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Roubini Tells Europe to Stop 'the Savings Madness'

Lisa Rowland and Antonia Oprita|CNBC.com
Tuesday, 12 Jun 2012 | 7:44 AM ET

Governments in Europe should lower taxes and increase salaries to boost growth rather than insisting on austerity and continued saving, famous economist Nouriel Roubini told a German newspaper in an interview on Tuesday.

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Roubini also said the German government should give its citizens incentives to go on holiday in countries in the south of Europe that were affected by the debt crisis to help those states recover.

Some leaders in major European countries have already shifted their rhetoric from austerity to growth, as tax increases and cuts in government spending have exacerbated the economic downturn, causing deep recessions in some euro zone countries. But Germany still insists on austerity as a way to bring budgets under control.

"The savings madness must be stopped. Governments must lower taxes and increase wages. Europe needs growth," Roubini told popular newspaper Bild.

"The German government should give every German household a 1000 euro ($1,250) travel voucher. However, it should only be used for holidays in crisis countries. That will help boost growth there. In addition, everyone who buys a holiday home in a southern European state should get a tax bonus,” he added.

Pulling the plug on funding Greece, which has already been bailed out twice, would lead to the collapse of the single currency, Roubini warned.

He said the euro zone had two choices: providing funding to facilitate an orderly exit by Greece or keep the Balkan country in the single currency by financing it in the same manner as West Germany supported the East after unification in 1990.

In Roubini's opinion, the second option would be cheaper in the long term for the German taxpayer than allowing the euro zone to break up.

The European Central Bank should expand money supply massively in order to weaken the euro, ideally to parity with the U.S. dollar to give Greece, Italy and Spain a real chance to become competitive, he said.

Politically, heads of state in the European Union need to come up with a plan for five to 10 years at the end of which Europe must have a unified banking system with a centralized regulatory authority, Roubini added.

- By Lisa Rowland and Antonia Oprita, CNBC