Nouriel Roubini has a dark warning about the fate of Europe should a “hot war” break out in Ukraine.
“There is the beginning now of a new cold war between the West and Russia,” Dr. Doom said Monday in an interview with Bloomberg’s Erik Schatzker and Stephanie Ruhle at the Milken Institute conference in Los Angeles.
The last thing Europe needs right now, he continued, is to be stuck in the middle of a conflict between Russia and Ukraine, with about 15% of its gas supply at Russia’s mercy. Soaring gas prices or a supply cutoff — a situation not without precedent — “would tip the European economies back into a recession if that were to occur,” Roubini said.
Moving on to other geopolitical hotspots, Roubini says the consensus may be wrong on a soft landing in China.
“My reading of the data, he said, “is that because of the buildup of leverage, because of the need to rebalance the economy from fixed investment to consumption, they’ll have to slow this excessive credit growth.”
The NYU economist also weighed in on the “delicate knife-edge situation” the Federal Reserve faces in shifting away from its unconventional monetary policy and whether he approves of Fed Chairwoman Janet Yellen.
On whether Ukraine represents the single biggest risk:
“Certainly among the global tail risks, the one coming from Ukraine is the most important one. There is the beginning now of a new cold war between the West and Russia, and this cold war could actually become a hot war if it’s possible Russia were to effectively destabilize and invade the eastern provinces of Ukraine, in which case things would escalate. You could have another episode of global risk aversion. If this were to become a real war, even a situation in which the supply of gas to Europe may be cut off from Russia. The European economy is barely now recovering from a recession. That could tip back the eurozone into a recession.”
On how concerned he is that things could get catastrophic:
“Well today I would say the risk is around 7 [out of 10] and raising because the situation is (inaudible) one in which Russia seems to be really very aggressive in Ukraine. They want to try to take over Ukraine, and therefore an escalation is likely to occur.”
On the possibility of a ‘hot war’:
“Suppose that Russia at this point decides to effectively either to destabilize, invade the eastern province of Ukraine. Two things will happen. The stance (ph) of the West will have to become more Russia and Russia could have (inaudible) going as far as limiting the supply of gas not just to Ukraine but also to Western Europe. Secondly, the NATO, even if they’re not going to have a military intervention, they’ll have certainty provide some military support to the government in Kiev. And that means that this war could escalate for quite a while. And therefore from a financial market point of view, there may be contagion deriving two (ph) advanced economy’s financial market, especially in the eurozone.”
“…the situation is such that even if he wanted to use force there (inaudible) first of all. Secondly, he’s not going to invade all of Ukraine. And you don’t know for how long a military conflict of this sort is going to continue, especially if the U.S. and Europe were then to support militarily the government in Kiev. This war could continue and last for a while. So I’m saying this is not my baseline, but there is certainly downside risk that that will happen. But even a baseline (inaudible) remains lingering for a while, at some point investor may become worried about it.”
On what it means for the European economy:
“Well the eurozone right now is recovering. There’s been a severe recession. There’s the beginning of an economic recovery, but this is a recovery that’s fragile, it’s anemic, it’s uneven, especially in the periphery of the eurozone. I would say the last thing that the eurozone can afford and need right now is another shock coming from an increase in gas prices and or even a cutoff of supply of gas coming from Russia to the Western European economies. That would tip the European economies back into a recession if that were to occur.”
On whether it makes sense that Spain is selling bonds at record low yields: