Bearish Economist Nouriel Roubini Turns More Positive on Greece

Source: The Wall Street Journal
Greece may not leave the euro zone in the immediate future but the bloc will have to become a transfer union to keep it in, influential economist Nouriel Roubini said Wednesday in Berlin.
“To keep Greece in the euro zone, effectively you need a transfer union, you have to realize that the problems of Greece are long-term, it’s going to take 10 to 20 years to do the austerity and the reform to stabilize Greece and therefore you have to give money and you have to be patient,” Mr. Roubini said.
“If you’re willing to do that for the sake of keeping the euro zone together, whether it’s economic reasons or political or geo political or foreign policy then Greece has a chance.”
The words are an about-face for the bearish economist, who in July forecast that Greece would exit the euro by 2013.
The probability of a Grexit is still “meaningful,” but less than 50% these days, according to Mr. Roubini, who is known as “Dr. Doom” for predicting in 2006 the global economic crisis.
So what’s changed since the summer, when the interest rates on Spanish and Italian sovereign bonds were sky high? Greece carried out austerity, Mario Draghi – president of the European Central Bank – promised to do whatever it takes to preserve the euro, the euro-zone approved its European Stability Mechanism bailout facility, and the ECB came up with a plan for conditional bond buying on the secondary market.
But according to Mr. Roubini, the clincher was a shift in Germany’s attitude.
The German government has grasped that there can be no orderly exit of Greece from the currency union, Mr. Roubini told journalists after a speech at an IG Metall union event in Berlin.
“I think the Germans have realized that if there was a disorderly collapse of the euro zone, the loss and the damage would not be just for Greece, Ireland, Portugal, Italy, Spain — but also for Germany,” which, as a creditor of these countries, would see its own financial institutions and government shoulder the burden of a bankruptcy.
“A disorderly collapse of the euro zone is not in anybody’s interest,” he added.
A coming election in Germany 2013 is another factor, Mr. Roubini said, as well as political considerations like instability in the Balkans and Greek banks’ exposure to such countries. If Greece goes, Cyprus would follow, leading to tensions with Turkey.
So does goodwill from Germany mean the euro is saved? Not exactly.
Dr. Doom says the bloc is too focused on austerity (take note, Ms. Merkel) and he fears the euro zone hasn’t put job creation and GDP demand at the center of its policy debate, but rather more and more austerity.
Front-loading austerity – too much too soon – will only exacerbate the recession in periphery euro zone states.
“If I had to propose policies that change and restore growth, I would say we have to postpone the fiscal austerity in the periphery and do it more gradual, slower rather than faster, in countries like Germany where there is fiscal space, instead of doing fiscal austerity now, we have to postpone it and do fiscal stimulus and public investment,” the New York University economist said.
But for all that doom, Europe’s political will to keep Greece in the euro continues to surprise even the most hawkish of observers.