On the evening of November 6th at Politecnico di Milano, we had the pleasure to host Nouriel Roubini, currently Professor of Economics and International Business at New York University Stern School of Business.
Mr. Roubini is a so well-known economist that I prefer not wasting anybody’s time attempting an introduction. Rather, I would like first to share my understanding of the points Roubini made during his lecture and then the following question-and-answer session.
As the title itself suggests, Roubini identified five major economic issues characterizing the current world juncture.
As the title itself suggests, Roubini identified five major economic issues characterizing the current world juncture:
- The Euro Area, whose condition is under discussion for years now,
- The US, especially with reference to:
- the fiscal cliff,
- the debt ceiling
- and medium-term fiscal consolidation,
- The future of China, especially its growing ties with South America,
- Rising Emerging Markets, especially a relatively recent appearance of a tendency to what is being called ‘state capitalism’;
- Geopolitical risks.
Given such broad scenario, Roubini goes on focusing on the Euro Area, where seven countries are affected mostly by stock problems – i.e. government debts – and other seven suffer mostly from flow problems – i.e. loss of competitiveness and the ensuing trade deficits.
But the big question on everybody’s mind is: why is there a recession in the Euro Area and, as it appears increasingly evident, in Europe in general? The US are certainly growing at a modest pace, but Europe is stagnating and many countries are in a serious recession.
There appear to be four major areas of concern at this juncture:
- Fiscal austerity, which has been too heavily ‘front-loaded’ and needs to be offset in part by counteracting measures, mostly spending;
- An overvaluation of the Euro, which needs to be brought down so as to enhance price competitiveness of Euro-Area made products;
- A credit crunch managed by banks, which they ought to relax in the months to come;
- A widespread lack of confidence among all economic agents and industries.
Moving on to policies adopted to counter the recession and perhaps even to jump-start the economy, Roubini’s assessment is that the situation has slightly improved over the last few months, especially because:
- The ECB has acted in the appropriate manner, supplying liquidity to the banking system. Yet, she has been too tight, and more should have been done at both quantitative and qualitative level;
- the ESM is being increasingly brought into working conditions;
- the project of a banking union is certainly worth pursuing, so long as the policy maker is aware that it will work the better the clearer its goal is: a first step towards a true economic, political and fiscal union.
The bottom line is, therefore, that in Europe we need to restore growth but, alas, this is a missing point in the European agenda! Yet, the tools to do that are readily available:
– a more aggressive expansionary monetary policy by the ECB,
– a smooth depreciation of the Euro (which a more aggressive expansionary policy will bring about itself),
– a postponement of fiscal consolidation by core countries so as to keep aggregate demand up,
– infrastructure spending as a further stimulus.
Adoption of such measures is urgent! Even if one were to believe that one of our problems in Europe is labor market flexibility, then the laying off of workers would only generate recessionary effects and thus make recession worse. Such counteracting measures are not put in place – that is, rising demand and, thus, growing demand for labor in industries other than the ones labor is being expelled from. Again, fiscal discipline has been too front-loaded and we cannot promise our citizens another five years of recession.
Parallel to growth, we need to restore the process of European integration: without more integration, says Roubini, disaster is not really far away into the future. ‘Integration’ is an important word, because it should take at least the form of debt neutralization and risk sharing, that is, the form of a transfer union. [Let me add here that such ideas have gone out of fashion when Prodi was replaced by Barroso at the head of the European Commission, and member states began defending aggressively their own interests rather than those of the Union as a unity, FS].
Let me conclude by reporting Professor Roubini’s answer to somebody from the public who asked, only half-jokingly, in what assets he likes to invest. Of the three answers Roubini gave, I only report the third one, the first two being debatable but ‘normal’ for a person in the profession. The answer was: “….and most of all, invest in ‘human capital’, invest in your training, invest in your education”. We all appreciated this answer immensely, not least because there were hundreds of students among the hundreds of persons attending the lecture, and the message for them was loud and clear.