Markets have recovered since the Brexit referendum vote sent them a temporary free-fall. But treasury and finance executives must be prepared for the worst—especially those with business in the EU, says economist Nouriel Roubini. The professor of economics at New York University’s Stern School of Business studies international macroeconomics, political economy and the mechanisms of economic growth and served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department. Best known as one of the first to forecast the housing bubble burst as far back as 2005, Roubini will speak at AFP’s Annual Conference in October. Learn more about this session here and be sure to register for the AFP Annual Conference by September 16 to save $200.
Roubini recently spoke with AFP.
AFP: I was reading one of your recent columns and you wrote that Brexit would be worse than a Grexit. Why would that be and can you even conceive of a timeline for a possible Brexit and EU dissolution?
Nouriel Roubini: Well, I would say I would separate Brexit from EU dissolution in the sense that the negotiation about the divorce between the UK and Europe are going to be complicated. But in some sense I think that the United Kingdom is going to survive. It’s going to be bumpy, there might be a temporary recession, but I think that eventually the UK is going to gradually recover. My biggest concern is that Brexit could be the beginning of the end of the euro zone in Europe. I’m not saying that that’s going to be my baseline scenario but the timing on politics, politics on what’s going to happen the next few months in Italy, in Austria, in Hungary, in Germany, in France, in the Netherlands, Europe could go in a direction of greater integration or go in a direction of greater disintegration over time. We don’t know which one of the two is more likely right now but certainly there are forces that are leading the Europeans to become more divided than them being more united.
AFP: What are the other risks in Europe?
Nouriel Roubini: In the short term you have this constitutional referendum in Italy. Renzi could lose it if he becomes less popular, and if we were to lose it, then actions in Italy next year or 2018, the anti-Europe party could come to power. And while Greece and Grexit risks were serious, Greece was a small economy, its GDP was less than two percent of the euro zone, public debt was €200 billion while Italy is €2 trillion. So, Italy is too big to fail and too big to be saved. It’s the third largest economy in the euro zone so there is no plan can bail out Italy.
So, the weakest link in the short term is in Italy but with the euro zone you have economic malaise, low growth, low potential growth, high unemployment rate, and think of it this way -- even in U.S. and UK where the economy is much better, unemployment is two percent as opposed to 10 percent, Japan and the U.S. those who were losers from free migration, integration, globalization have evolved either voting for Trump or for Sanders, and in the UK because of their concerns about the bands of Polish plumbers, they decided to leave the European Union. And growth is better in UK and U.S. than in Europe, unemployment rate is better in U.S. and UK than in Europe, and in spite of these, forces against globalization and trade and migration.
In Europe, unemployment is 10 percent, much higher in Greece or Spain in terms of the unemployment in Europe. So, no wonder there are all these populist parties of the extreme right and extreme left that are becoming more noisy, and not just in the periphery of the euro zone from Italy to Spain to Portugal to Greece to Cyprus and so on and so on but also in the core of the euro zone, from France to Germany to the Netherlands to Belgium to Finland to Sweden and so on. So, those are the capital risk, the political risk.
Europe is also living in a bad neighborhood. You have Russia talking more aggressive in Ukraine, in the Balkans, in the Baltics. Turkey is problematic. You have the migration, you have instances of terrorist repeated. Unfortunately, the issue is not whether more terrorist episodes will occur but rather when will they occur and how frequently and where. And the Middle East next to the Europe is burning. Failed states and civil wars from Iraq to Syria to Yemen to Lebanon to Libya and so on and so on. So, Europe is facing many serious and severe challenges.
AFP: Theresa May seems to have slowed down the move towards a Brexit. Now they’re talking about maybe 2019 at the earliest. Is this good news from your perspective or does the uncertainty of a timeline just make things even worse for businesses?
Nouriel Roubini: Uncertainty doesn’t have because businesses would like to know whether they have access to the European Union and which terms and which sector and which sector is not. That uncertainty is not positive. On the other hand, the longer you push it and the more you kick the can down the road, the more there is even a chance of maybe that British electoral will have second thoughts and realize that Brexit is a negative and maybe there are things that maybe like a second referendum that is going to lead to a different majority to convince the UK to stay. So, it’s a bit of an ambiguous effect, I would say.
You know, whether there is Brexit or not, UK is not going to lose full market access, it’s going to lose partially. Less in goods, more in services especially financial services if they restrict somehow labor migration. But it’s not black and white, either the UK is going to be fully cut off from the European Union or be fully part of it. We’re going to be something of a gray area. So, the UK shot itself in the foot but it’s an injury, not life-threatening damage to the United Kingdom.
AFP: Corporate treasurers and CFOs complain about regulatory risk growing and they see just a growing body of regulations across the globe. Do you think all the rising number of regulations across the globe could actually backfire and make businesses and economies less safe because it’s harder to do business?
Nouriel Roubini: Well, you know, fixed investment, capital spending has fallen sharply during and after the global financial crisis and has not yet recovered. And there are many explanations of that, one of them is that there is a burden of new regulations and so on and so on. I don’t think that the regulation overall in the corporate sector are more severe than they were before and that other types of economic, financial, political, and geopolitical uncertainties that may be leading corporate to spend less, do cutbacks, less job hiring. Therein which there’s been a greater regulation is the financial sector but that was needed because there was too little capital, too much leverage, too little liquidity, and those fragility led to the worst financial crisis since the Great Depression. So, we needed to increase capital, decrease leverage, increase liquidity and tighten the behavior of banks.
And right now, just corporate business if not negative, the long-term interest rate is very low with credits being massively available. The biggest constraint to more investment or more spending, more hiring with the corporate sector is not the availability of credit, is not the price of credit, if anything, credit is probably too cheap for most of the corporate sector. So, I’m not convinced that it’s our government regulations explain why there is this funk in the global economy. Some people call it the new normal, I call it a new abnormal, the IMF called it the new mediocre, Ray Dalio at Bridgewater called it the great deleveraging. There are many other issues with the global economy. I don’t think that regulation is why we’re in this global funk.
AFP: Your Project Syndicate article registers very negative around the globe. Do you see any calls for optimism anywhere in any region or any particular nation?
Nouriel Roubini: The bad news is that global growth is low, potential growth is low, deleveraging is occurring, both emerging market and advanced economy now are in a growth funk. That’s the bad news. The good news is that I don’t predict a global financial crisis or a global recession anytime soon. Growth is mediocre in the U.S. but is around two percent. Growth is mediocre in the euro zone, it’s around one, one-and-a-half percent. And the same thing in Japan. Emerging markets have been slowing down because there are lots of global headwinds from everywhere, slowdown of China, end of the commodities cycle, many of them had macro fragilities, many of them have not done financial reform so potential and actual growth have fallen but they’re still growing around four percent. They’re not growing further to six percent the way they did years ago but the world is growing, is growing in a mediocre way but is growing. So, there are bad news but there are also good news from that point of view.And of course, there are some individual countries that have a stronger economic and growth fundamentals that are growing robustly. Among the BRICS, Brazil and Russia are still in recession, South Africa is barely growing, China is still growing between five and six percent, and official data suggests India is growing around seven percent. So, both in emerging markets and advanced economies, there are pockets of economic growth close to the potential of countries and the potential in advanced economies is lower than in emerging markets.