Economist Nouriel Roubini sees Europe sliding this year:*
“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…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, while…Germany can withstand a euro at…$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. … [T]he only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.
“To make matters worse, the eurozone depends on oil imports even more than the United States does and oil prices are rising….
“The trouble is that the eurozone has an austerity strategy but no growth strategy.
“Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen. And, without resumption of growth — not years down the line, but in 2012 — the stock and flow imbalances will become even more unsustainable. More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.” Emphasis added.
As Europe goes, so may go President Obama.
* “Europe’s Short Vacation,” Project Syndicate