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Bartiromo One on One with Nouriel Roubini: Trouble Ahead for Economy

From USA TODAY:

Nouriel Roubini, co-founder of the economic strategy firm Roubini Global Economics in New York, is worried about the so-called fiscal cliff the United States is facing at year’s end. I caught up with Roubini to talk economics, Europe and that fiscal cliff. Our interview follows, edited for clarity and length.

Q: Where are we in the economic recovery?

A: There is an overall slowdown of global growth. Europe is in a recession in the periphery countries, and it’s getting worse. There is a double-dip recession in the United Kingdom, sluggish growth in Japan, and the data from many emerging markets are also suggesting a slowdown in China, Russia, Brazil, India and places like Turkey, Mexico and South Africa.

Q: What about the U.S.

A: We have positive economic growth, but it’s below trend — barely 2%. Job creation is still anemic. The recovery is still anemic because the painful process of de-leveraging has not even started in the public sector. And next year there will be some fiscal drag because of the fiscal cliff that’s coming up.

Q: Explain what you mean by fiscal cliff.

A: Many things are expiring at year end. All the tax cuts on income, on dividends, on capital gains, on estates. There’s an expiration of the payroll tax (cut). There is a reduction or expiration of transfer payments to state and local governments, to unemployment benefits. There is the expiration of infrastructure spending, and then there are the automatic cuts on discretionary spending, which came about because we failed to reach an agreement for reducing the budget deficit.

The point is, all this is expiring at year end, and the hole will be $600 billion, or about 4% of GDP, and then we plunge into a nasty recession. Now, some items may be continued (if the Republicans and Democrats can agree to extend) but a realistic assessment is a fiscal drag. Even if the cliff is not a free fall because some items won’t expire in an agreement, there will still be the beginnings of a fiscal drag, because you reduce disposable income by raising taxes, and (by) cutting transfer payments, you reduce aggregate demand by reducing government spending.

Q: What about Europe?

A: The European recession is getting worse. There’s fiscal austerity that, in the short run, makes the recession worse. Second, the value of the euro is too strong for the countries on the periphery that have lost competitiveness. Third, you have a credit crunch because the periphery banks don’t have enough capital, and they will be forced to cut credit. Fourth, you have the effects of high oil prices, and Europe depends 100% on oil imports. And now politics in Europe are an issue, as we saw from the Greek elections, French elections, the Italian elections and German elections, and the collapse of the government in the Netherlands.

Q: Wow. How long will this sustain?

A. You have on one side austerity fatigue, because these countries are finding that austerity makes the recession worse. The austerity fatigue is spreading to France and the Netherlands. On the other side, you have bailout fatigue in places like Germany or Finland or Austria. These Germans tell me, ‘These Greeks have a big fat Greek wedding not for a weekend, but for the last 20 years. We give them one bailout, then a second bailout. We cut their foreign debt by 75% in the debt restructuring, and they still don’t want to do any fiscal austerity and structural reforms.’ So they say, ‘Enough is enough, let’s pull the plug.’ ”

Q: What will happen to Greece?

A: The risk is that you’ll have Greece exiting the eurozone with all the collateral damage. Also the risk is that many other countries will find it difficult to do austerity. There is a significant sociopolitical and policy uncertainty in Europe that affects the global markets. So, to me, the eurozone looks like a slow motion train wreck. Slow motion is not going to collapse overnight. But Greece is not going to be the only country that’s going to restructure. Greece by next year might exit the eurozone. If one or two of the smaller countries restructure their debt and exit, like Portugal or Cyprus, the eurozone survives. But if the contagion spreads through Italy and Spain, the third- and fourth-largest economies, it could lead to a breakup of the eurozone three or four years down the road.

Q: So, how does all of this affect the U.S.?

A: First, there is huge exposure of U.S. companies to Europe because they have factories and businesses there. If Europe goes into recession, the profits of these multinationals are cut. About half of all the profits of U.S. S&P 500 firms are coming from their foreign operations, many of them in Europe. Second, whenever there is risk of disorderly financial conditions in Europe, there is not just a sharp correction of European stock markets, but also of U.S. markets. When Greece was first in trouble in the spring of 2010, you had a 20% correction in the European stock market, and a similar correction in the U.S., in Asia, in emerging markets. Same thing last year between August and October. So financial contagion becomes instantaneous because of sentiment, exposure of U.S. financial institutions to European ones, and because of these links between the U.S. businesses and their own activities in Europe. No country is an island.

