Nouriel Roubini: Greece is insolvent

Europe can’t afford to throw money out the window praying for economic growth to return.

Interest rates on loans to the most indebted EU countries, Portugal, Ireland and Greece, have risen over the past few weeks, despite bailout plans from the European Union (EU) and the International Monetary Fund (IMF), quoted economists Nouriel Roubini and Stephen Mihm as telling French daily newspaper Les Echos. Greece is insolvent actually, the two experts said. Despite an assistance of up to 10 per cent GDP, accompanied by a drastic austerity plan, its public debt is 1.6 times the country’s GDP. Portugal too is heading slowly towards bankruptcy. In Ireland and Spain, huge losses in the banking sector add to a rising public debt.
“Let’s suppose that the countries mentioned don’t have a solvency, but a liquidity problem and the loans taken would open new markets to them. This strategy is doomed to fail, as many of the decisions states used to take no longer apply,” the two economists hold.
Unable to turn to the printing press, constrained as they are by the euro zone regulatory straight-jacket , they cannot rely on fast-rising GDP to save their skin. To return to economic growth, these countries should try to regain their competitiveness by devaluing their home currencies towards converting the trade deficit into a trade surplus. It took Germany more than ten years to keep salary increases under the level of productivity growth as a means for reducing workforce-related expenditures.
Reductions in public and private spending to increase private economies and put fiscal measures into practice is not going to work either. Therefore, downsizing and an orderly reduction of public and private debt is what needs to be done. This could be accomplished in various ways, for example, by rescheduling the reimbursement timetable and cutting down interest rates, which would narrow the risk of contagion and loss by financial institutions.
Europe can’t afford to throw money out the window praying for economic growth to return. No Deus ex machine will come to help the IMF or the EU.

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