NOURIEL ROUBINI: Monetary Union at risk unless growth resumes

Nouriel Roubini : SINCE last November, the European Central Bank (ECB), under its new president, Mario Draghi, has reduced its policy rates and undertaken two injections of more than €1-trillion of liquidity into the euro-zone banking system. This led to a temporary reduction in the financial strains confronting the debt-endangered countries on the euro zone’s periphery, sharply lowered the risk of a liquidity run in the euro zone’s banking system and cut financing costs for Italy and Spain from last year’s unsustainable levels. At the same time, a technical default by Greece was avoided and the country implemented a successful restructuring of its public debt. A new fiscal compact — and new governments in Greece, Italy and Spain — spurred hope of credible commitment to austerity and structural reform. And the decision to combine the euro zone’s new bail-out fund (the European Stability Mechanism) with the old one (the European Financial Stability Facility) significantly increased the size of the euro zone’s firewall. But the ensuing honeymoon with the markets turned out to be brief. Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along. And, inevitably, the recession on the euro zone’s periphery is deepening and moving to the core, namely France and Germany. Indeed, the recession will worsen this year. - in Project Syndicate