Q: What are you expecting from the markets in the next year and how do you invest in the face of this?

A: We see it being flat for the rest of the year, like it was flat last year, given all these uncertainties and given there is a fiscal cliff and there is more gridlock. I don’t expect the stock market to tank this year. But I don’t see, from current levels, much upside. The emerging markets are a long-term story. Their growth rate in the long run is 6%, while in advanced economies (including the U.S.) is 2%, 2.5%. So if you are willing to invest for the long run, yes on emerging markets. But if you’re thinking about what’s going to happen in the next few months, no country is an island.

Bartiromo is anchor of CNBC’s Closing Bell and anchor and managing editor of the nationally syndicated Wall Street Journal Report with Maria Bartiromo. Follow her on Twitter @mariabartiromo. To see previous columns, go to bartiromo.usatoday.com.

8 Responses to “Bartiromo One on One with Nouriel Roubini: Trouble Ahead for Economy”

Wanda ReneeMay 21st, 2012 at 8:46 pm

If our legislation will not act on a compromise then contraction is inevitable. If voters get out and essentially fire those who are causing contrationary conditions in the U.S, we might be able to have more consistent growth in our economy. Europe's troubles will always exascerbate Wall Streets problems because they are linked as stated. If we could all get on board to help each other (outside of bailouts), but have real solution for creating real growth; we could see a better recovery. Truth is confidence is still low and pessimist (short sellers) are driving most of the fear to move forward. REAL TRUTH!

economicminorMay 22nd, 2012 at 3:35 pm

Both sides seem pretty entrenched and compromise more of a hope than a possibility. I don't see this changing with the election either as the rules of the Senate allow one Senator to block any legislation that can not get 60 or more votes. It takes 60 votes to change this rule and getting that large of a majority in the Senate is very unlikely.

It takes more than confidence to move an economy forward. It actually takes a well regulated free market and we have neither good regulation nor free markets. In a free market, demand would set the price. For the value of money (interest rates) and the cost of goods and services. In this market, the FED sets the price along with a bunch of protected near monopolies. Even under Obama Care, the health care industry is still exempt from the Sherman Anti Trust laws. And when was the last time you heard of the Justice Department actually enforcing the Sherman Anti Trust Act or even putting fraudsters or any ilk in prison. After the Savings and Loan debacle over a thousand criminals went to prison. How many this time?

cstahnkeJune 4th, 2012 at 4:11 pm

Sadly, we don't have much choice. We choose between one party that offers us mild austerity and the other offers us austerity–none of these policies make the least amount of pragmatic sense they are responding, in my view, to a generation of misinformation put out by the PR industry on how modern economies operate. Hint: they are not like households.

sierra7May 22nd, 2012 at 9:27 pm

You have to be a complete fool to believe that any progress is going to be made in this global (faux) economy until "…..all positions are deleveraged"….and "…..that ain't gonna happen"!

HW BoydMay 25th, 2012 at 5:46 pm

Nouriel Roubini is telling it like it WILL BE: A true Orical, unfortunately. At lease small
investors ARE paying attention to his words. Get going! Pay attention! We are in the
Boat and WE have to watch for the big waves that are coming. But we have to mind
our helm and keep the bow pointed favorably. Small investor's boats are agile and
can handle this storm.

SchtinktankMay 30th, 2012 at 6:08 pm

I wonder if Roubini is a closet Neo-Malthusian – if he is then more power to him. The ugly truth is that thanks to technology there are more people and less jobs in the world. Ask old Meg at HP about how they can hire top engineers in Singapore for a monthly salary equaling the cost of a bowl of organic brown rice in San Francisco if you don't know what I'm talking about. We live in a post-colonial world and the old imperialists in Europe and the U.S. can't accept it. Capitalism is based on inequality not holding hands and singing the praises of a global economy Kumbayah.

pmi-acp cert.June 11th, 2013 at 8:26 am

I’m not that much of a online reader to be honest but your sites really nice, keep it up! I'll go ahead and bookmark your website to come back down the road. All the best!…

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