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Monday, March 11, 2013 3:16 PM


Roubini Promotes ECB Currency War and Other Silliness


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Economist Nouriel Roubini is now actively proposing the ECB enter the global beggar-thy-neighbor currency wars as a solution to the eurozone crisis.

As reported by Yahoo! Fiance ,Roubini stated ECB must cut rates or risk crisis again

The bank would act eventually to avoid the recession getting worse, but risked doing "too little, too late," Roubini said in an interview with CNN's Nina dos Santos.

"They have to cut the policy rate, they have to stimulate the economy, they have to try to weaken the value of the euro," said Roubini, who was credited with predicting the financial crisis of 2008.

"The euro should be 10, 20 or even 30% weaker to restore the competitiveness of the [eurozone] periphery," Roubini said.

With all the world's major central banks using "unconventional" methods to throw money at their economies, Roubini said the ECB could not sit on the sidelines while social tension mounts in weaker eurozone states. That tension is reflected in the Italian protest vote against austerity, and as resentment about the cost of bailouts rises in Germany and other northern states.

"If they are the only [central bank] holding out, then the damage economically and politically will be severe," he said. "The risk is there will be a clash between austerity fatigue in the periphery of the eurozone and bailout fatigue in the core -- the two could clash in a way that could put at risk again the entire eurozone system."
Would Rate Cuts Help?

Roubini may have called the crisis (so did many others), but he sure does not know what to do about it.

Does it matter to any significant degree if interests rates are .5% or even .25% vs. .75%? I think not. More importantly, the notion that a euro 10, 20 or even 30% weaker would "restore the competitiveness of the periphery" is complete silliness.

The problem, as should be obvious, is structural. Rebalancing requires Spain, Italy, Greece (and now France) to become more competitive vs. Germany.

The opposite is happening as noted on February 6 in Germany Rebounds but ... France Economic Implosion Accelerates; Record Decrease in Service Employment in Italy.

The very nature of the eurozone interest rate structure prevents rebalancing in a sensible manner.

Worse yet, Germany insists on policies that will take years, if not decades to bear any fruit. As evidenced by the rise of eurosckptic parties and the Neo-Nazis in Greece, rebalancing cannot and will not wait that long.

Illusion of Eurozone Stabilization

On February 7, I wrote about Illusions of Stabilization.
There is no real stabilization and there is no healing. Rather, the policies of Hollande are so disastrous that some output has shifted to Germany and elsewhere, (coupled perhaps with some inventory replenishment and a temporary stimulus-fueled increase in demand in Asia).

With employment sinking in France, Italy, and Spain, precisely who will buy German exports?

Properly rebalancing will require a shift in production from Germany to the rest of Europe as well as a shift towards more consumption in Germany from the rest of Europe. That cannot and will not happen with the destructive polices of Hollande, and the lack of reforms in Spain and Italy.

Moreover, and as I have noted on many occasions, the entire Euro construct is flawed. Until those flaws are fixed, there is only the illusion of stabilization, and that based on more unbalanced growth.

The only thing that has stabilized (for now) is interest rates, and even that won't last.
On March 6, I wrote Eurozone Downturn Accelerates Despite German Growth; Divergence to France Widest in 15 Years.

Would a 10% drop or even a 30% drop in the euro help Italy, Spain, France, or Greece relative to Germany? How would it? Yet that is where the imbalances are.

Worse yet, Roubini actively encourages the ECB to engage in currency wars as noted by his statement "If they are the only [central bank] holding out, then the damage economically and politically will be severe."

Can the ECB even do what Roubini asks under its charter? Regardless, would Japan, the US, and China all sit for it?

Roubini is not thinking clearly.

What Gives?

It's highly likely Roubini knows what he proposes won't work. If so, what gives?

I propose Roubini is grasping at straws, hoping against hope for some miracle, because he is still wedded to the preposterous notion the eurozone must be preserved at all costs.

Roubini needs to admit the euro is a fatally flawed currency and the eurozone must break apart before there is any hope of rebalancing.

As it stands, he is just another "let's do more of what isn't working" economist, as if doing something stupid works better if done with increasing force.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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