Monetary Easing a ‘Necessary Evil’: Roubini

The European Central Bank’s reluctance to consider further monetary easing exacerbates the problems the euro zone is currently facing, and Germany’s criticism of the Federal Reserve second round of bond buying is “misplaced,” economist Nouriel Roubini told CNBC Thursday.

Nouriel Roubini
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Nouriel Roubini

“In a situation where there is massive fiscal consolidation … the ECB should be providing more liquidity to the financial system and do more bond buying," Roubini said in an interview, adding the ECB did not do enough to limit the widening of bond-yield spreads.

German finance minister Wolfgang Schäuble recently irked US authorities when he criticized the Federal Reserve’s decision to launch another round of bond buying and called the policy "clueless."

“There is a huge divide between the position of the United States and that of Germany, “ Roubini said.

“The Fed believes we need to do (a second round of asset buying) while the ECB and the Germans are dead against it. On that particular issue I think the Germans have it wrong,” he said.

Given that growth is low and falling and with inflation low and falling, the buying, also known as quantitative easing or QE2, was necessary, Roubini, whose analysis firm Roubini Global Economics recently opened an office in London, said.

“To me QE2 was a necessary evil because with growth so below potential and with inflation following a risk of deflation, if we had not done QE2, the risk of a double-dip recession and of deflation would become more significant.“

But the real economic effects of QE2 will be modest in Roubini’s view, as the market has already priced in its effect to a large extent.

“A lot of that critique of QE2 is somehow misplaced … If anything, you could criticize the ECB for not doing QE2,” he said.

The Federal Reserve's most recent move wouldn't be its last one, Roubini said.

"In my view it is not just going to be QE2. The Fed eventually is going to do QE3, QE4 and even QE5 because growth is going to fundamentally stay below trend and inflation low," he said.

Roubini was critical of the austerity programs outlined by the British government among others in Europe, saying that frontloading fiscal consolidation would only reduce growth.

Instead, governments, including the US, should commit today to a schedule of reducing spending and raising taxes that would be gradually phased in over the next few years, “so people see there is light at the end of the tunnel of the fiscal trainwreck.”

What the euro zone needs is easier monetary policy to stimulate growth and to weaken the euro, the strength of which is damaging the chance of a recovery in the region’s periphery, Roubini said.

While Germany can live with a strong euro because it is very competitive, the periphery of the euro zone needs a euro closer to parity, he said.

“Eventually, even Germany is going to be hurt. So far Germany is doing well (but) if the periphery is sinking, eventually Germany will too. No country in the euro zone is an island.”

If Spain were to fall off the cliff in the next twelve months, that would pose a serious problem for the euro zone, he said.

"The size of Spain in terms of its GDP and debt – private and public – is so large that official resources like the IMF may not be sufficient if they lose market access to roll over their debt and finance their current fiscal deficit."

"It’s also systemically so much more important. And even (a country as small as) Greece had contagious effects," Roubini added.

Roubini expects the Bank of England to launch another round of monetary easing as soon as the austerity measures the government has set out kick in.