, 2010

Posted by Yilan in China, EU, European Union, Yunanistan.
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New York University professor Nouriel Roubini said Greece and other “laggards” in the euro area may be forced to abandon the common currency in the next few years to spur their economies.

A “real depreciation” in the euro is needed to restore competitiveness in nations including Spain, Portugal and Italy, he said in an interview on Bloomberg Television today. The euro will remain the currency for a smaller number of countries that have “stronger fiscal and economic fundamentals,” Roubini said.

The European Union and International Monetary Fund last week approved a 110 billion-euro ($139 billion) lifeline for Greece to arrest the country’s fiscal crisis and stop the turmoil from spreading. Europe’s debt woes may push it into a “double-dip” recession, growth in advanced nations will be “anemic” and China’s overheating economy risks a slowdown, Roubini said, adding that Greece may still eventually need to restructure its debt.

“The challenge of reducing a budget deficit from 13 percent to 3 percent in Greece looks to me like mission impossible,” Roubini said. “I would not even rule out in the next few years one or more of these laggards of the euro zone might be forced to exit the monetary union.”

Greece agreed to the package on May 2, pledging 30 billion euros in wage and pension cuts and tax increases in the next three years to tame the euro-region’s second-biggest deficit.

Prime Minister George Papandreou had revised up the 2009 budget deficit to more than 12 percent of gross domestic product, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.

‘Ugly’ Process

The fiscal changes Greece needs to undertake as part of an international bailout will be an “ugly” process that will only get worse, Roubini said. Public opposition to the plan sparked riots in Athens last week that led to three deaths.

“They are not going to be able to raise taxes and cut spending that much,” he said. “As you raise taxes and cut spending in the short run, output is going to fall even more. The IMF expects another two to three years of recession in Greece. How much austerity and recession can a country take?”

The 16 euro nations, jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, this week agreed to offer financial assistance worth as much as 750 billion euros to countries under attack from speculators. The European Central Bank said it will counter “severe tensions” in “certain” markets by purchasing government and private debt.

‘Not Convinced’

The MSCI Asia Pacific Index rose 0.2 percent to 119.02 as of 12:50 p.m. in Tokyo, as some companies forecast higher earnings. Standard & Poor’s 500 Index futures dropped 0.2 percent and the euro fell against the dollar for a second day, after climbing as high as $1.3094 on May 10 after eurozone officials announced the agreement.

“The markets are not convinced because while there is $1 trillion of money on the table, that money is going to be disbursed only if these countries do massive amounts of fiscal consolidation and structural reform,” Roubini said. One or more European economies may default on their debt, he said.

The lending plan is just “another nail in the coffin” for the currency, which is at risk of being “dissolved,” investor Jim Rogers said in a Bloomberg Television interview in Singapore today.

Spending Cuts

“This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency,” the chairman of Rogers Holdings said. “You have all these countries spending money they don’t have and it’s now going to continue. Nobody is minding the economics behind the necessities to have a strong currency.”

A weaker euro may spur growth in Europe as spending cuts and higher taxes reduce consumption, said Sebastien Barbe, head of emerging-market research for Credit Agricole CIB in Hong Kong.     “The ECB cannot lower interest rates further and fiscal expansion is out of the question so it is up to external demand and a lower euro to help European growth,” Barbe said. “The euro is likely to continue to depreciate and a lower euro could save economic growth in countries like Germany.”

In China, where property prices rose at a record pace in April and consumer prices climbed at the fastest rate in 18 months, the economy faces the risk of a “significant slowdown,” Roubini said.

“China should be tightening monetary policy, increasing interest rates and let its currency appreciate over time,” he said. “They are too slow, they are not doing it fast enough.”

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