October 3, 2011

Roubini: Europe Needs 2 Trillion Euro ‘Bazooka’

Economist is concerned crisis is 'getting out of control'

Nouriel Roubini.  (Photo: AP) Nouriel Roubini. (Photo: AP)

Economist Nouriel Roubini said Europe must increase the money it has raised to battle its debt crisis and deploy a 2 trillion euro ($2.7 trillion) “bazooka” before it is too late.

In a Sunday Bloomberg interview, Roubini, a professor at New York University’s Stern School of Business, said, “I’m very concerned of things getting out of control. You need a huge bazooka of at least 2 trillion euros, but you can’t wait three months. You have to do it in the next few weeks.”

Europe could be running out of time thanks to the situation in Greece, where austerity measures have missed targets set by the International Monetary Fund, European Central Bank and European Commission, and because markets are growing increasingly worried that Spain and Italy will follow other nations down the bailout road.

A complicating factor is that Monday was the date originally set for European finance ministers to approve the second tranche of funding for Greece’s rescue; however, that is now in doubt thanks to those missed targets, despite 6.6 billion euros in new austerity measures passed by Athens on Sunday. Austerity provides no room for growth, and without growth it is doubtful that Greece will be able to repay its loans.

Roubini commented in the report, “Even if you have a debt reduction, that’s not going to restore growth unless you have a change in real exchange rates through a depreciation and you go back to national currencies.”

He added, “The problem isn’t that Greece is insolvent, but that the fact of having two big elephants in the room—Italy and Spain. They’re too big to fail but also too big to save. Even if they are illiquid, but solvent given austerity reform, they’ve already lost market credibility.” That meant there was the chance, he said, of a “self-fulfilling run” on their government debt.

He said that several steps were necessary to avoid a debt meltdown, but that they were “massive.” They included, he said, a relaxation of ECB policies and rates; a decrease in the euro’s value; European bank recapitalization; and an “orderly process to allow the exit of Greece from the euro zone.” Fiscal stimulus, he added, must be at the core of the euro zone to avoid a recession for all European countries. However, he was not optimistic.

“What is the likelihood of all of these things occurring in a coherent, consistent and realistic way to avoid the mess?” he asked. “I think it’s a low probability because of the political constraints.” If steps were not taken, he added, the result would be worse than the collapse of Lehman Brothers.

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