Countries again to face a recession like phase

Category: Global Economy Sub-category: World Economy
Document type: news

The euro zone is facing a period of zero growth if not recession and the United States is heading for financial trouble. Even Europe is feared to face the risk a renewed recession. That’s what US economist Roubini was found saying on Saturday in an interview with Swiss daily Tages-Anzeiger.

Roubini, known as Dr. Doom and best known for predicting the US housing crisis, said that "There is that risk, at least for the euro zone. Growth will fall towards zero. Even if that is perhaps not a real recession, it will feel like one. Greece was just the tip of the iceberg." “And the Americans too will run into the wall at some point if the carry on the way they are," he said in the interview published in German.

He said that the risk of a second financial crisis has arisen with countries becoming insolvent and being forced out of the euro, and banks collapsing. Countries such as Spain and Greece are under pressure to cut spending and raise taxes to retain access to the capital markets, even though they had no growth to speak of. Moreover, if governments implement rigid measures too soon then they will have to put a sudden end to their demand and recovery, but such delays could provoke a catastrophe with high interest burdens and inflation.

"You're damned if you save and you're damned if you don't," he said. Though he suggested that it is "possible to square this circle" if governments commit to a credible medium-term plan to restore their budgets.

But such policies do carry the risk of a deflationary inflation, which again must be compensated for with a loose pan-European monetary policy to stimulate demand. Roubini also stated that any resulting further decline in the euro would make European exports more competitive and allow Germany to raise wages and purchasing power at home to stimulate exports from other euro zone countries.

According to Roubini, a Japanese-style period of deflation, stagnation and high unemployment is a much greater risk to Europe for the next two or three years than inflation.