Great powers still disagree on global economic issues: Nouriel Roubini

Interview with, Professor, New York University's Stern School of Business

Nouriel Roubini, professor at New York University’s Stern School of Business was one of the few who predicted 2008’s financial recession. He spoke with Bloomberg Television's Tom Keene at the World Economic Forum in Davos, Switzerland. Edited excerpts:

On financial versus real economic recovery
I say the problems are less worse than last summer in the Euro zone. But the fundamental problems persist; look at the unemployment numbers in Spain, they're rising even further. The fundamental problem of the Euro zone is a lack of growth, and continuing the recession is debt and instability. A lack of competitiveness also remains.

On how we can link this better financial economy over to a better real economy
I am not sure. In the Euro zone, the credit crunch in the banks on the periphery remains. They have a problem with capital, they are still deleveraging by selling assets, contracting credit. The transmission monetary policy is not working because of a lack of organisation in the financial system. The spread is being lowered in Italy but Spain remains positive. The transmission to the real economy is still broken.

Will it be a G-zero or G-seven world when things get done?
We’ve been talking about a G-zero world because there are all these global economic issues on which there is disagreement between the mutual powers — on monetary policy, fiscal policies, exchange rates, currency wars, global imbalances, how to reform the international system of surveillance of the banks, of reforms in the international financial systems, energy, food security and all the geopolitical issues. On all those issues, we need more coordination and cooperation with the great powers. But there is a division of views, not just between the US and China but even between the US, Japan and Europe, on fundamental currency issues.

What is your to-do list for the US and Europe in the next 90 days?
For the US, we have kicked the (fiscal) cliff down the road. We have the sequester issue on the debt ceiling; we have a continued resolution issue. I think they're going to kick the can further down the road. There's not going to be a grand bargain on the treatment of spending cuts and on revenue increases. They're going to decide if they can, maybe, cut spending by $40 billion, then push the problem to another three months, then every three months they're going to disagree, they're going to have another commission, and until there is market pressure (there's none in the US), the US is going to kick the can down the road, so the fundamental fiscal issue, the gridlock in Congress, stays.

In Europe, the politics could worsen. For example, it’s now obvious in Italy that Berlusconi is not going to win the Senate. We already see we're going to have guerilla warfare against PD (the major centre-left political grouping in Italy), against the government, against Monti (the current head of government), they're going to make the country ungovernable. That's a risk; the conditions in Greece could still collapse, Greece could exit out of the Euro zone. There's political risk in Spain, there's political risk in Germany and in France. The political risk has gotten better but the risks still remain.