Monday, May 31, 2010

Latest Roubini: Double Dip, Banks Are Back To Old Ways, Brazil Could Grow 7%

Noriel Roubini gave an interview to the great O Estado de Sao Paulo (in Portuguese) newspaper in Brazil. Here are his main points.

Nouriel Roubini is launching a book about the turbulent global capitalism's period: The Economics of Crisis, with the historian Stephen Mihm and asserts that developing countries wil have different expansion rates in the coming years.

He says that Brazil needs structural changes to grow by over 5% per annum. "With reforms, Brazil could grow 7% for a decade."Roubini reaffirms the dangers posed by the debt of European countries again warning that Greece is only the tip of the iceberg and about the difficulties of governments to make needed reforms to prevent a repate of the 2008 and 2009 crisis.

Please note that the latest estimates for GDP growth in Brazil were published today: 6.47%, increasing for the 11th consecutive time.

In your book, you speak of a continuing recovery for the economy. Is "Dr. Doom" more optimistic?

I try to be realistic. The optimistic view is that the recovery will be in "U" shape. But I am concerned about the situation in Europe. The current forecast for euro zone growth this year is 0.8% and can get close to zero. With this, we can say that there is a risk of a double crisis in Europe. There will be more anemic recovery in the U.S., Europe and Japan, and a stronger expansion in developing countries.

Are we shifting from a banking crisis to a debt crisis?

The global crisis started with a lot of leverage in the private sector. The problem was for the public sector, with budget deficits of 10% of GDP and public debt above 100% of GDP in advanced economies. This happened because of the expense of governments to prevent the recession from becoming a depression. The problems in Greece are the tip of the iceberg. Already spread through Spain and Portugal and can affect Japan, UK and U.S.

Did the role of government in the economy change after the crisis?

The crisis showed that a market economy is the best solution, but that regulation is also required. The role of government intervention has been recognized, but they must not get involved too much, only with a supervisory role. To believe in private regulation is the same as believing that the system does not need any regulation. During the crisis, banks have become more risk averse, but are now back to the old ways, they have not learned the lesson.

But is there political power to make the necessary reforms?

We need to accelerate structural reforms in Europe and change the regulation of the financial system. The question is whether governments will be able to do that. Until now, there was more more talk about the need of what to do than real action. In the opposite scenario, in Brazil there is talk of excessive growth.


Brazil is growing at more than 7%, but this will not hold because it is beyond the capability of the country. It is also timely: commodities are booming and there is inflow of capital. With reforms, Brazil could grow 7% for a decade. We need to increase productivity, with economic reforms, investment in human and physical capital and innovation. Without it, Brazil does not grow 7% (annually). Today, the potential is between 4% and 5%.

An article defending the dictatorship in Brazil was published in RGE (Roubini Global Economics). How did it happen?

We are open to different viewpoints, but we will not publish anything extreme. This particular text preached something wrong and we apologized for having it published. So then it was taken down.

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