The euro needs to sink to parity with the US dollar in order to restore Europe’s peripheral economies to growth, Nouriel Roubini, the economist known as “Dr. Doom” for his bearish predictions, told CNBC Friday.
“The euro zone needs a real depreciation in the periphery to achieve the restoration of growth, external balance and competitiveness,” he said at the Ambrosetti Workshop on the shores of Lake Como, Italy. “The periphery needs to have the euro closer to parity with the US dollar.”
The euro has stayed at historically strong levels against the dollar despite the crisis in the euro zone.
Roubini added that markets are “schizophrenic” at the moment, as they cannot decide whether to reward or punish countries such as Spain and Italy for their austerity plans.
“There’s this vicious circle with the deficit that doing austerity makes the recession worse,” he said. “Without growth, the socio-political backlash will become overwhelming for some governments.”
His concerns about growth are agreed to by many, as the euro zone is predicted to officially enter the second part of a double dip recession this year. The so-called PIIGS countries – Portugal, Italy, Ireland, Greece and Spain – are still causing concern, with the markets’ focus trained on Spain this week as strikes spread through the country ahead of Friday’s budget disclosure.
On Friday, euro zone finance ministers are expected to agree to almost double the firewall put in place to backstop public finances in the region.
The European Central Bank’s mass liquidity injection, which has helped boost European markets this year, would help in the short term, according to Roubini. He warned: “The painful process of deleveraging is going to continue.”
He added that the central bank is now “close to the limit” of what it can do to boost the European economies.
The euro zone is still at the top of his list of the factors causing concern about the global economy, followed by volatility in the oil price .
Tensions in the Middle East have sparked recent concerns about supply issues, even though Saudi Arabia has pledged to make up any shortfall caused by sanctions by the West against Iran.
“Even short of a military confrontation, the war of words is going up and the covert war is going up. These tensions are going to rise,” Roubini said. “The entire Middle East is a source of tensions that are geopolitical for the global economy.”
Roubini warned that the world would face recession and then stag-deflation – a combination of recession and deflation – if oil prices continue to rise.
A “sharp slowdown” in China and worse-than-expected economic figures from the U.S. are the other key risks to the global economic recovery, he said.