Roubini : The Recession on the Eurozone periphery is deepening and moving to the core

Nouriel Roubini : .....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 eurozone’s periphery is deepening and moving to the core, namely France and Germany. Indeed, the recession will worsen throughout this year, for many reasons. First, front-loaded fiscal austerity – however necessary – is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity. Moreover, while über-competitive Germany can withstand a euro at – or even stronger than – $1.30, for the eurozone’s periphery, where unit labor costs rose 30-40% during the last decade, the value of the exchange rate would have to fall to parity with the US dollar to restore competitiveness and external balance. After all, with painful deleveraging – spending less and saving more to reduce debts – depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro. - in Project-Syndicate