Dr. Doom Goes to Davos

The annual meeting of economists, industry leaders, and politicians got under way in Davos, Switzerland earlier this week. Front and center on the opening day panel was Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University. It was at this very conference last year, that Roubini was vindicated for his earlier warnings that housing prices in the US were forming an asset bubble that would ultimately collapse, plunging the global economy into crisis.

As we all know now of course, Roubini was mostly correct in his predictions, but at the time, the party was still in full-swing and nobody wanted to hear Roubini’s “theories”. His work was marginalized by many as simply the rantings of a “perma-bear” – even the New York Times got in on the act by dubbing Nouriel “Dr. Doom”!

Compared to last year, the mood was certainly more upbeat but caution still remains the theme of the summit. One hopeful sign came from Roubini himself who said he now believes it is “unlikely” that the economy will face a recession double-dip; this represents a much sunnier outlook than the good doctor had earlier in the year, but alas, there are still plenty of dark clouds on the horizon and let’s start with a look at the potential for growth this year.

Global Growth Outlook

Overall, summit participants believe growth will continue throughout 2010, but the level of growth will vary wildly by jurisdiction. Expansion will almost certainly be greater in the emerging economies where China is expected lead the way with growth exceeding 10 percent.

Western nations on the other hand, can only look to the emerging nations with envy as growth in the West is expected to be considerably more modest in nature. The Organization for Economic Cooperation and Development (OECD) pegs growth this year for the US to be about 2.5 percent, just slightly more than 1 percent in the UK, and only 0.9 percent for the Eurozone countries as a whole. Worse still, this weak growth is being described as “jobless” as it will not expand the economy sufficiently to create the new jobs so desperately needed in these regions.

Future of the European Union

When speaking of the troubles facing the Eurozone, Roubini – sounding much like Milton Friedman before him – made it clear that he too feels the Eurozone is doomed as a political entity. Roubini points to the series of near-bankruptcies from the more troubled nations including Greece and Spain, as the catalyst that could lead to a splintering of the Eurozone itself and the end of the euro currency.

The Professor argues that the smaller countries within the Eurozone are at a competitive disadvantage to the larger powerhouses such as France and Germany – this is the exact opposite of what the move to single currency was supposed to produce. But – according to Roubini – there was never any doubt that the needs of the smaller countries would always remain secondary to the larger countries and by forcing all countries to use a single currency, the weaker partners have even been denied the ability to deliberately devalue their currency in order to “export their way” out of recession.

“Down the line – not this year or two years from now – we could have a breakup of the monetary union,” Roubini said in an interview from Davos. “The Eurozone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some currencies might exit the monetary union.”

Rush to Regulation

The other major theme emerging from the first day of discussion at Davos – and this should not come as a surprise – revolved around the question of increased regulation within the financial industry. Roubini came out strongly on the side of increased regulations describing recent proposals by the Obama administration as being in the “right direction”. Roubini explained the need for massive reform to ensure that the banking industry doesn’t simply “return to business as usual” thereby reverting to the same flawed practices that he believes led to the recession in the first place.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.