New York University Professor Nouriel Roubini said he\u2018s never been more pessimistic about the future of European monetary union, saying Spain poses a looming threat to the euro region holding together.<\/p>\n
\u201cDown the line, not this year or two years from now, we could have a breakup of the monetary union,\u201d\u009d Roubini said in a Bloomberg Radio interview from the World Economic Forum\u2018s annual meeting in Davos, Switzerland. \u201cIt\u2018s a rising risk.\u201d\u009d<\/p>\n
Roubini\u2018s concern contrasts with the view of European Central Bank President Jean-Claude Trichet who said it\u2018s \u201cabsurd\u201d\u009d to imagine that the 16-nation euro area could splinter. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent\u2018s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.<\/p>\n
\u201cThe euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union,\u201d\u009d said Roubini, who predicted the recent financial crisis a year before it began. \u201cThis is the very first test\u201d\u009d of the single currency bloc.<\/p>\n
Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said. Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said.<\/p>\n
Commission Deadline<\/p>\n
The Greek budget deficit ran more than four times the European Union limit of 3 percent of gross domestic product last year and Greece is one of 13 nations facing deadlines from the European Commission to cut its shortfall. The country\u2018s debt is set to top 120 percent of GDP this year, the highest in the euro region and twice the limit for adopting the single currency.<\/p>\n
Trichet on Jan. 14 dismissed as an \u201cabsurd hypothesis\u201d\u009d the argument that Greece could be forced to exit the euro area. The country should remain in the union where its problems \u201cwill be unequivocally easier to solve,\u201d\u009d central bank governor George Provopoulos said in the Financial Times on Jan. 22.<\/p>\n
Roubini said for all the focus on Greece, Spain may eventually pose a bigger threat to the euro zone because it\u2018s the region\u2018s fourth-largest economy and has higher unemployment and weaker banks. Spain\u2018s jobless rate is more than 19 percent, almost twice the EU average.<\/p>\n
\u201cIf Greece goes under that\u2018s a problem for the euro zone,\u201d\u009d he said. \u201cIf Spain goes under it\u2018s a disaster.\u201d\u009d<\/p>\n
Bond Vigilantes<\/p>\n
Roubini described rising sovereign risk as a \u201cnew phenomenon\u201d\u009d for advanced economies that will complicate their recoveries from the worst global recession since World War II.<\/p>\n
So-called bond vigilantes, or investors who punish governments by dumping their debt, \u201chave been asleep at the wheel,\u201d\u009d outside of Europe, Roubini said. The risk premium investors demand to buy 10-year Greek debt over comparable German bonds rose to an 11-year high of 312 basis points on Jan. 22.<\/p>\n
\u201cEventually they could wake up\u201d\u009d in Japan and the U.S. and sell off their bonds as they did with Greece.<\/p>\n
\u201cWe have a massive fiscal problems in most of the advanced economies, and we\u2018re not really dealing with it,\u201d\u009d he said.<\/p>\n
After Standard & Poor\u2018s yesterday lowered its sovereign credit rating outlook on Japan, Roubini said he was \u201cworried\u201d\u009d about the world\u2018s second-largest economy as its debt mounts, deflation returns and population ages. While it can currently finance itself thanks to domestic savers, at some point they may \u201cflee the yen,\u201d\u009d pushing up borrowing costs and crippling the economy, he said.<\/p><\/blockquote>\n
___<\/p>\n
Disclosure: Horowitz & Company<\/a> clients may hold positions of securities mentioned as of the date published.<\/p>\n","protected":false},"excerpt":{"rendered":"Mr. Doom and Gloom (OR is it Doctor) is feeling rather negative again. Come to think of it, I am not quite sure that I have ever seen him with a positive tone. This time he is worried about the fate of the Euro. AND, I agree with him. The difficulty with trying to balance […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[5,12,253],"tags":[284,483],"class_list":["post-7415","post","type-post","status-publish","format-standard","hentry","category-economy","category-markets","category-strategy","tag-currency","tag-markets","et-doesnt-have-format-content","et_post_format-et-post-format-standard"],"acf":[],"_links":{"self":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts\/7415","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/comments?post=7415"}],"version-history":[{"count":0,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts\/7415\/revisions"}],"wp:attachment":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/media?parent=7415"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/categories?post=7415"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/tags?post=7415"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
![\"\"](\"http:\/\/www.thedisciplinedinvestor.com\/blog\/wp-content\/uploads\/2010\/01\/nouriel_roubini.jpg\" "\\"73079997MG008_forum\\"")
<\/a>This time he is worried about the fate of the Euro. AND, I agree with him. The difficulty with trying to balance multiple economies with one currency was the main concern when establishing the Euro. Now that we are watching a recovery that is vastly divergent within the EU, there is a great deal to worry about.<\/p>\n