Eurozone risks a break-up, says Dr Doom

MUMBAI: Nouriel Roubini may be “Dr Doom” to the investment bankers on Wall Street. But the New York University economist, who became a superstar after predicting the 2008 financial crisis, insists that he doesn’t go out looking for half-empty glasses.

“I’m not a permanent bear,” Mr Roubini says. “I’m a realist.” He may be right, though several of the investors, who heard him this week at the Edelweiss India Conference 2010 in Mumbai, found in his words enough cold water to douse their ebullience.

Mr Roubini sees the second-half of 2010 as particularly challenging for advanced economies. Hobbled by receding fiscal stimulus and a high rate of unemployment, private consumption in the US will trail GDP growth. Nor is the outlook for new investments bright, not with capacity utilisation struggling at a little more than 70%.

Mr Roubini is even more bearish on the outlook for Europe and Japan, where, at 2%, the potential for economic growth is a full percentage point lower than in the US, he told ET in an interview on Tuesday, fresh from a meeting with the top brass of the Reserve Bank of India (RBI).

The sovereign-debt crisis is far from over, he says. “Greece is just a canary in the coal mine.” The former economic advisor to the Clinton administration reckons that the risk of a break-up of the Eurozone exists.

“If those countries are not able to resolve their fiscal problems, the cost of staying on in the Eurozone will be far higher than exit, as it will be politically difficult to accept austerity.” Given the turmoil in the Eurozone, the appeal of the Euro as a reserve currency will also diminish.

The man, who is known for his prescience and is now much sought-after by policymakers, says that markets have not priced in the risk of a clash on the currency front between the US and China. The US wants China to let its currency, yuan, appreciate, a course of action the Communist giant has resisted.

While Mr Roubini does see bond yields in advanced economies eventually shooting up on inflationary concerns, he expects them to remain contained for now. “For the moment, deflation is the bigger worry,” he says.

There is one bright spot, though, in this gloomy picture. “Emerging markets, particularly those in Asia and Latin America, will grow at or above potential,” Mr Roubini says. Therefore, unlike their advanced-economy counterparts, emerging markets will have to grapple with inflation.

A case in point is India. “More aggressive monetary tightening may be needed here,” Mr Roubini says, adding that he expects the Indian economy to expand 8-9% annually over the next couple of years. He favours the “more balanced economy of India” over China which, in his opinion, is too dependent on fixed-asset investments of dubious usefulness. According to him, China is also behind the curve in terms of monetary tightening than India.

Mr Roubini believes that if managed properly, financial sector reforms in India could be positive for the economy. The lesson from the financial crisis is that liberalisation has to go hand-in-hand with sound regulation.